A very good morning, ladies and gentlemen. Thank you all for joining. Welcome to the First Quarter 2014 Drew Industries Incorporated Earnings Conference Call. My name is Lisa, and I'll be your operator for today. Today's conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Ms. Renee Ketels with Lambert, Edwards & Associates for opening remarks. Please proceed.

Good morning, everyone, and welcome to the Drew Industries 2014 First Quarter Conference Call. I'm Renee Ketels with Lambert Edwards, Drew's Investor Relations firm. And I am 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; Scott Mereness, President of Drew; and Joe Giordano, CFO and Treasurer of Drew. Management will be discussing first quarter results in a moment. But first, they have asked me 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 and involve a number of risks and uncertainties. As a result, the company cautions you that there are a number of factors, many which are beyond the company's control, and which could cause actual results and events to differ materially from those described in the forward-looking statements. These factors are discussed in the company's earnings release and its annual report on Form 10-K and in its other filings with the SEC. The company disclaims any obligation or undertaking to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made, except as required by law. With that, I would like to turn the call over to Jason Lippert. Jason?

Thanks, Renee, and thanks, everybody, for joining us on the call today. I've started and ended my prepared remarks on each of these calls for the past year thanking our outstanding employees. This call will be no different so I want to again say a personal thank you to all of our people. It's because of the efforts of our more than 5,000 employees nationwide that we have been able to improve manufacturing efficiencies, develop new products, make acquisitions and better service all of our customers. Because of the tremendous efforts of our employees, we have grown from $400 million in annual sales in 2009 to over $1 billion today and why we believe that we'll continue our growth in the future. The extreme weather conditions in the Midwest caused a slower-than-expected start January 2014. As a result, our sales for January 2014 were negatively impacted. However, strong industry-wide demand, coupled with the catch-up for production delays from January, resulted in a 13% sales increase for the first quarter. Over the past 2 years, we have been increasing capacity with physical space, investing in employees through hiring, training and retention, as well as improving operating efficiencies through continued lean and automation activities. The fruits of these investments are reflected in our operating results for the first quarter of 2014. We are regularly evaluating our capacity needs and are continuing these types of capital investments in order to stay committed to efficient growth. As we look to the future, we see several paths for additional growth. First, the RV industry is strong today. While there are no guarantees, we believe that there are several positive factors, which will benefit the RV industry. Among those are positive demographics and continued growth in popularity of RV. Several industry analysts also report that the…

Thanks, Jason. As Jason noted, we are continuing to evaluate our capacity needs and are investing further for the future. When we reported our year-end results, we noted that in January 2014, we entered into a 9-year lease for a 366,000 square foot facility to consolidate our furniture and mattress operations. And in the last month, we entered into a 12.5-year lease for a 539,000 square foot facility, half of which is subleased for 5 years, to improve and expand our distribution and warehousing capabilities. These 2 new leases add significant new capacity, in part to improve our customer service, as well as helping us prepare for expected growth over the next few years in the industries we supply. In connection with the opening of and relocation to these new leased facilities, we anticipate incurring realignment costs over the next several quarters, but not of the magnitude experienced in 2012 and early 2013. In addition to adding capacity through more facilities, we are looking to add capacity at our existing facilities by continually considering ways to optimize operating efficiencies through automation and process improvements. Put simply, we continue to ask ourselves the question, how can we do more with less? We will also look to leverage the G&A structure we already have in place. The initiatives we have underway to further improve margins will take time and results will not happen right away. But we expect to see additional benefits from these initiatives over the longer term. In addition to the investments we're making internally, we also completed 2 acquisitions in the 2014 first quarter. The acquisition of Innovative Design Solutions provides us with further access to unique and innovative electronic products for the RV and adjacent industries, while the acquisition of the business and certain assets of Star Design…

[Operator Instructions] And our first question is from the line of Scott Stember of Sidoti.

Could you maybe call out if there was any extraneous cost related to any inefficiencies? Let's say snow removal related to the production bottlenecks that you saw from some of your customers?

As far as the -- as far as impact of the weather on the snow removal side, it was insignificant. But we had a few days' delay with customers where they were shut down. And like we've mentioned in the release and in some of our remarks, we saw several customers trying to catch up in the prior months with working Saturdays and days that they might not have worked otherwise. So we feel as the quarter is a pretty good snapshot of what the quarter would have been without the weather.

Okay, great. Next question, there's some commentary about driver shortages in the Elkhart area and potential increases in freight rates. Could you talk about how you guys are viewing that and how it could potentially affect you guys?

Yes, there's certainly a lot of talk about that right now. I mean, RVIA is involved and they've had recent meetings here in Elkhart and some panel discussions, trying to figure out how to attack it, but really, it's an age-old problem. It pops up every time this year. And I think the industry is at a point where we need to probably look at making some investments as an industry to get that problem taken care of and plan far enough ahead because this problem pops up every peak season time, from January to June, and units tend to stack up a little bit. It's a little bit worse this year with the weather. And I think that, in the next few months, the game plan for 2015 will probably come to fruition. It sounds like they're making some headway and adding some new resources to the plan, but that's about as much as we can comment on right now, as much as we know.

Okay. And as far as the facility realignment costs, Joe, that you referred to, could you maybe just expand upon that a little bit?

Yes. Scott, that -- when we're thinking about moving, right, so we're going to be moving our furniture and mattress operation here over the coming quarters. And as I've noted, we do not expect the cost to be material. We have moved operations here just back -- like we noted in 2012 and early 2013. So we've become quite good at it and become a little more efficient than maybe we were a few years ago. So I do not think the cost will be significant related to the coming quarters.

Got you. And last question, could you talk about the aftermarket? Any new products that are sticking and that are worth mentioning? And could you talk about whether you started selling the awning into the aftermarket yet?

Sure. We -- to start off, I think it's noteworthy to mention that what -- I think we mentioned in the remarks that we feel the aftermarket in total is a few hundred million dollars. And the more time we spend around it and the more we've grown our team, there just seemed to be more and more opportunities. We get more and more excited every quarter, and we're throwing in more and more resources at it every quarter. But if you look at the popular products, right now, we're having a lot of traction with mattresses and furniture, if you look at suspension products and some of our accessory products. We've got a lot of other areas we're selling a little bits and pieces into and starting to get traction. But the last 2 years since we started in April 2012, really focusing on the aftermarket and starting to hire a team and develop a bigger team that focuses on the wholesale distributors, the dealers, the Internet service providers, the dealer Internet service, the Amazons and the thousands of dealerships that are out there with physical stores and storefronts, it's -- the demand out there is quite astounding. But we've just started selling awnings into the aftermarket, and we expect to continue to get more traction in that product. We noted, when we first started talking about the aftermarket, that awnings is $75 million plus in potential, and we feel that we're just getting into some real traction with customers that sell awnings into the aftermarket in bulk, and we're going to take advantage of that.

Our next question is from the line of Dan Moore with CJS Securities.

This is actually Lee Jagoda for Dan Moore. So your 22% gross margins in the quarter were pretty expectational. Where are you regarding capacity utilization? And are there -- is there any room for additional upside in margins as we move out over time?

Well, with respect to the capacity utilization, I think the best way to answer that is we talked about adding capacity ahead of demand the last several quarters and we feel that's been real effective in our ability to lower our overall costs through a reduction of overhead and increasing the manufacturing efficiencies. When we stay ahead of the growth curve, we're typically able to spend -- we're not spending time trying to keep our heads above water but we've got the capacity and are able to focus on new initiatives and efficiency initiatives and things like that. So that's the answer to the capacity question. In terms of ability to continue to grow our margins, we can't give projections, but I think the best way to answer is that we're still working on lean and automation efficiencies, as well as many other manufacturing efficiencies that are key initiatives for our manufacturing groups. And we hope to continue to make progress there like we have in the past several quarters.

Great. Just switching gears a little bit. If I look at your manufactured housing revenue, it was down a little bit more than the overall market. Is there something specific to your geographies of your customers?

I'll take that one. We did have one significant customer that had chosen to vertically integrate our product line. That began late in the -- in Q4 of 2013. If you were to exclude that, we actually would have been up for Q1.

So how do you see that trending going forward?

Well, we don't expect to see any other customers do that, but this particular customer feels that that's part of their overall strategy.

And to add to that, I think that we've seen this trying to happen before over the last decade. I mean, you get manufacturers that want to go their own way and vertically integrate a little bit, and we've seen some stick with us and some come back. But the most important thing is we always find a way to -- we've always been able to find a way to replace that business, so we're fully focused on doing that.

Our next question is from the line of Kathryn Thompson with Thompson Research Group.

This is Wenjun sitting in for Kathryn. I have a follow-up question on capacity utilization. Where do you see the biggest opportunities versus your competitors as demand continues to grow into a suppressed capacity?

In terms of, well, in terms of physical space, I mean, our growth is centered around Elkhart County and all the RV activity that happens here. That's where a lot of our growth is coming from. So we're focused on expanding plants. We've announced that we've purchased or entered into lease agreements, 2, 3 substantial facilities several hundred thousand square feet, and we have not moved into those yet. We're in the process of moving in. So if you look at what those 2 large facilities are going to add to our current capacity base, I think it's looking at -- looking ahead to 2015, we're already covering the growth with current capacity in 2014. Having these facilities will really help us to be able to handle increased demand and growth in the coming years. So I hope that answered your question, Wenjun, but...

Yes, that's helpful. Could you also dig a little bit more into volume progression interquarter in February and March?

Did you say volume progression?

Yes.

In terms of...

In terms of sales, I think.

Yes.

Are you looking for the industry-specific or just our sales?

Just your sales in February and March. I mainly want to see how it recovered as the weather improved in those 2 months.

So I'll give you the information that we talked about. We normally don't get into too much in the specific months, but this is time we have. So when we reported in February, I believe that we reported our sales were down 3% for the month of January. And then when we filed our 10-K, we included our February sales, indicating that we were up 5% for the year-to-date at that point. And now we can talk about where we are in March, being up, for the year-to-date, being up 13%. So you can basically imply each of the months at that point and see that there's been a nice progression with each month getting a little bit stronger.

Our next question is from the line of Alvin Concepcion of Citi.

Just to follow up on the margin upside question. In your opening remarks, I think you talked about retention. How significant could improved retention be to improving margins? And can you talk about your progress on that front?

We're talking margins going forward or compared to last quarter 2013 -- or first quarter 2013?

Going forward.

Okay. So just to expand a little bit on we talked about, we've got -- we talk a lot about lean initiatives and automation, and we're in the early stages there. We've just hired several lean directors for our multiple plants, whereas in the past year, we've been kind of focused on some small activity at one of our facilities. So we expect to see some improvements there. I mean, we've seen benefits from what we've done over the last several of years in lean, and we obviously started our automation group with the acquisition of an automation company last July and that's going to start to gain traction over the next couple of years. But we've already delivered automation equipment. Really, the big thing there is we're focused on improving throughput, but also improving quality through just consistent -- developing equipment to help us more consistently manufacture products at higher-quality standards. So we anticipate seeing more and more of that. The equipment and machines that we've delivered thus far over the last, call it, 8 months have really helped the facilities. So we'll continue to see those benefits coming, and we're going to invest more money there as we see those opportunities grow at the plants and we look more widespread across our company. So -- and just the day-to-day stuff and we find efficiency opportunities all the time, whether it's looking at individual products and how we can add value through improving the content on a particular product or some of the development of new products. We'll never know when we're going to have that next home run.

One other comment that I would make is that inventory was down compared to Q1 last year, as well as the end of 2013. So one of the other things that we're constantly focused on is improving inventory turns. And when you look at our cash that we generate and cutting waste out, one of the improvements that we've seen is continued inventory turns.

And on that note, I mean, you mentioned in the remarks about inventory, that you saw an increase in certain raw material costs. How significant were those increases? And if they were significant, can talk about your ability to take price on that?

I would not say they're very material, but it still has -- it may have some impact on some of the carrying cost of inventory, but not of any great material nature.

Great to hear. And just one more question on content per unit. It seems like there's opportunity to increase your share with awnings and other items, but wondering what your expectations are going forward on growing that content per unit over the year?

Yes, I think if you look at some of the bigger things that we have going on, awnings is certainly one of them. We finished the year last year really our first full year of producing awnings at $13 million. We look at -- forward-looking, we're tracking roughly $25 million there so we're growing that nicely. And the product's really good, and we're continuing to find new customers inside and outside the U.S., so we don't see any reason why we can't continue to do well in that category. Leveling has been a great new product for us. It was not existent on towable a few years ago, and we're tracking close to $40 million plus there and leveling sales, so. We're seeing some nice bumps on new product, on our axles, which aren't really new, but we're building a lot of new types of axle products. And we've seen a lot of good growth there, same with our slide-out. So we don't see any reason content can't continue to get better where we're selling. But we do see some trends to more entry level units, and it always depends on the mix. Motorhomes is another big opportunity for us. We continue to move forward with content and motorhomes. We're supplying all the major OEMs in the motorhome market today where we weren't a few years ago and have some real nice traction and momentum there. And are confident in our products and our name now. So all-in-all, we've got a lot of good momentum moving forward.

[Operator Instructions] And our next question is from the line of Barry Vogel, Barry Vogel & Associates.

My first question -- the first question is for Joe. If I did this right in the RV operating profits and sales, on incremental sales in the first quarter versus the first quarter of last year, again, if I did this right, your incremental operating margin was 32.2%, which is pretty large incremental margin. Could you give us an estimate based on where you are today. And again, we're only talking about the RV segment, of incremental RV margins in the last 3 quarters of this current year, if conditions -- overall conditions stay the same.

Sure. I'd be happy to give you a little color on that, Barry. So I think -- let's talk a little bit about history first, right? That incremental margin you're looking at has 2 components to it, right? It has an incremental margin from the growth in sales, but within that is also the incremental margin that's coming from the improvement of and the elimination of the operating inefficiencies, facility realignment costs, consolidation costs that we were going through, still in the first quarter of 2013. And we had talked last year about maybe upwards of 200 basis points where we felt improvement could come in those numbers. So a big piece of that 30-plus percent is relating to just the elimination of those items from last year. Now what you're left with is probably the same incremental margin and the same rate as what we look at today. And we look today at our incremental margin, and honestly, this is whether it's RV or MH or any of our businesses, it's primarily in that 15% to 20% incremental margin and on variable-type costs, right? So 15% to 20%. Then as I've said to many of you, I think, that listened before, if we were looking at growth on an annual basis of maybe $20 million or $25 million, I stopped the conversation there pretty simply, at our incremental margin, knowing that our fixed costs would remain relatively steady. But if you believe many of the analysts or believe that our growth in sales in this first quarter can be the $100 million, you take the first quarter times 4, and we believe we can reach $100 million of sales growth, there is going to need to be fixed cost added. We will need to grow staff, whether it's an accounts payable person or an IT person or those type of infrastructure that we need. So you're probably looking in the range, and this is over a long term, this is not going to be exactly right in the quarter, but over the long term, closer to that 3% of 5% on some fixed costs that get added over that incremental sales volume. So 15% to 20% was variable, 3% to 5% reduction there in terms of fixed costs, the investments to keep the business, to maintain our customer service and continue investing in new R&D, new facilities, et cetera, to keep ourselves ahead of the curve. Does that answer your question, Barry?

Well, let me ask you this, just to make sure I understand it. If you take the 15% to 20% incremental margin and then you deduct 3% to 5% and what you just explained on fixed costs, et cetera, does that mean, overall, your incremental margin is 12% to 15%?

If you're thinking larger sales growth, then yes, because certain fixed costs do have a variable nature to it with larger-type sales growth, yes.

Okay, that's very good. Now could you give me -- give us some modest idea, a little idea, because you used the word accretion, immediate accretion, several times in your press release, which is very impressive. The 2 acquisitions, Innovative Design Solutions and Star Design, if you could give us some color on what kind of accretion you might have for the calendar year 2014? Again, generally speaking.

I can give you some couple of things, Barry, that will help you understand the details of the acquisitions. When we say accretive, we're expecting them to add to our bottom line here from day 1. We're not going to give any very specific projections in terms of what that's going to be in terms of EPS. But when we look at deals, we're generally looking for deals at, give or take, that 6x multiple of EBITDA. And while it may not in the first year exceed an 18% type of a hurdle, we're looking for that over in a relatively short time period. So that's generally our threshold, that we're looking for an 18% return on net assets within a few quarters to a year, maybe even 1.5 years at times. So you can kind about that at least as maybe a little bit of baseline. And how much higher? It will depend upon how well we can manage, if we can manage the business well, and improve those returns.

Okay. The other one that you talked about, accretion, was the sale of the extrusion assets and restructuring of the extrusion operation, which I commend you for, it looks to me like you didn't sit down and say we have to go forward with this no matter what, the way we've structured it. And I congratulate you on doing that, but can you give us some idea of what kind of accretion because of the restructuring of those assets you might -- we might see over the next few years?

Yes. In terms of that, Barry, I mean, it's not going to have a significance, really, a significant benefit to it, but we do expect it to have some small positive benefit.

Okay. And now as far as manufactured housing is concerned, notwithstanding your comment made about one customer, the fact of the matter is the manufactured housing area, including your aftermarket and your adjacent industries, have really shown no -- very little or any recovery in revenues. It looks like it's a dead area. And I know I've asked you this before because you do have good profitability, so it's little cash cow. But the fact of the matter is, you would have thought -- or I would have thought that it would be doing a little bit better than it's doing in terms of revenues. So the question I have here is do you still believe it's a keeper, despite the current apparent poor growth prospects?

I'm sorry, Barry. State question for me one more time just so I'm clear on it.

Do you think it's -- is manufactured housing a keeper despite apparent current poor growth prospects and poor sales gains and profit gains in the economic recovery that we've had of some sort?

Well, in terms of product lines, we have core competencies in all the product lines that we sell into the MH market, so we have no plans on -- we still like that particular industry. We're going to stay in that industry. It just so happens that it's small right now with the annual numbers that they have with the small -- it's a small industry. So we want to continue to focus on it. We continue to be profitable on that segment. But we look to things like aftermarket and adjacent being faster areas of growth for our business.

Okay. And Jason, I have a couple of other little questions. How would you rate the acquisition pipeline today?

Obviously, if you look at what we've done this year, we call it pretty good. And it ebbs and flows and there's a lot of people out there looking right now. I mean, there's a lot of people that made it through the recession and -- with their businesses and many that didn't. The ones that did are feeling good enough to the point now where I think they're out looking a little bit harder than they were right after the recession because they're showing some positive results and how they can get a little bit more for their business than what they could have 3 years ago. So it feels as good as it's felt in a while.

Both of the -- I'll make a comment. Both of the acquisitions we did in Q1 have not only RV revenues but adjacent market revenues as well.

[Operator Instructions] And moving on, we'll have our next question from the line of Sasha Kostadinov of Shaker Investments.

You mentioned earlier that the seasonal high -- the high season for you guys always result in higher shipping costs. Can you quantify what kind of impact the high season has versus a normal -- the low season, so the first half versus, say, the second half of the year?

I think the question was about the shipping costs of OEM manufacturers?

Yes.

To the dealers.

To the dealers, yes. So that doesn't impact us. I think that what we're trying to say was that the industry is meeting collectively to try to figure out some solutions for next year before they get in the same predicament again and it sounds like they'll find some resolve.

Okay. So your SG&A was wasn't impacted in the quarter then by higher shipping costs, was not?

No.

No.

Okay, okay. So going forward, do you expect to be able to begin to leverage the SG&A line now that you've gone through this transition period, where you've had some duplicative costs, and now going forward, you shouldn't really have those costs?

A lot of it's a factor of how robust the industry stays. I mean, if this industry continues to grow like it has then we're probably okay for a while. But then we get to that point, a tipping point, where we need to add more resources on various parts of SG&A. But for now, we feel like we're staffed pretty adequately for the 2014 growth, and we'll reevaluate it come end of the year when we kind of get a better feel what 2015 looks like.

Ladies and gentlemen, that concludes our question-and-answer session. I would now like to turn back the conference over to management for closing remarks.

Well, we once again want to thank everyone for sitting in on the call and the questions. I hope you have a great week, and we look forward to talking to you on Q2 earnings call 2014. Thanks.

Thank you. Ladies and gentlemen, that concludes today's conference. You may now disconnect your lines. Have a good day. Thank you.