SEEKING FOLDING TRAILER DIVISION PROFITABILITY
Our folding trailer division also lost money this year. The folding trailer industry experienced weakness similar to that in travel trailers and we were unable to generate a profit in spite of the fact that we hold dominant market share. In addition to the same cost cutting that the rest of the RV Group has undergone, we are pursuing opportunities to improve our manufacturing processes as well as other measures to return to profitability as soon as possible.
This has been an eventful year in a very challenging market.
We have made significant progress in rebuilding the foundation upon
which Fleetwoods future will be based . . .
HOUSING GROUP MEETS CHALLENGES HEAD ON
We believe the Housing Group is well positioned for the current market. Calendar 2006 with just 117,000 manufactured housing industry shipments was the weakest year since 1961. In the face of this very soft market, with sales dollars down 35 percent in fiscal 2007 versus 2006, the Housing Group was profitable in three of the four quarters. For the full fiscal year, however, the Group incurred an operating loss of $2.6 million.
To optimize profitability in this adverse environment, we reduced the number of Housing Group regions from three to two to eliminate management costs and to better reflect the current network of plants. Plants were consolidated in Tennessee as well as Southern California, and we closed a manufacturing facility in south Georgia. Meanwhile, in an effort to capitalize on opportunities we see in modular housing in certain areas of the country, an idle plant in Douglas, Georgia, was converted to modular production, as was an operating HUD-Code plant in Belton, Texas. We are now running 20 facilities, down from 22 at the end of fiscal 2006.
PURSUING IMPROVEMENT IN HOUSING DISTRIBUTION AND CUSTOMER SATISFACTION
Warranty costs have declined, primarily due to decentralizing the service function, which has given our plants the ability to solve problems more quickly and effectively. The Group has also instituted better quality controls and pre-delivery inspection systems, resulting in improved product quality as well as reduced warranty costs. We have returned to the discipline of tracking satisfaction scores from all constituents.
Our Customer Satisfaction Index is calculated monthly based on a quick survey of all ultimate Housing customers. Our retailers are asked to rate us every six months in all areas of performance including product value, product quality, warranty service, and sales team performance. Due to our renewed focus on quality and customer service, both of these indexes indicate our performance has improved significantly over the past two years.
In an effort to restore some of the retail capacity we lost with the sale of our company-owned stores in 2005, we launched a successful national New Point of Distribution initiative targeted at increasing our national distribution with new, quality, independent retail locations.
We are also supporting our retailers with a new incentive program Fleetwood Rewards and an upgraded, dynamic extranet site, www.FleetwoodRetailers.com. As of June 25, 2007, more than 1,700 subscribers representing 779 retail locations have signed up. Our revamped public website, www.fleetwoodhomes.com, was launched in October 2006, and has generated thousands of leads, which are assigned to Fleetwood Homes retailers.
We are also emphasizing a renewed lean manufacturing initiative early in fiscal 2008 that will enable us to improve plant productivity, efficiencies, and associate safety, as well as reduce costs. It will be coordinated by our industrial engineering organization and implemented by our regional and plant management teams.
CHANGES AND OPPORTUNITIES APPARENT IN HOUSING MARKET
Late in the year, the Housing Group launched the Trendsetter Modular Division and introduced the Trendsetter Homes modular housing brand. Like manufactured homes, modular housing is built in a factory setting, but to a local or regional building code rather than the federal HUD Code. Modular homes require a different marketing strategy, with an emphasis on relationships with builders and developers. The new divisions production is incremental to our single-family HUD business, and includes condominiums and military barracks, which do not necessarily track the same cyclical patterns as HUD housing.
All indications are that modular housing will be essential to rebuilding the areas devastated by Hurricanes Rita and Katrina. The Gulf Coast has made very little use of modular homes in the past, and so we are on a level playing field with our competitors in establishing relationships with builders and developers. In addition, the location of our manufacturing facilities is ideal for supplying this area.
There is no doubt that the problems in subprime and Alt-A mortgages will affect our industry; what we dont know is exactly how or when. The site-built housing financing story is familiar, containing many of the same elements that have impacted manufactured housing financing since 1999. While the first part of calendar 2007 suffered the lowest shipment levels of this extended downturn, we began to see reports of higher manufactured housing loan application volume with improved credit quality in January. Our own year-over-year backlog saw improvement beginning in late January. These are encouraging signs and may indicate that a number of potential manufactured housing customers who had been persuaded to buy site-built housing through some of the subprime or other liberal mortgage schemes are now seeking alternative affordable housing.
FOCUSING ON CORPORATE INITIATIVES
Our overall strategic objectives for fiscal 2008 and beyond are similar to those for fiscal 2006 and 2007, although we intend to continue raising the bar on each of them. First and foremost, we expect to see improvement in financial results. We anticipate that the restructuring and cost-reduction initiatives we have undertaken, particularly in the last half of fiscal 2007, will bear tangible results in fiscal 2008.
We will continue to work to improve market share, unit volume, and revenue; reduce costs and further streamline our organization; and strengthen our balance sheet. We will focus on forward-looking product development, efficient manufacturing techniques, the most productive locations, and creative marketing. We will continue to seek opportunities to leverage our manufacturing capabilities and capacity as well as the considerable talents of our management team and workforce.
BIDDING FAREWELL TO OUR FOUNDER AND FRIEND
John Crean, who founded Fleetwood in 1950, passed away after a long illness on January 11, 2007. His vision and leadership set the standard not just for Fleetwood, but for much of the RV and manufactured housing industries. Early on, John was determined to build the foundation of Fleetwood on functional, reliable, high-quality products, produced by a financially sound company composed of loyal, motivated people. Motivated employees have been attracted to Fleetwood by the same things that gave John a sense of satisfaction: an opportunity to be creative, to make decisions, to make mistakes and improve, to control their own destiny, and to share in the resulting profits. These are the values that made Fleetwood a leader in both of our industries, and they are the values we are restoring to this fine company.
LOOKING TO THE FUTURE
This second year in our turnaround effort has been an eventful one in very challenging markets. We have made significant progress in rebuilding the foundation upon which Fleetwoods future will be based, and toward achieving our long-term objective: making Fleetwood the most respected manufacturer in our industries and producing recreational vehicles and affordable manufactured housing that exceed our customers expectations while generating industry-leading returns for our investors. We appreciate your patience and support as we work toward these goals. The support of our shareholders, our associates, our dealers, the hundreds of thousands of Fleetwood owners, our suppliers, and our lenders is essential to our future success. Thank you.
ELDEN L. SMITH
President and CEO