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Winnebago Industries (NYSE:WGO)
Q2 2018 Earnings Conference Call
March 21, 2018 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Winnebago Second-Quarter 2018 Earnings Conference Call. [Operator instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Steve Stuber. Sir, you may begin.

Steve Stuber -- Finance Director

Thank you, and good morning, everyone for joining us for the Winnebago Industries Conference Call to review the company's results for the fiscal 2018 second quarter, which ended February 24, 2018. I'm joined on the call today by Michael Happe, president and chief executive officer; and Bryan Hughes, vice president and chief financial officer. This call is being broadcast live on our website at investor.wgo.net, and a replay of the call will be available on our website later today. A news release with our second-quarter earnings results was issued and posted to our website earlier this morning.

Before we start, I'd like to remind you that certain statements made during today's conference call regarding Winnebago Industries and its operations may be considered forward-looking statements under securities laws. The company cautions you that forward-looking statements involve a number of risks and are inherently uncertain in a number of factors, many of which are beyond the company's control, could cause actual results to differ materially from these statements. These factors are identified in our SEC filings, which I encourage you to read. With that said, I would now like to turn the call over to our president and CEO, Michael Happe.

Mike?

Michael Happe -- President and Chief Executive Officer

Thank you, Steve, and good morning, everyone. We hope you're all well. We appreciate your time this morning as we review Winnebago Industries fiscal year 2018 second-quarter results. We have much ground to cover today, as I'm sure you would agree.

As is usually the case, I will first provide a high-level summary of the quarterly results. And then be followed by our chief financial officer, Bryan Hughes, who will go into much more detail regarding our financial performance. I will return with closing comments outlining our progress on key strategic initiatives and offer a few thoughts about other relevant topics. And undoubtedly, you'll have a few questions for us that we can answer in our Q&A session.

Our second-quarter performance continues to reflect the journey we are on here at Winnebago Industries, to build a more robust, balanced, increasingly profitable overall business model. Much has changed in recent quarters at Winnebago Industries and our results this period are both a reflection of those accomplishments, but they also highlight that we continue to have unfinished work to do. This will be a net-positive journey, we believe, and we are pleased with our consolidated results in the second quarter, which are record numbers on both the top line and in profit generated. Overall, strong sales growth and meaningful margin improvement for the company were hallmarks of this quarter, certainly highlighted and generated by our impressive growth in the towable segment.

Again, another reflection of what's changed in the last two years. Consolidated second-quarter revenues rose 26% year over year, and marked the first comparable quarter that fully included Grand Design RV as part of Winnebago Industries portfolio in both the prior-year and current-year results. We're pleased that overall revenue continues to grow organically and profitably at a strong pace. Gross margin increased 110 basis points, driven primarily by accelerated growth in the towable segment.

Both towables businesses are delivering solid profitability, as they both gain share. Looking at the segments in more detail. Starting with the towables side. Revenues increased 55% year over year, which again represents entirely organic growth, now that Grand Design has been part of Winnebago Industries for over a full year.

Margins also expanded due to both fixed-cost leverage and net cost-savings initiatives that continue to incrementally contribute to improved profitability in this segment. The towable industry segment remains healthy, continues to grow, and importantly, we as a company are capturing meaningful shipment and retail market share across the segment with both the Winnebago and Grand Design brands. Both towables businesses had retail performance in the quarter, which significantly outpaced the industry. Backlog for the quarter was up 10% to over 9,000 units, which is compared against a particularly robust backlog from one year ago, which if you recall, included the continued dealer ramp-up of our high-demand Reflection and Imagine series, combined with capacity constraints within the Grand Design business.

We believe this backlog supports our future growth expectations in the towable segment. Our current plants in Indiana have been running efficiently, and new capacity has become to come online within the Grand Design business midway through the second quarter. Initial interest in our recently announced new Grand Design RV Transcend line has been tremendous. The Transcend officially launched in January, with production just now beginning to reach material levels and represents Grand Design's entry into the largest segment of the towable market, the introductory travel trailer segment, that we have not had a presence in before.

We are still metering our deliveries on Transcend to dealers across the country, and we'll see this reach a more normal flow throughout the back half of the year in terms of orders generated, retail and shipments. In addition, the Winnebago-branded mini plus fifth wheel introduced last fall, also is now reaching normalized production rates, and being taken on to dealers' lots, generating more lab share [ph] and exhibiting good, early season retail performance. We're fully aware that the eyes of the financial community often wander to what can be improved when a company's financial results are released or the comparative against previous periods, but we are also quite proud of the significant progress Winnebago Industries has made as an entity in the towables segment in just 18 short months. The Grand Design acquisition has been strategic and effective, and our own Winnebago-branded towables business is growing rapidly as well.

In an industry where 85%-plus of the units are towables, we have advanced our towables segment share from less than 1% market share at the beginning of 2016 to somewhere in the mid-single digits presently. And most importantly, doing that with favorable margins. We are optimistic about the ability of our towables businesses to make materially more progress in the market and help generate net positive results for the company in the future. Our towables brands are becoming a stronger, viable choice for dealers and end-customers looking for alternatives to their long-held competitive options.

And we are aligned on our core differentiation principles of product quality, innovation, and customer service support. Turning now to the motorized segment. We are slowly but assuredly making progress in our sales results. Shipment numbers were light versus the industry's overall numbers, but both Winnebago dollar and unit shipment showed a positive comp versus our own second quarter a year ago.

Component availability limitations on several new products provided an unexpected headwind versus what was possible in the quarter on the top line, and we are working intently to mitigate those availability challenges. We are also working to manage down some less-than-desired historical sales discounts to occasionally move our inventory. And while our sales allowance support levels are down year over year, this industry doesn't always reward those good intentions immediately, especially in light of other competitive activity and incentives. However, we are extremely pleased that motorized retail growth improved quarter over quarter, with double-digit percentage growth, reaching levels that are in line with the overall industry pace, and thus demonstrating point-in-time stability in retail market share for the first time in several years.

The motorized backlog was up more than 42%, reflecting solid interest in our new products and increasing confidence in our future by dealer-partners. Our optimism is growing about the traction that we're beginning to slowly see in the marketplace. We are becoming more competitive. Initial retail sales of our new motorized products, including the previously announced Intent Class A gas, the Revel Class B, and the Horizon Class A diesel, have been on pace, notwithstanding a few of the component-availability issues I mentioned earlier.

And we look forward to continued revenue benefit from these new product lines in the back half of fiscal 2018. During the second quarter, we also worked on a new Class C product, which was just unveiled early this March, at the beginning of Q3. The new Outlook, a Class A gas motorized product, is the younger brother to the Intent platform, broadens our portfolio in the Class C gas lineup, especially in the value category and the rental markets, and continues our recent track record of introducing new products with stronger customer appeal, better value with a shorter product development cycle. In the case of the Outlook, we have targeted an affordable price point, much like we have done recently with the Class A Gas Intent, and look to see Class C share erosion moderate in coming months.

Shipments on this new product will begin later in the third quarter. While we are encouraged by the improving stability of our motorized business facing the market, driving acceptable profitability continues to be impacted by the manufacturing investments that we are making to both restart facilities like the one in Junction City, Oregon, but also to remake manufacturing lines in Forest City. In addition, we are seeing some net challenges from rising material cost in the motorhome segment and some product line mix shifts as we more vigorously defend market share. We are focused on addressing all of these challenges and certainly improving profitability long term in our motorized business, as we continue to make foundational operational improvements to the business.

There are many tools at our disposal, including select price increases that will happen with the advent of our 2019 model year units. While we believe we are on the right back to ultimately improve motorized profitability, this won't be an overnight fix, rather a gradual, but certain ascent to stronger performance. I'm personally not very patient on this front, but we continue to take a methodical approach to the turnaround process. And with that overview, I will now turn the call over to Bryan Hughes to review our fiscal 2018 second-quarter financial results in more detail. Bryan?

Bryan Hughes -- Chief Financial Officer

Thanks, Mike and good morning, everyone. Second-quarter consolidated revenues were $468 million, an increase of 26% year over year, driven primarily by strong organic growth in the towable segment. As Mike mentioned, the second quarter of last year of fiscal '17 was our first full quarter following the acquisition of Grand Design RV. So we've now fully left the transaction and the reported growth of 26% is, thus, fully organic.

Gross profit was $67.7 million in the second quarter, an increase of 37% year over year, driven by continued growth in the more profitable towables segment, which accounted now for 57% of total revenues for the quarter. Gross profit margins expanded by 110 basis points, driven by mix of business and fixed-cost leverage from the towable segment. Second-quarter operating income was $35.3 million, up over 24% and net income was $22 million, an increase of 45%. Earnings per share were $0.69 per diluted share, an increase of 44% over the $0.48 EPS in the second quarter of last year.

You should note, for comparison purposes, that the second quarter of 2017 included a $12 million benefit relating to the termination of our post-retirement healthcare plan. Finally, also recall that last year also included heightened amortization associated with the Grand Design deal. As a result of the recently enacted Tax Cuts and Jobs Act, the company recorded a $2.3 million, or $0.07 per share, net benefit in the second quarter. We have provided non-GAAP EBITDA and adjusted EBITDA performance measures in our press release as a comparable measure.

The schedules accompanying the press release show a reconciliation between net income and adjusted EBITDA. As these schedules show, consolidated, adjusted EBITDA for the quarter was $39.4 million, an increase of over 35% year over year. Turning to the individual segments. In the towables segment, revenues were $266 million for the quarter, up 55% year over year, driven by continued strong organic growth across the Grand Design RV and Winnebago-branded lines.

Segment adjusted EBITDA for the second quarter was $35.3 million, up nearly 94% from the prior year. And adjusted EBITDA margins increased 270 basis points, driven by fixed cost leverage on strong topline growth. Towable backlog remained strong at over 9,000 units, growing 10%, but as mentioned by Mike, this number compares to a backlog in the prior year that was at elevated levels due to the ramp-up of a couple of our key products. Retail sales continue to outpace the industry for both the Grand Design RV and Winnebago-branded lines.

Motorized revenues were $202 million for the quarter, up 1.5% year over year, supported by recent stability we are seeing in our retail momentum. As Mike mentioned earlier, backlog increased over 42%, or over 900 units, reflecting the strength of our recently introduced new products. Segment adjusted EBITDA was $4 million for the quarter, down nearly 63% year over year, and adjusted EBITDA margin decreased 340 basis points, driven by manufacturing start-up investments and increased material cost. We are also facing year-over-year margin headwinds from product mix, as the Class A Diesel business was slow in the quarter compared to last year due to the ramp-up of our new facility that assembles the diesel product.

And at the same time, we increased in second quarter the production and sale of the value-priced product as part of our efforts to fill the gap that existed previously in our product lineup. Turning to our balance sheet. As of the quarter end, the company had outstanding debt of $271.1 million. That's comprised of $279.7 million of debt, net-of-debt issuance cost of $8.6 million.

Working capital was $177.1 million. Our current net-debt-to-adjusted-EBITDA ratio is 1.4, on track with our deleveraging expectations and in line with our targeted leverage ratio range of 0.9 to 1.5 as communicated last November at our Investor Day. Cash flow from operations was $15 million in the first six months of fiscal 2018, an increase of $9.9 million from the same period in fiscal '17, driven by continued profitable growth and changes in working capital. As I mentioned earlier, we recorded a $2.3 million, or $0.07 per share, net benefit in the quarter as a result of the recent tax reform legislation, and our blended effective tax rate was 27.2%.

Included in these figures is a $1.4 million charge related to the remeasurement of net deferred-tax assets. But this charge was more than offset by the benefit associated with the reduction in the federal tax rate. Since we're on a fiscal year that differs from the calendar year, we project our blended reported tax rate will be 29% for fiscal 2018. For the year, we expect tax reform will contribute a $0.10 to $0.12 per share benefit, net of the reinvestments we are making in the business that Michael speak to further in a moment.

We currently estimate our ongoing rate to be further reduced for fiscal 2019, as the full fiscal year realizes the benefit of the lower federal statutory rate of 21%. Finally, our board of directors recently approved a quarterly cash dividend of $0.10 per share, payable on April 25, 2018, to common stockholders of record as of the close of business on April 11, 2018. That concludes my review of our quarterly financials. I will now pass the call back to Mike for some final comments.

Mike?

Michael Happe -- President and Chief Executive Officer

Thanks, Bryan. I would like to first expand on Bryan's comments regarding Winnebago Industries tax reform distribution intentions. We have committed to passing on a portion of the tax reform savings to benefit our dedicated employees in the form of four distributions. One, each employee would receive a one-time bonus from the company split 50% in cash and 50% in a stock award.

Two, we will target certain areas of the organization with select wage adjustments to ensure we are market-competitive in key roles. Three, we are making a seven-figure donation to our Winnebago Foundation, with the specific purpose of identifying targeted opportunities in the future to give back, financially, to the communities that our employees live and work in. And No. 4, we will make specific capital investments in improving the workplace environments in which our employees gather at work.

Our employees are learning about these intentions concurrent with this morning's release. On the employee front, we also want to highlight that our recently announced employee stock purchase plan, which was approved by the board and shareholders last quarter, has been launched. We seeded this program with an initial offering of shares for each employee, with the hopes that our employees view this program as a great way to enhance our teammates' connection to the organization and provide them with a direct avenue to personally benefit from our future successes. We are intent on building a stronger, high-performance ownership culture.

Many of you are likely looking for what we believe about the future prospects of the North American RV industry. As a whole, we remain cautiously optimistic that the calendar year 2018 will see another positive increase in shipments and retail in North America. The RVIA recently released an updated forecast for 2018 and is projecting wholesale shipments for the U.S. on the magnitude of 7% up for the year.

We have no reason to believe, at this time, that the industry projection is not a good starting point. Each month will unveil ultimately its accuracy. We still believe that the secular trends driving increasing popularity of the RV lifestyle are real and that the macro academic -- economic conditions are relatively stable. There is certainly more noise in the media and on the street return about the volatility in the equities market, the risk of increasing interest rates by the Fed, and the possibility of cost pressures from steel and aluminum tariffs in or inflation in general.

And all of those may, in fact, be very real things to watch and manage in terms of its impact on consumer confidence. However, foot traffic and buying interest and results in various RV retail shows across the country, has generally been quite solid. Not foreshadowing a material and sudden decrease in consumer interest in RVs this spring or summer. Overall, dealers [Inaudible] remained stable in the RV industry.

And we believe that dealer confidence, in the ongoing narrative of what Winnebago Industries and our brands are building is increasingly positive. We recently completed a Winnebago-brand national dealer meeting in San Diego in early March, the first meeting of its kind in four years. It was a very positive opportunity and event for us to tell our story to dealers about the progress we are making to build a stronger flagship brand and a stronger company. We also used the opportunity to visit with dealers and suppliers about the state of the industry, and especially current inventory levels.

The consensus, from our point of view, is that inventory levels are in fact balanced. Not aging significantly and dealers are positioned to serve the retail needs of the customer in the spring and summer months ahead. In fact, potentially better-positioned than they were one year ago. What I believe is more important than dealer inventory at the present time though is the manufacturing output pace of the OEMs in the months ahead.

Manufacturers have done a good job in the last few years of driving production to record levels, and in many cases, adding new capacity. It is in Winnebago Industries best interest and that of all of our competitors to continue to ensure that we manage our production pace to the pace of both retail and dealer stocking level demand, regardless of whether that will be really positive in the future or not. We are aggressively managing aging inventory in the field, and we're pursuing increase log share due to the momentum, especially of our towables businesses. Our motorized turns in the field are up, and our towables turns are steady.

We will keep a close eye on our own production output and the inventory levels that we carry ourselves. This isn't a sign of skepticism, it's a simply good business practice. In line with those comments, we are though continuing to make progress on our recently announced towables capacity-expansion projects. A portion of the Grand Design RV capacity came online, as expected, in January, with an additional phase coming online later this spring.

We are continuing with the Grand Design capacity expansion projects. We are also now ready to launch our Winnebago towables capacity-expansion project, with the recent closing on land contiguous to our current campus in Middlebury, Indiana. We expect that we will see the financial benefits of the Winnebago towables expansion in the front half of fiscal 2019, particularly around second quarter of that year. If we are to reach our goal of 10%-plus overall unit RV market share by that of fiscal year 2020, these towables-expansion projects will be critical to that end.

Lastly, we are pleased with the increasingly positive state of our balance sheet. Last November, Bryan Hughes shared our overall capital allocation priorities, and also communicated where we would like to be in terms of a leveraged zone. We must certainly protect the company's long-term interest, and have a path to ensuring that we can weather a material downturn that could happen in the future. But we have also been transparent about our intentions to smartly use the balance sheet to drive profitable growth and deliver increased shareholder value.

We have [Inaudible] to answer the high end of our leverage comfort zone, and will continue to progress toward the lower end. But we are also ramping up activity here at Winnebago Industries on both the business development front, but also in terms of identifying further organic investments that can accelerate our growth and profitability. Stay tuned as we share more in future quarters about our intentions and developments. And with the, we will wrap up our formal comments for the morning.

I would like to end, as we always do, with a genuine statement of thanks to our Winnebago Industries employees for their hard work during the quarter and for their continued commitment to providing our customers with high-quality products and services. It is their efforts that make all the difference. Thanks, very much, for your time this morning. I wish all of you, and all of the Winnebago Industries team, a great start to spring.

For those of you in the Northeast, hang in there. It won't snow forever. I'll now turn the call back over to the operator to start the Q&A session.

Questions and Answers:

Operator

Thank you. [Operator instructions] Our first question comes from the line of Craig Kennison of Baird. Your line is now open.

Craig Kennison -- Robert W. Baird & Company -- Analyst

Good morning. Thanks. On the tax rate, Bryan, what should we use as the effective all-in tax rate for fiscal 2019 and beyond?

Bryan Hughes -- Chief Financial Officer

For 2019 and beyond, although have a 21% statutory, you can assume a 3%, 4%, state rate. That's the unknown rate right now, Craig, as we work through, and I think every company works through, the impacts to the state rate. But that would be the assumption I would guide you toward.

Craig Kennison -- Robert W. Baird & Company -- Analyst

And then, Mike, in your repaired -- prepared remarks, you mentioned the employees, the foundation and some capital projects as potential uses for the windfall from tax reform. What proportion of the windfall would you expect to allocate to shareholders? And kind of on a related note, how does the decision to reinvest in the company in the way you describe impact your 2020 margin plans, if at all?

Michael Happe -- President and Chief Executive Officer

Good morning, Craig. And I'll probably have Bryan go into a few more of the details around the employee distribution and its percentage potentially of the tax reform benefit. And I would say that we're not necessarily looking at the tax reform savings as something that will be a -- certainly a headwind to meeting our 2020 objectives. Certainly, all this continues to unfold.

And as you know, it's not the only development that's happening in the economic market as well, with certainly some of the things I referenced earlier around steel and aluminum tariffs and other potential pressures there. So we believe this is just another factor in striving toward the four 2020 goals that we laid out. And if you're referencing specifically the 10%-plus operating income goal that we announced last November at our Investor Day, we certainly are not hedging away from that. And as we intentionally use the plus in that phrase, we will do everything we can to meet that and certainly exceed it.

But Bryan, you want to speak to some of the --

Bryan Hughes -- Chief Financial Officer

Yes, Craig, as it relates to impact on the 2020 margins, those will be discretionary decisions that we would make at the appropriate time in the future. I would say, at this stage, the impact to our OI margin would be inconsequential.

Craig Kennison -- Robert W. Baird & Company -- Analyst

I guess the question is, should shareholders read anything into the fact that they were not mentioned among the groups that are going to benefit from the tax windfall?

Bryan Hughes -- Chief Financial Officer

No, you should not read anything into that. There will certainly be a portion of the benefit that will flow to shareholders.

Craig Kennison -- Robert W. Baird & Company -- Analyst

Great. Thank you.

Bryan Hughes -- Chief Financial Officer

That was meant to be implied.

Operator

Thank you. Our next question comes from the line of Seth Woolf of Northcoast Research. Your line is now open.

Seth Woolf -- Northcoast Research -- Vice President

Hey, good morning, guys. Thanks for taking my question. Just a couple quick ones for me. First one, just, thank you, Mike, for the color on the production cadence inventory.

I think that's really helpful information. I guess, it seems a little bit more of a cautious tone. Have you seen anything with retail, perhaps, with any reference to the snowstorms coming, have you seen anything to maybe cause a little bit of a later start to the season?

Michael Happe -- President and Chief Executive Officer

Well, good morning, Seth. I would say, certainly, any time nor'easters hit the northeast part of the country, that may have an impact on that particular part of the country. I've talked to a few RV dealers in that area of the country whose lots are becoming a little bit more difficult to maneuver around. And certainly, as they take in some inventory from OEMs to start the season, with the way that snow is piling up, they're trying to figure out how to manage that.

But that's more pragmatic and logistical for the dealers. There's been a few retail shows across the country where weather has not been favorable. The good news is that, as I mentioned in my comments, we are seeing very strong RV retail show traffic. That is generally consistent across the country.

Now there are times where weather potentially plays an impact on the actual sales that happen at those retail shows. But I would say, when you look at our own results, I mean we're -- I certainly won't share much about what we're seeing here in March at the start of third quarter. But we have been pleased with Winnebago Industries results on both Grand Design and Winnebago through the first two months of the calendar year, January and February on the retail side. So I think we're all rooting in the north part of the country for the sun to come out and the snow to stop falling in certain places.

But we're not seeing anything that would mean that the customers are going away permanently. If they don't buy at the levels that they might have bought last March, we believe that demand is still there for April or May or June.

Seth Woolf -- Northcoast Research -- Vice President

OK. Yes, hopefully spring arrives soon. OK, then just a real quick question with respect to Grand Design. So there's two parts to it.

No. 1, if we look at the backlog, there's a little bit of deceleration. But does that include the Transcend product? Because we've heard very favorable things from the dealers. And I was just curious if some of the Transcend product would be included in the backlog you reported this morning.

And secondly, there is some consolidation in this space. And I think, generally speaking, some of the consolidators don't carry Grand Design. Any -- could you just kind of give us a reminder of what happens when you have a Grand Design dealer that's acquired and maybe the parent company doesn't generally do business with Grand Design? How does that shake out? Are there opportunities for you to move to another point of distribution of the market if need be?

Michael Happe -- President and Chief Executive Officer

Sure. I'll address your first question, obviously, first. That being around the backlog for Grand Design. We are very comfortable and pleased with the backlog for Grand Design.

And as we referenced in our comments, this business continues to grow at a very material pace. They have introduced new products, really in each of the last two or three years, that have really hit the mark in the industry. And all of those products, as they're introduced, had a little bit of a different cadence to them in terms of order generation. Certainly shipment pace and then the retail impact on the business.

And so your question, I think, was specific to the Transcend. We are taking orders for the Transcend and have been since we showed the product in Louisville in November of 2017. However, we are working with the dealers to make sure that the orders that they give us on the Transcend are reasonable on what we can fill over the course of the coming months. The Transcend is being built on a new line in one of the new production facilities on the Grand Design campus.

That production really began in earnest in early January and is continuing to ramp-up to material production rates as we speak. And so, if you were to survey many of the Grand Design dealers, they would tell you that they're not really -- they really haven't been able to get as many Transcends yet, as they would have liked. Because the customers are learning about it, and they are asking the dealers. And certainly, they're acting, in terms of retail, on the units that they do have on their lot.

So we can continue -- we will see transcend contribute more to the backlog in the future and to contribute, obviously, more to the shipment and retail results as well. The other thing that perhaps I wasn't overly emphatic about in my comments were, Grand Design has gotten off to such a great start in its company's history that its back-order position really outpaces significantly its capacity or manufacturing capabilities. And as you guys well know, there is a point where too much of a good thing can hurt you a bit. And that backlog for Grand Design was certainly elevated because of strong demand, new products, pipeline fill.

But we have been struggling to obviously react to that with strong production rates. We believe that this addition, and if you remember, a couple of quarters ago, we referenced 40% more square footage being added to the Grand Design campus over time, we believe that those manufacturing additions will certainly allow us to work the backlog down while we continue to add orders to the backlog in the future. So it's a bit hard on Grand Design to do apples-to-apples on backlog still. And that will probably normalize itself over the coming years.

Seth Woolf -- Northcoast Research -- Vice President

OK. And what about the consolidation? And if you a dealer that's taken out?

Michael Happe -- President and Chief Executive Officer

Thank you, for the reminder. Our process for Grand Design, very candidly, is very similar to what we do the other two businesses as well. Whenever a dealer in the marketplace is acquired or has a new owner that presents itself, we look at that situation on a one-by-one basis, and determine whether that new ownership group is aligned with what we want to build in the market. Now there are certain states in market, which have specific franchise laws or some regulations, which make that process a little bit different in some areas than it is in others.

But for Grand Design, we are very pleased with the dealer base we have. And as potential dealers, that carry Grand Design, are consolidated, we review those on a case by case basis and determine whether the new company that acquired that dealer is somebody that we feel is a good fit for the Grand Design business model going forward. And there are many great independent dealers in the RV business that would love Grand Design, that do not have it. And they are certainly folks that we'll look at in the future, if they acquire one of our dealers. But, again, case-by-case decision as that happens.

Seth Woolf -- Northcoast Research -- Vice President

Got it. Thanks, guys.

Operator

Thank you. Our next question comes from the line of Steve O'Hara with Sidoti. Your line is now open.

Steve O'Hara -- Sidoti & Company -- Analyst

Yeah, hi, good morning.

Michael Happe -- President and Chief Executive Officer

Good morning.

Steve O'Hara -- Sidoti & Company -- Analyst

So, I mean, I guess, in terms of the Grand Design, I mean, it looks like your production has kind of been short of your backlog for some time. So I assume with the production increases coming at Grand Design and potentially the wholly owned towable business, you could have the potential to produce more than you currently have in the backlog at the end of the quarter. Does that make sense?

Michael Happe -- President and Chief Executive Officer

Well, certainly our production capabilities are increasing on the Grand Design campus. And as long as we have, obviously, a healthy backlog and the market conditions remain stable and hopefully growing, we'll continue to utilize more and more of the new capacity that we bring online. So I don't want to get into specifics about how much we can make and what percentage of the backlog. The backlog is literally a sort of a first-in-first-out list.

Dealers have placed orders, with obviously, the intention of receiving those. And the Grand Design team is feverishly working to fill those orders as quickly as they can with high quality product. And so there is a pace to a manufacturing process that we try to stay within to make sure that our employees work in a safe, productive environment. But yes, our capacity is increasing in that business.

And so long again as market conditions and our backlog warranted, we hope to continue increasing manufacturing output to meet that demand.

Steve O'Hara -- Sidoti & Company -- Analyst

OK. And then did you say what the growth was for Grand Design year over year in terms of revenue?

Bryan Hughes -- Chief Financial Officer

We're not calling out Grand Design specifically anymore. But the towable segment was 55%.

Steve O'Hara -- Sidoti & Company -- Analyst

OK. In terms of -- I mean, can you maybe talk about in terms of the Winnebago towables? I would assume the growth rate would've been higher there just due to the fact that it's a low number. Does that make sense?

Bryan Hughes -- Chief Financial Officer

Yes, it's a much smaller piece of the towables segment than Grand Design is. But both businesses combined together, are contributing very nicely to the growth rate.

Steve O'Hara -- Sidoti & Company -- Analyst

OK, OK. And then lastly, just on the -- I mean obviously the EBITDA, adjusted EBITDA, for motorhomes down again. I think that was expected based on comps last quarter. Can you just talk about longer term, certainly not this year, but maybe what your goal is for that business? Can you kind of get it back to levels that it was in the past? Do you still feel confident that you're maybe on the right track? I know sometimes you can take a step forward, two steps back, and it's not a straight path, I guess, is what you've said.

But do you still feel confident that you can return that business to maybe prior margins or what type of margins are the goal there on an da EBITDA basis?

Bryan Hughes -- Chief Financial Officer

Yes, so Steve, that's a -- that's certainly a focus is, I believe, you can tell from our comments this morning and then previous quarters. I hate to be overly simplistic, but we'll break the motorized turnaround into two pieces. One, facing the market. Are we becoming more competitive in the marketplace with products that dealers and end-customers like? And can dealers make appropriate margin on the Winnebago-branded motorhomes that we're offering? We are making good progress facing the market on the motorized business.

Our product line is turning over effectively. We're getting more efficient at introducing new products to the market. Those products are more regularly being viewed as good products. We believe we can do even better in the future with the sort of the feature combination and certainly the design elements, both interior and exterior.

But facing the market, we believe we're starting to see some traction. And we don't want to get ahead of ourselves. But we're working hard to rebuild the dealer's confidence in what we can do. But also ultimately then earn the right to get the end customers business.

The second half of the motorized turnaround is certainly, as you mentioned, the profitability of the business. And that has been something which, for me now having been at the company 26 months, has proven to be a little bit more of a headband than I would've expected and certainly would've liked. Now some of those are very intentional investments in order to upgrade and revamp our manufacturing facilities and our capacity on the motorized side. And some of those are intentional in terms of defending what has been eroding market share.

We've introduced products in the Class A gas and Class C now here with our early quarter unveiling of a new product, which are meant to attack that portion of the market that we weren't previously competitive in. By the team is intently working on driving the cost structure of the overall business, including materials and labor, into a stronger position. And your question about what is the margin potential of the business, we have been very clear that we have expectations for, over time, low- to mid-double-digit margin -- gross margin potential in this business. And that progress has been slower than we would've liked.

The gap between our first-quarter profitability, Q1, '18 versus Q1 '17, that gap is wider than what it is now between Q2, '18 versus Q2, '17, meaning we've narrowed the gap a little bit year over year. And we will look to potentially increase the gross margin, hopefully, consistently in future quarters. So lots of hard work being put into that and we recognize that has to happen to have all three flywheels of our business model spinning.

Steve O'Hara -- Sidoti & Company -- Analyst

OK, all right, thanks very much.

Bryan Hughes -- Chief Financial Officer

Thanks.

Operator

Thank you. Our next question comes from the line of Scott Stember of CL King. Your line is now open.

Scott Stember -- C.L. King & Associates -- Senior Vice President

Good morning, guys.

Bryan Hughes -- Chief Financial Officer

Good morning, Scott.

Scott Stember -- C.L. King & Associates -- Senior Vice President

Just looking at the growth in the towable business, again, it was all organic this quarter. And just, I know this isn't an exact science, but if you look at your growth in generally speaking Grand Design's growth at retail, which has been at that mid-50% range. So it pretty much assumes, I know there's been some build up of product, but obviously that you have some really good pull-through on the other side of that. With that said, heading into the back half of the year, where things stand right now with your backlog and just where your dealer inventories are, did do you still believe you're still in that position to mostly have that mirror what we're versing at retail versus wholesale?

Bryan Hughes -- Chief Financial Officer

As I mentioned late in the prepared comments, our turns on the Grand Design business in the field are steady. Which means that, as things are being retailed, inventory is being replenished. And the aging inventory at Grand Design is, very honestly, in wonderful shape. It's the best of our three businesses, and not presenting any headwinds really to us at all on that particular brand.

We continue to be optimistic about Grand Design's growth prospects in the future. The lot number starts to kick in a little bit, as that business begins to get a little bit or a lot bigger. In terms of the percentage comps that you can put on larger numbers. But again, we're very early on, as an example, in the Transcend, in our entrance into the introductory travel trailer segment, or as the industry insiders will call it, Stick-and-Tin.

And so, we have really barely any share at all in the Stick-and-Tin segment. And Grand Design is now our first entrée into that segment. And so, in addition to the other products in their line, and some of the additions and wrinkles they've been adding there, we continue to be optimistic, Scott, about what they can do. And as long as the turns stay in good shape, that's, for, us a good sign.

And I know people look at backlog and they look at inventory. We look at turns very intently in terms of whether they're increasing or decreasing or staying stable. And for a business like Grand Design, that's a -- continues to grow tremendously. We're pleased with where -- how they're managing their business and their performance in the market.

Scott Stember -- C.L. King & Associates -- Senior Vice President

So basically, echoing the comments in the press release and what you said, you're comfortable with your Grand Design inventory right now, where it stands?

Michael Happe -- President and Chief Executive Officer

We are comfortable with our Grand Design inventory. We are taking dealer lot share. We're introducing new products. The aging percentage of that inventory is very low.

And more and more dealers are shifting more business to Grand Design. And so, again, Grand Design is -- has mid-single-digit share of the towable segment. And so there's a lot of runway there, which means the raw inventory numbers, gross wise, should grow over time as we take share. So long as the turns stay steady or increase.

And again, we watch both those to make sure inventory is healthy.

Scott Stember -- C.L. King & Associates -- Senior Vice President

Just going back to the backlog, on a year-over-year basis. Again, you said the last year, it sounds like you were taking full orders for a couple of new products. This year, I guess, you were taking orders but not really as much as you probably could've, because you don't want to just have units that you can't deliver if you don't have the production capability for it. So how do we -- good way to look at the backlog could've been a lot higher if you really -- if you were to fulfill all of the Transcend orders that are out there?

Michael Happe -- President and Chief Executive Officer

Yes, I would just say that the Grand Design team has very much been managing the conversations with the dealers about the Transcend and the production output capabilities. And I think dealers are placing orders that are in accordance with what they believe the production output is. And so as production increases on the Transcend, and knock on wood, the products continues to retail, as it has been early on at strong levels, we believe we'll continue to see the order backlog increase on Transcend. It's material today.

But again, it's a -- it's still very early. And probably one year ago, we were probably putting our foot on the pedal a little bit with the Imagine, and I think, the Reflection product that had been -- those two had been sort of recently introduced in the year prior. And so timing is obviously a little bit different in terms of the Transcend introduction. But again, we're not seeing any concerning signs in terms of market acceptance of the Transcend, as compared against the other products Grand Design has introduced in its lifetime.

Scott Stember -- C.L. King & Associates -- Senior Vice President

And just going to the Outlook on the Class C side, you talked about how earlier this month, so -- is when you revealed it. It Sounds like it's been well-received. And maybe just talk about -- I mean, this was not in your motorized backlog, Of course, at the end of February, correct?

Michael Happe -- President and Chief Executive Officer

No, we unveiled that at the National Dealer Meeting in early March in San Diego. We also unveiled, and I did not mention this in my comments, a new Travato product with a lithium battery pack, which also was received very favorably by our dealers. And we took orders on both of those products in addition to other products that we showed. But those were kind of the two primary new motorized offerings.

And so, the orders we took on both the Class C Outlook and the Travato, and that we're continuing to take, would not have shown in our end of Q2 backlog. So that narrative and conversation with the dealers is really just beginning on both of those products.

Scott Stember -- C.L. King & Associates -- Senior Vice President

Got it. And then just one last quick one. I know it's far too early to talk about tariffs. But maybe just give us your initial take on that on how you would handle that.

Whether it would be through price increases? And maybe, if you could just talk about, I don't know if you have this figure handy, but steel and aluminum, how material of a piece of your cost of goods sold? And that's all for me. Thanks again.

Bryan Hughes -- Chief Financial Officer

Scott, this is Bryan. The impact of the tariffs and how that will flow through into the domestic marketplace here is still a big unknown. OK. So we have gone through a process of analyzing our direct purchases, which are entirely domestic.

Our direct purchases of steel and aluminum, i.e, which are domestic. Our component parts, we likewise, analyze what percentage of our cost of goods are exposed to the component parts. And so, we've done all the work. Now it remains to be seen where the market settles on steel and aluminum here.

And I think it's a little bit early to tell. And of course, our initial [Inaudible] assume that the administration will stick to the no exemptions policy. And that is clearly loosening now with Canada and, I think, Europe now, also receiving exemption. So a lot remains to play out yet in the marketplace.

How we would handle it? We would certainly first work with our vendors. Understand how we could offset any potential increases from the marketplace through cost reduction initiative that we would jointly pursue. And then, we would also pursue any [Inaudible] necessary to offset inflationary pressures around aluminum and steel in the marketplace. So that's how we are approaching it.

But it's still early, it seems, in terms of seeing how this will play out in the market.

Scott Stember -- C.L. King & Associates -- Senior Vice President

Got it. That's all I have. Thanks for taking my questions.

Bryan Hughes -- Chief Financial Officer

Thank you, Scott.

Operator

Thank you. Our next question comes from the line of Mike Baudendistel With Stifel. Your line is now open.

Mike Baudendistel -- Stifel Financial Corp. -- Vice President

Thank you. I just wanted to ask about the Winnebago-branded towable-expansion project and some of these other projects to expand the manufacturing capacity. Could you frame that for us in terms of how much you're increasing the capacity for unit output? Or is there potential revenue?

Michael Happe -- President and Chief Executive Officer

Yes, so, Mike, good morning, and thanks for the question. This is Mike. I -- we're not sharing specific unit or even revenue and the potential impact from the capacity expansion plans. We reference with Grand Design, when we made the announcement several quarters ago, that we were adding about 40% manufacturing space to the Grand Design business.

Now not all of that was relative to assembly. There was some increase lamination capacity that was added. And some other room that's needed for material storage and the like. Winnebago towables expansion was approved by our board a couple of quarters ago.

We made that announcement then. We've been working with certainly our construction firm partners and with state and local officials, to be prepared to kick off that project. The land that we intend to look at for that expansion has been recently closed on. And we're nearing the point where we'll be breaking ground and/or at a minimum preparing a site for that project in the future.

And so, if you were to go to the Winnebago towables campus today, it's a relatively small campus versus its size in the industry. And it literally has two buildings that are manufacturing product in it. We will begin the expansion project by adding a third building. And so the math isn't probably exactly from two to three buildings, in terms of our output.

But it gives you some relative idea of the proportion of an increase that's happening there. And we have the capability with the land we've acquired to add even more buildings on that site if we need to. So that business, Winnebago towables, is growing, albeit, at smaller volumes. It's growing at a very similar rate to the Grand Design business.

It's smaller. It has a more compact product line. Very much focuses on sort of a different product concept in many ways. But we are much focused, equally as focused, on growing our Winnebago towables business as we are on Grand Design.

And we have a lot of work to do in the product lineup there. We're very light on ship wheels as an example. Very light on toy haulers. We've not entered the Stick-and-Tin segment with the Winnebago-branded towables.

And so the manufacturing space that we'll be adding allows us to not only grow the current product line, but potentially consider expansion into these other segments.

Mike Baudendistel -- Stifel Financial Corp. -- Vice President

Great, that's helpful detail. Also, I just ask you as a follow-up on the input cost. It sounds like from your comments that the main sort of pricing actions to pass those input costs onto the dealers would come into the fall when the new model years rollover. And am I interpreting that comment right? And are there opportunities at interim to capture -- to pass this cost on sooner than that?

Michael Happe -- President and Chief Executive Officer

So, there's a difference between model year and fiscal year. The model year changes in the RV industry, actually tend to happen more in the early spring part of the business cycle. And so, when I say model year changes, we're actually right in the midst of some model year changes from 2018 to 2019 across our businesses. And we have tended to tie many of our price increases to model year changes.

And so, some price changes were embedded in performance year-to-date. But there are more price adjustments to come, as the three businesses introduced 2019 model year. And we do not use a straight line pricing strategy across-the-board. We price to market.

Each business unit leader is -- got the autonomy and the empowerment to price the products to the market. But certainly, respectful of some of the price pressures or cost pressures that they're seeing on the commodity or on the supplier side. And the other comment I'll just make is that our three businesses have varying degrees of effectiveness at driving cost out. And as I mentioned, our motorized business can do a lot better job in the future and driving cost out of the products to help offset potential inflationary pressure that we missing the future and that's just part of the learning curve here and the journey that were on is to have a list or productivity improvements and cost improvements without impacting quality that allow us to offset it.

We do better job of it that are towables business today and that's in part why you're seeing the towables' business continued to demonstrate really good profitability.

Mike Baudendistel -- Stifel Financial Corp. -- Vice President

Great. That's helpful detail. I'll just sneak one last one. If I can get some detail on your thoughts on your inventory.

If you have any thoughts on the overall industry inventory levels? Has there been any stuffing the channels by competitors in order to capture share of the dealers' lots or anything like that?

Michael Happe -- President and Chief Executive Officer

Our visibility to industry inventory levels comes from a variety of sources. Some of the inventory financing partner have better insight into that. Sometimes even some of the bigger suppliers can give us some insight into that and very candidly, sometimes we read the endless reports to get some of that inside a little bit as well. I would tell you that, again, we are at distant No.

3 in terms of size of this industry. And so, as you're hearing us say today, we're actually comfortable with the inventory positions in the field on our three businesses. And so, if there is any pressure in the field on inventory levels, it's not coming from Winnebago Industries in the eyes of the dealers. And so to be watch other lines on the large that via visibility do with the dealers that we work with? Sure.

And certainly, my comments in my prepared remarks about OEM manufacturing pace are in some ways related to your question and that I think as an industry, we just, and with all this capacity coming on line, all of us just need to be continually mindful that no matter what the growth pace is, if it's similar to the past several years, or, in fact, if it does slow down, we just need to be very mindful that we've gotta manufacture to what the market is doing. And so that's -- we're having that conversation very much here at our company, let's not get ahead of the market. Let's run the business smartly. Let's optimize everything that we can, but we're not going to drive our turns down in order to take retail share, that's not our strategy.

Mike Baudendistel -- Stifel Financial Corp. -- Vice President

Great. Thanks very much.

Operator

Thank you. Our next question comes from the line of Michael Swartz of SunTrust. Your line is now open.

Michael Swartz -- SunTrust Robinson Humphrey -- Director

Hey, good morning. Just questions on the motorized side. From a profitability standpoint, you said margins were down I guess over 300 basis points year over year, right around that. Can you give us a sense of how much of that is going to be mix versus input cost versus so some of the investments you're making through the ramp-up cost? I think last quarter, you said about 50% of the year-over-year decline was investments.

Could you give us a sense of maybe what that would look like in the second quarter?

Bryan Hughes -- Chief Financial Officer

Yes, and I can give you -- this is Bryan, Michael. Good morning. I don't think we'll provide a specific breakdown of -- in percentage point terms. I'll tell you in terms of how I would rank them and the impact they've had.

I would say, it starts with investments to increase capacity, the on-boarding of the West Coast facility, the change over the lines in Forest City that Mike alluded to. I think the material pressures, I would characterize as second, and I would characterize the business mix as third.

Michael Swartz -- SunTrust Robinson Humphrey -- Director

OK. And just, to help understand a little bit better. On the investment the capacity in the line changeover, I guess thought that you talked about it. When should we start to see that impact ease?

Bryan Hughes -- Chief Financial Officer

When do we start to see it ease? Is that what you said?

Michael Swartz -- SunTrust Robinson Humphrey -- Director

Yes.

Bryan Hughes -- Chief Financial Officer

We're not committing to a specific time frame, Michael. As Mike alluded to, this is a longer-term transformational journey that we're working toward. We believe that were doing all the right things during Q2, I would say, that's true in Q2 as well. And so we're not making a long-term commitment or a near-term commitment to it.

But we are committing to it long term, believe we're doing all the right things to turn this business around and add third transformation journey were on is the right bath.

Michael Swartz -- SunTrust Robinson Humphrey -- Director

And then second question on motorized, I think you said during the quarter, you had some challenges from the sourcing perspective for some of the new product you introduced in the fall of '17. Could you give us a sense of maybe when some of those model mix or some of the sourcing issues actually clear out?

Michael Happe -- President and Chief Executive Officer

Yes, this is Mike. I'll speak to that a little bit. I'll give you an example that's probably a sort of follow first world problem. We introduced there Revel has just been within customers in the market.

It is our Class B 4X4 sort of off-road RV. And it has just hit, just a huge vane in the sense of excitement around, especially younger RV customers and explorers and outdoor enthusiasts about this product. In fact, it actually heads the market in terms of what customers used to buy their own Class B van and outfitted themselves and out of the Revel is essentially what they were trying to build themselves in their own garage. That product when we introduce that at Open House in the fall of 2017, just tremendously generated excitement across dealers and with end customers.

We have seen millions of impressions and hits on social media. And subsequently, the demand from the dealer base has exceeded some of our initial forecasts. And we're working with our suppliers on the Revel to try to keep up. And so that's an example where component availability is generated from stronger demand that we had anticipated.

At the same time, we have a few products in which some of our suppliers and at times working with Winnebago where we've fallen down together and it's inhibited a few of the products from getting out in as timely a manner as we like. So it's not epidemic. It's really sort of spot by spot. But I just point to it in the sense that it's just something we continue to battle in the motorized business as we mature and get better.

Our focus will get more accurate and we'll have better relationships even with most of our suppliers in more timely delivery.

Michael Swartz -- SunTrust Robinson Humphrey -- Director

Thanks a lot. That's all for me

Operator

Thank you. Our next question comes from the line of David Richardson of Morningstar. Your line is now open.

David Richardson -- Morningstar -- Analyst

Thanks, good morning. Just two questions from me. First is on consumer shopping behavior. Have you ever seen any data on customers who perhaps were in the market for an RV and ended up not buying an RV? Or ended up not buying Winnebago product either way? What did they end up doing? Did they end up either buying a different RV? Not buying an RV at all? Or perhaps buying, say, an off-road light vehicle, like a Jeep or a pickup truck?

Michael Happe -- President and Chief Executive Officer

Well, good morning. I would say we have more visibility in the RV customers that start their search with Winnebago and then buy something else. In fact, we -- the term we use here is close rate for that. And in fact, I was just looking at some data over the weekend published by actually in the RVDA publication about Winnebago being the most searched-for brand in Class A and Class A motorhomes.

We literally are the most searched-for online brand in Class A and Class C motorhomes. Last I checked, we did not have market-leading share in either of those segments, which means our close rate is not as strong as we would like it to be. So we then dive into, obviously, those dealerships that do have Winnebago and what's our share in those dealerships compared to their other lines, and we do some analysis around that. It is much harder to track, David, a customer that leaves the shopping process and goes and buys something else in the consumer discretionary market could be an automobile, could be a boat, could be an ATV, anything else that they might want to experience in the outdoors.

So that is harder. We do believe RVs have been competing very effectively for consumer discretionary dollars over the past several years. If you look at the average selling price of RVs compared to that subsequently of the marine market, the RV industry has been very stable and in fact, I think been able to compete very effectively if a customer has a choice there. But no, we don't necessarily track customers who leave the RV sales process in their -- in its entirety.

David Richardson -- Morningstar -- Analyst

OK, thanks, that's helpful. And then, Mike, you also said you're personally not very patient on the pace of the turnaround effort. And what's frustrating you the most right now?

Michael Happe -- President and Chief Executive Officer

Well, I worry, David, about the things we can control and the things we can't. And so we're -- as I said before and at the end of my comments, we're here to build a high-performance ownership culture. Certainly one that cares for employees so that they care for our customers. The majority of my frustration as a leader is around the things that we can control and we can do better.

And the effort in the motorized business is superlative. We think we have very good leaders in different roles but we continue to be inefficient in cases of removing constraints or barriers on the business or creating a few of our own headwinds. And so that's probably where I'd tell you that the pace is a little bit frustrating, but yet, but really turning a 60 -year-old culture and trying to do it in a way which is respectful, but also ultimately convinces our team that were going to build something that we all want to be a part of and all can be a part of. And I would say even the tax reform distribution announcement this morning to our employees signals that we're committed to the culture, both in terms of the cash benefit but also making each of our employees even larger owners with today's announcement as well.

So but thanks for the question. We're working on it.

David Richardson -- Morningstar -- Analyst

OK. Thanks so much.

Operator

Thank you. Our next question comes from the line of Greg Badishkanian of Citi. Your line is now open.

Fred Wightman -- Citi -- Analyst

Fred Wightman on for Craig. I think in the prepared remarks, you highlighted that you were working down sales support levels in the channel. Can you just talk about where those are today versus peers in the industry and sort of where you think that needs to go in the future?

Michael Happe -- President and Chief Executive Officer

Yes, thanks for the question. It's an important topic and I think in terms of the health of our business, we use the term sales allowance to signify at times the sales support you need to support a product moving through the pipeline. First into a dealer lot and on occasion into an end- customer's hands. And this industry, not unlike other durable-goods industries, at times has some habits where OEMs incentivize dealers certainly to take product at times in which inventory needs to be moved.

And I would argue that the healthier our motorized business becomes and the more pull we have with end-customers and the more profitability that our dealers make with our Winnebago brand of motorhomes, the less we'll need to offer potential discounts in order to compete for space on their lots. The good news is, six months year to date in the motorized business as a percentage of sales, we're supporting the sales line with less sales-allowance dollars, which means that the product is getting better, dealers are actually ordering it genuinely, as you can see in the backlog increase of 42%. And it's something that we just want to continue to have a healthy balance in the way that we support dealers with moving product, but we're not looking to -- we are looking to mitigate the temptation to incentivize dealers to take product that they always potentially ask for at that particular time. And we're making some progress on that but it will come because the product itself is better and more demanded by the end-customer and the dealer and we're starting to get there.

Fred Wightman -- Citi -- Analyst

OK, great. And then from an end-consumer perspective, if we sort of look at the two big forces this year, maybe some benefit from the tax bill, offset by rising interest rates. If you can sort of talk about how you're thinking about those two factors going forward for the rest of the fiscal year?

Michael Happe -- President and Chief Executive Officer

Well, certainly, we think there'll be a positive from tax reform legislation. It is starting to slowly trickle into the wallets of end-customers through through their weekly, or twice-a-month paychecks. At the same time, there will be more benefit, I think, from that, as folks in the future receive those checks regularly, they file their tax returns in the future, so we think that will be a positive certainly. In terms of the interest rates and I certainly understand there may be some news yet today, we don't believe that the interest rate ascension that could happen in the next year will tremendously lower RV demand because we believe interest rates are still historically affordable and that the monthly payments that sometimes are offered by the financing companies on sound financing deals combined with those interest rates are still very much affordable.

So while we believe that it's, would we prefer to see interest rates go up? Probably not for our business, but were not anticipating that what we're hearing could happen is going to have a significant negative effect. We believe that there are enough other secular tailwinds and. again, as I mentioned, traffic at RV retail shows has mostly been very good across the country. And so we believe people are still very interested in the lifestyle.

Fred Wightman -- Citi -- Analyst

Perfect. Thank you.

Operator

Thank you. Our next question is from the line of Steve O'Hara with Sidoti. Your line is now open.

Steve O'Hara -- Sidoti & Company -- Analyst

Yes, I guess, sorry for the follow-up. I am late on the call. But could you just remind us what CAPEX would be in 2018 and fiscal '19? Just directionally maybe?

Bryan Hughes -- Chief Financial Officer

Yes, Steve, CAPEX, we're expecting to be around $35 million. And 2019 would come down off of that following the big capacity expansions in both Grand Design and the initial steps we're taking in the Winnebago-branded towable business. And then we also have the ERP. That should be ramping down in 2019 from 2018.

Steve O'Hara -- Sidoti & Company -- Analyst

OK. Thanks very much.

Operator

And I'm showing no further questions at this time. I would like to turn the conference back over to Mr. Stuber for closing remarks.

Steven Stuber -- Finance Director

Great. Thanks, everyone for joining our call today. We certainly appreciate your time and look forward to speaking with many of you throughout the quarter. Thank you, and have a good day.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes today's program. You may now disconnect. Everyone, have a great day.

Duration: 78 minutes

Call Participants:

Steve Stuber -- Finance Director

Michael Happe -- President and Chief Executive Officer

Bryan Hughes -- Chief Financial Officer

Craig Kennison -- Robert W. Baird & Company -- Analyst

Seth Woolf -- Northcoast Research -- Vice President

Steve O'Hara -- Sidoti & Company -- Analyst

Scott Stember -- C.L. King & Associates -- Senior Vice President

Mike Baudendistel -- Stifel Financial Corp. -- Vice President

Michael Swartz -- SunTrust Robinson Humphrey -- Director

David Richardson -- Morningstar -- Analyst

Fred Wightman -- Citi -- Analyst

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