Exhibit 99.1
[SLS CAPITAL LETTERHEAD]
August 27, 2007
Board of Directors
Fleetwood Enterprises, Inc.
3125 Myers Street
Riverside, California 92503-5544
Dear Members of the Board:
As you know, SLS Management, LLC beneficially owns approximately 11.8% of
Fleetwood Enterprises, Inc. ("Fleetwood" or the "Company"). We commend the
Company's CEO, Elden Smith, for recognizing that the Company has significant
intrinsic value and for the steps he has taken to unlock that value since
replacing Ed Caudill in 2005. Despite these efforts, however, the Company has
remained unprofitable over the past two fiscal years and has still not optimized
its cost structure. We strongly believe for the reasons detailed below that the
time is right for the Board to immediately explore consolidation alternatives to
maximize shareholder value. We believe the best available alternative is a sale
of the Company to Champion Enterprises, Inc. ("Champion").
While we understand that the Company's inability to earn a profit owes much to
prior management, more must be done to drive profitability. Specifically, there
remains ample room to reduce the cost structure, bringing it more in line with
that of Fleetwood's peers. In fact, Fleetwood's public competitors have by and
large been able to generate positive margins and net income despite the cyclical
nature of the industry and the current challenges that the industry faces. A
single statistical SG&A comparison between the Company and Winnebago Industries,
Inc. ("Winnebago") highlights the Company's cost structure woes. In fiscal year
2007 in the motor home division, SG&A, inclusive of warranty costs, was $110M on
revenues of $961M (11.5%). During the same period and with lower sales than
Fleetwood, Winnebago's SG&A, inclusive of warranty costs, was $60M (7.1%). Even
allowing for differences in the way the two companies operate, this comparison
demonstrates the Company's bloated cost structure.
We have repeatedly encouraged Fleetwood's management to address its cost issues,
and though we are frustrated with the pace of change, we are supportive and
encouraged by steps taken to start to right size the cost structure such as the
recent decision to reduce the manufacturing footprint of the Company. However
there remains significant opportunity to cut SG&A costs at the Folding Trailers
and Travel Trailers units and the failure to do so at this point is frustrating.
While we believe the Company's latest efforts to restructure its RV group will
eventually support the profitability of this unit, this is not enough. We
believe the only practical way the Company can unlock the potential in its
manufactured housing unit is by dramatic reductions in capacity. Fleetwood's
manufactured housing business has the capacity to manufacture 40,000 homes per
year. Based on the Company's current market share, the industry would have to
ship 300,000 units a year in order to absorb Fleetwood's capacity. This goal is
quite simply unattainable in any realistic investment time frame. The latest
2007 estimates have the industry shipping between 95,000-110,000 HUD code homes.
In total, we estimate industry capacity at somewhere around 200,000-250,000
units.
140 WEST 57TH STREET, SUITE 7A NEW YORK, NEW YORK 10019 TEL 212 537 3600 FAX 212 537 3550
Industry overcapacity is clearly not only a Fleetwood issue. We have repeatedly
urged Fleetwood's management to rationalize capacity. In response, we have been
told that there is only so much capacity to take out before the Company starts
to exit markets. Since this is the same answer that every other industry player
gives, massive overcapacity is not surprising. The only sure path to capacity
reductions is through consolidation. We have therefore encouraged Fleetwood
management to explore consolidation alternatives. We believe the best
alternative available is a sale to Champion structured in a tax-free merger
transaction.
The most uniquely compelling aspect of the combination of Fleetwood and Champion
is their ideal overlap of manufacturing facilities. Out of fourteen states where
Fleetwood has one or more plants, Champion also has facilities. We believe that
the synergies and efficiencies of this combination would result in combined
annual savings in excess of $60M. Our assumptions are as follows:
o A tax free share exchange is done at a 1:1 or slightly higher basis
for Fleetwood shareholders
o The combined company closes at least 11 plants without exiting any
market.
o The combined company saves $14M from elimination of management at
those plants.
o The combined company saves additional $6M of SG&A from elimination of
manufactured housing redundancies.
o The combined company would be able to operate at 80% capacity
utilization up from current 40-50%, thereby resulting in combined
annual manufacturing efficiencies in excess of $40M.
o Our assumptions do not include extra savings that could result from
elimination of corporate overhead.
We believe a strategic combination between Fleetwood and Champion Enterprise
would create more than $600M in value for shareholders of both companies. We
think the value creation for Fleetwood shareholders alone would be approximately
$3 per share, more than 30% increase from where the stock is trading today.
According to the latest SEC filings a significant percentage of Fleetwood
shareholders are also Champion shareholders. Therefore we believe that our
fellow shareholders would be quite comfortable with this share exchange and with
Champion's management.
For the reasons we have detailed, we believe it is in your shareholders' best
interests to immediately pursue consolidation alternatives to maximize
shareholder value. We look forward to continuing discussions with you and your
management team, and we trust that the best interests of all Fleetwood's
shareholders will remain of paramount importance. We must, however, reserve the
right to take any action we deem appropriate to protect the interests of
shareholders.
Sincerely,
/s/ Scott L. Swid
Scott L. Swid
Managing Member
SLS Management, LLC
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