Good day, ladies and gentlemen, and welcome to the Q2 2013 Drew Industries Inc. Earnings Conference Call. My name is Ian. I'll be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I'd like to turn the call over to Mr. Jeff Tryka from Investor Relations. Please go ahead, sir.

Thank you, Ian. Good morning, everyone, and welcome to the Drew Industries 2013 Second Quarter Conference Call. I'm Jeff Tryka with Lambert, Edwards, Drew's Investor Relations firm. And I'm joined on the call today by members of Drew's management team, including Leigh Abrams, Chairman of the Board of Drew; Jason Lippert, CEO and a Director of Drew, and Joe Giordano, CFO and Treasurer of Drew. Let me take a few minutes to discuss our second quarter results. However, before we do so, it is my responsibility to inform you that certain statements made in today's conference call regarding Drew Industries and its operations may be considered forward-looking statements under the securities laws. As a result, I must caution you that there are a number of factors, many of which are beyond the company's control, which could cause actual results and events to differ materially from those described in the forward-looking statements. These factors are identified in our press releases and in our Form 10-K for the year ended 2012 and in our other filings with the SEC. With that, I would like to turn the call over to Jason Lippert. Jason?

Thank you, Jeff, and thanks everybody for joining us on the call today. I want to start off by thanking our outstanding employees, who are all critical to our success. It's because of their hard work and commitment that we achieved record sales of $287 million in the second quarter of 2013. And for the first 6 months of 2013, our sales were $540 million. In addition to our committed employees, our significant growth has resulted from several factors: industry-wide growth, new products, market share gains and acquisitions. I expect these to continue to be the long-term factors which fuel our growth into the future. The RV industry is healthy, with wholesale towable production up 11% for the first half of 2013 and towable retail sales up an estimated 10% for the same period. An even brighter spot for the RV industry is the improvement in motorhome sales, with both motor home and retail, wholesale activity up approximately 30% over the last 6 months. Motorhome components remain a significant opportunity for us for continued gains in market share. We take pride in enhancing the RV experience by providing top quality, innovative products through constant customer input. We are known for bringing a unique approach to the development of both new and existing products in the RV industry. As a result, our customers often bring their ideas and new product opportunities to us for solutions. Over the past few years, we have invested in both personnel and equipment, building a research and development group that is stronger than ever, with a dedicated R&D staff of over 35 professionals. As a result, we're an industry leader in product innovation. For example, R&D group played an integral role in developing our awning product line, which was introduced in early 2012. After just 18…

Thank you, Jason. Our consolidated sales for the 12 months ended June 2013 were $966 million, with the growth rate to date in 2013 that puts us on track for our sales to exceed $1 billion for the full year 2013. And thinking back now to 2009, when our sales were just under $400 million, reminds me of how far we, as well as the industries we serve, have come. In particular, the overall growth we have seen in our sales to adjacent industries and the aftermarket has been strong, and looking at it, it's up more than 25% over the last 12 months. For the 12 months ended June 2013, our sales to customers, other than RV OEMs and other than manufactured housing OEMs, was nearly $150 million or 15% of our consolidated net sales. Together, everything -- looking at with the recent positive consumer confidence readings and continued growth expected for the U.S. economy, albeit modest, I am excited about the future growth prospects for our business. Due in large part to the efficiency improvements we implemented, our gross margin in the second quarter of 2013 was 21.4%, the highest since the second quarter of 2011. During the second quarter of 2013, the impact of many of the initiatives we implemented were realized, including lowering our outsourcing costs as a result of the installation of our second glass tempering facility, with further savings from the new glass tempering facility expected going forward. During the second quarter of 2013, we also opened our new thermoforming operations here in Indiana, which makes kitchen and bath products, such as showers and sinks, among other products. And we expect efficiency improvements in this operation over the coming quarters. In total, as expected, the costs we incurred relating to facility realignment and consolidation…

[Operator Instructions] Please stand by for your first question, at which comes from the line of Kathryn Thompson at TRG.

In an about face, I know that you'd had a lot of questions in the back about what was driving gross margins down, but you've had a few things behind you. You did a nice job of improving gross margins. If you look at the improvement, I know that there were some certain costs related to having to bring on staff in order to meet demand. But you also have been engaged in efficiency initiatives, and there also in the past have been various impacts on raw materials. If you look at your overall gross margin improvement, just in rough numbers, either on a percentage basis or however you like to present it, how much was driven by higher utilization, efficiency initiatives or just certain costs rolling off?

Well, there's a lot of questions there. And I think that what we can tell you is that we've been talking the last couple of quarters about getting some of those efficiency improvements back. And they've been coming by way of efficiencies through some of the automation initiatives through some of the plant restructurings. But in tandem with all that, we've had sales growth of over $250 million in the trailing 12 months. So there's been a lot to get our hands around over the last 12 months. So a lot of our efficiency planning has gone like we thought it would. And as you can see by the results, we've attained some of those efficiencies a little bit sooner than what we initially were forecasting. Can you get a little bit more specific on one of your questions, and we'll just tackle them one at a time?

Yes. Maybe is half of the year-over-year gross margin improvement from efficiency initiatives or would you say a big portion of it, which is rolling off some of the costs that you had, from staffing up? So, really, just trying to understand how much of something is just from higher utilization, which is -- obviously have a positive impact on margins, versus something more company-specific that is beyond the industry that just is more indicative of things that Drew is doing versus just benefiting from an overall industry growth. Does that make sense?

Yes, I'll turn the specifics over to Joe here in a second, but I don't think there's anything specific we're doing. We spent a lot of time and energy at the company over the last 12 months to really focus on restructuring the company. Management and facilities, as we talked about in the first -- last quarter of last year and the first quarter this year, we did significant amount of facilities realignment. So what we're seeing over the last quarter is just a lot of that all coming together, but Joe, you've got some specifics on some other questions. I'll let you handle that.

Yes. Thanks, Jason. Yes, Kathryn, I don't know that I can get in terms of specific percentages, looking at year-over-year, for the reasons for the change. The business over the last 12 and 15 months, as Jason said, has changed so significantly. I look at it a little more sequentially, taking out several quarters of the volatility. And first quarter margins have a little less than 6%. We know we're subpar in here at 9.2%, clearly benefited from the changes we made, as well as benefited from the seasonality of the high sales being almost at $290 million. So that 3.4% sequential improvement, I would say a significant piece of that related to the efficiency improvements, but there was also a decent chunk that related to the spreading of the fixed costs over the seasonality also. I know I'm not getting specific on you, but those -- you've got the big pieces. How it exactly splits, I think, is too difficult to get too precise on that.

And just in terms of RV products, I know that you're focusing more on motorhome products and broadening your coverage here. Could you just remind us what is the potential opportunity you see in the motorized segment? And what additional -- what do you foresee as motorized as a percentage of your total RV business, say, 2 to 3 years out?

Well, it's hard to give a projection there, but I think our content today is a little over $1,000. And we've really started getting after motorhome market just a few years ago. So there's a lot of business there. And with some of the backlogs and growth there and that market edging up higher, we're continuously adding more focus to that area with slide-outs and levelings, systems and windows, furniture, all the key products we supply to towables. We're trying to add some of our focus to the motorhome market, with existing towable sales force and maybe RV sales force we already have in place. So a lot of the motorhome customers are also towable customers, so -- with a lot of the same decision makers. So it's a natural for us.

And any margin differential with motorhome focus versus towable components?

I'm sorry. Can you repeat the question again?

Is there any margin difference in motor -- products focused toward the motorhome sector versus the towable sector?

Not notably. We're -- I mean, it's a lot of the same products. Like I said, there are slide-out systems and leveling systems and furniture and a lot of the same types of things we supply to towable. There's minor differences in a lot of the product but same applications.

And, Kathryn, let me just add -- let me add on one quick thing on the sales side of it there. If we talk about motorhomes and you want to look at the total potential with -- and I will use -- let's say the industry gets back to 40,000 units here with our potential and, let's say, maybe it's around $4,000 per unit, at 40,000 units at $4,000, it's $160 million potential market, which we had about 25% market share today. So if that was to increase to 50%, it would be an $80 million-type run rate, which compared to, let's say, $1 billion in sales, maybe a little over, that's still relatively minor in terms as a percent of our total sales. But again, as we've grown over the last 10, 15, 20 years, we do it in small incremental steps, small product here that may be a $5 million or $10 million or $15 million product line and motorhomes is just another piece of that type of a growth pattern we've had over the decades.

And I'll close, Kathryn, by saying that we're supplying all the major motorhome OEs, a little bit of our products. And we continue to make inroads there, and our products are being well-received.

Perfect. I don't know if this was specifically timed, but the largest RV dealer just had a segment on CNBC as you were opening your call. So nice job with marketing timing.

We have another question for you. This one's from Daniel Moore at CJS Securities.

If you look out a bit further, maybe up to '14, comps will get a little bit tougher, and dealer inventories, obviously, have increased back to more normal levels. Any concern that the level of optimism is -- in the industry is maybe getting a little bit ahead of itself or any other issues that give you sort of pause or concern, particularly giving the incremental levels of staffing that you've had to build up over the last few quarters?

Yes, I think to answer your question, Dan, the industry is pretty consistent. And if you look back, we've never really been able to predict out much more than a quarter or 2 at a time in terms of what our customers are doing. The dealers -- it's all in the hands of the dealers. And if they decide to change their stocking requirements or initiatives, then that immediately falls back and puts pressure on the OEs. But it's been -- it's obviously been a good year so far with sales. Our customers are very optimistic. The shares are better -- turning out to be a better year than last year in terms of unit sales and wholesale. So nobody, right -- at this point in time, nobody is anticipating that kind of change, but we'll watch it quarter-by-quarter and really listen to our customers. And they really give us the best guide to determine how we're going to staff and how we're going to run production at our manufacturing facilities. So, Joe, you have anything to add to that?

No.

And as a follow-up, just your expectations for -- any color you give us and expectations for expense growth over the next 6 months. How much incremental capacity do you have now that -- given the recent increases in the workforce for future growth?

I'll comment on the capacity and let Joe comment on the expenses. But from a capacity standpoint, as we said in many calls, we traditionally don't run a lot of second shifts at our manufacturing plants. So we have all that capacity sitting available if the industry were to experience some more aggressive growth than what we're seeing now. But I think one of the best testaments to our management team this year was, typically, we're running a significant amount of over time in the first 4, 5 months of the year. And this year, we're able to get through that with very little overtime. And that came back and added a better quality, and our employees were fresher. And we, overall, had a better 6 months in part because we did a lot of good planning there. But from a capacity standpoint, going forward, I think we're sitting pretty good.

Yes. And in terms of expenses, it goes right along with the capacity question, I think the expense levels we're at today are what we'd expect for the next several months going forward. And then as we head into the fall, we have the open house coming up here in Elkhart County for all the dealers and then the RVIA show in November, early December. And those 2 shows will give a great indication to our customers and then ultimately to us to see if we need to adjust either our fixed costs and, thus, our capacity here to meet the industry demands in 2014.

And lastly, M&A, it's been relatively quiet, say, for a tuck-in or 2. Talk a little bit about the pipeline, and given the rebound in the industry, is it getting tougher to find deals at attractive multiples?

I think the sellers are expecting a little bit more. I don't think it's necessarily tougher to find deals. There's a lot of businesses out there. But we continue to evaluate that every quarter. And since I've been with the company, there's always been a lot of seller interest out there, but we always look for the right opportunity. And we evaluate that as a management team and with our board. And we just -- announcement dates in June, which is going to help with some of our automation initiatives that we've got coming on board. So we're always looking, and we'll continue to keep you updated as we move along.

We have another question for you. This was from the line of Scott Stember at Sidoti & Company. Scott L. Stember - Sidoti & Company, LLC: Maybe just talk about some of the new products. Obviously, the last year, awnings, electric stabilizers and slide-outs have really had a nice impact on your content per towable. But could you just talk about if there's anything else out there that is starting to move the needle that people look forward to for additional gains, particularly in the back half of the year heading into next year?

Sure. Yes, there's a lot of stuff going on. But I'd say -- you mentioned awnings, and whenever we come up with a big product, it's got the kind of potential that the awning product does for the OE in the aftermarkets. We spend a lot of time out in the marketplace, getting the product out there, focusing on it, tweaking it. That's consumed a lot of resources there, but it's going well, as we've mentioned. And leveling, you mentioned that, that's one of those products that we spend a lot of time developing. And most Class As get leveling product standard. And prior to a couple of years ago, towables didn't have leveling. And when we introduced that product with a lot of success, we've got a lot of the high-end towable product moving toward leveling, and the retail customers have been really happy with the product offering there. So they pulled a lot of that through, and ultimately, it's going to bleed down in some of the mid price points and low price points where the volume is. So we still feel leveling has a lot of potential. If you look at electronics, we're doing some -- we've introduced new products there, and those will continue to get big in all product segments. The toy haulers and motorhomes we've announced are big product potential for us. We're constantly adding new features which go through R&D, new features and benefits to existing products. So while it might not be a brand-new product, we might take something like a step, for instance. We saw a lot of entry steps for the towables and motorhomes. And we've recently made some new features to those -- added some new features to those products, which improved the content with those products. So it doesn't necessarily always have to be a new product, but I'd say electronics would be a big new area that we're doing some new things there. The specialty trailer market will be a big area. It's an adjacent market to the RV business. And we're spending a lot of time with the cargo trailer folks and the horse trailer folks and getting out there and putting new products or existing products that we've got to fit into those products and those new markets. So hopefully that answers your question, Scott. Scott L. Stember - Sidoti & Company, LLC: No, no, that's great. And on the aftermarket side, maybe just talk about what's moving the needle there. And have you started to do any business with awnings in the aftermarket yet?

The aftermarket, where we're at, we've got a couple different phases. We've got a lot of replacement part business coming through our service and our customer service and warranty division. So that grows every year that we introduce new products. So the more products we put out there, the more opportunities there are for replacement part sales, as customers have those needs down the road once they've owned their coach for several years. So that's one area. And then the second area is through the wholesale distributors, which we've been talking about the last year and a half. And we're growing our product offering in the wholesale distributors catalogs, which go right to the dealerships. And at this point in time, we're just spending time getting the information out to the dealers so they know what products exist of ours at the wholesale distributors so that they can purchase those and have those ready for their customers that walk into their retail stores. So that's a longer process, and this will be our second year -- our second full year at the distributor shows that all the dealers attend. So those happen from November through March. And we saw a nice little pop this year after those shows and just people getting more informed about our products. And this year, we don't expect any different, we expect more momentum there. Scott L. Stember - Sidoti & Company, LLC: And as far as the awning opportunity, that's still untapped on the aftermarket?

Yes, for sure. Yes. Yes, it's just going to take time to get dealers familiar with our products in the awning segment. But more importantly, the retail consumer gets a lot more informed about our products once they start buying RVs with our awnings on the RV products, which has just obviously been starting to happen the last 12 months. So... Scott L. Stember - Sidoti & Company, LLC: Got you.

Did I answer your question? Scott L. Stember - Sidoti & Company, LLC: Yes, that's perfect. Last question on the adjacencies. I guess, any bus business that you're doing, particularly with your top customer selling their bus division? Will there be any impact on the way that you do business on that part of the adjacencies?

No, again, like some of the other adjacent markets, there's some -- there's windows and furniture and other products that we sell into the RV business that can be adapted for those other types of markets. But we're consent -- buses are one of those adjacent markets that we're putting a lot of effort toward.

And I think, Scott, you're driving at the specific lower transaction, planning to sell their bus division. And I think we were doing minimal business with them now, and we would expect to continue developing those relationships as that -- even after that is sold.

We have a further question for you. This was from the line of Kevin Leary at Spitfire Capital.

I was wondering if I could talk more broadly about gross margins for a minute. So if I go back and I look at a year like 2010, where industry towable production was up 40% or 50%, this is before you made investments in manufacturing efficiency and automation, but the company still pulled off 22% gross margin. How should we think about a year like that where gross margins were materially higher versus where you are today and where you think you can go in the future? Are the investments you're making today, can they bring you back there, you expect to go beyond that in the next several years? Can you just help us think about that for a minute?

Yes. I am looking back at, you're right, in 2010, 22% for the full year in terms of our gross margin. There is nothing systemically that can keep us from getting back to those levels. Now there are a lot of factors that do drive into that product mix is one of those factors that can definitely have an impact on gross margin as we go forward here in the business. The automation projects that we're working on, the efficiency improvements that we're working on all should assist us and continue to help us improve our gross margins. The other thing to think about coming out of 2010 was a year where the industries were growing significantly, as you mentioned. And we were -- I don't want to say shy is not quite the right word, but we held back in terms of adding -- or adding capacity for future growth. Nobody quite knew where the world was going. And so in 2010, there was a little bit of concern. And I think as we sit here today, we've ramped up to not only meet the capacities for today, but we're beginning to invest for tomorrow at the same time, which is going to have an impact on today's margins also. So systemically, could we be there -- if we will stop our investments, I think you'd see a pop in our margins. But I think, and I know you're a long-term shareholder, one of the reasons is that we continue to invest this for tomorrow. And I think that will have some impact on margins in the short term.

That's helpful. And then just to follow up, what is utilization, for example? Has it changed a lot? I know you're making investments in new capacity, but are we talking a 10% or 20% difference in utilization? Can you just help us? How should I think about that?

When you think -- are you talking about plant capacity utilization?

Yes. So if you're looking at 2010, were you operating full bore? And today, are you operating at 60%, 70% because you're making the new investments?

When I look at utilizations, and utilizations is very difficult concept, as Jason mentioned, we typically won about 1 shift. And we are at about -- I'm going to say about 60% capacity utilization for 1 shift across all of our facilities. And that varies by facility. Some facilities are clearly higher, and some are clearly lower than that. I would say that's not significantly different. If you ask me in 2010, I probably would have said we were at 50% capacity back then of 1 shift capacity.

Right, right. Okay. That's helpful. And then last question, just shorter term. So looking at last year seasonally, it looks like gross margin declined about 100 basis points in the second half. Would you guys expect the similar seasonal decline this year? Or will that decline maybe be less because of the recent improvement?

As I look forward towards the balance of the year, I would expect there to be the -- on the magnitude of a similar type seasonal decline. Now there are many factors that happened in the balance of 2012, the latter half of 2012, as we were engaging in management consulting, increasing our outsourcing of glass, beginning our facility realignment and consolidation process, which significantly impacted the fourth quarter of 2012. But I would not be surprised to see a seasonal decline from Q2 to Q3 in our margins and again until Q4. That's typically what happens with Q4 being the quarter most impacted by the seasonal decline in sales, thus, the spreading of fixed costs over a smaller sales base.

There's no further questions in the queue at this moment in time. [Operator Instructions]

Okay then. We appreciate everybody's time, and we look forward to talking to you on Q3 for the earnings call. Thank you, everybody.