Good day, ladies and gentlemen, and welcome to the Second Quarter 2014 Drew Industries Incorporated Earnings Conference Call. My name is Esteban, and I will be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Renee Ketels with Lambert, Edwards & Associates.

Good morning, everyone, and welcome to Drew Industries' 2014 Second 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 Jim Gero, Chairman of the Board; Leigh Abrams, Chairman Emeritus; Jason Lippert, CEO and a Director; Scott Mereness, President; and Joe Giordano, CFO and Treasurer. Management will be discussing second quarter results in just 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 of which are beyond the company's control, and which could result in 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?

Thank you, Renee, and thank you for, all, joining us on the call today. I always begin by saying that our people are the backbone of this organization and it's their hard work and dedication that makes the outstanding success of our company possible. I work side by side with countless Drew employees over the last 20 years and I can attest that we have the best people in the business. Our employees not only give us solid effort at work, but many volunteer their time back to the communities in which they live. This is engrained in our company's culture, and it's just one of the things that makes our company so unique from others. In the first 6 months of 2014, we have accomplished quite a bit. We have increased net sales by $67 million and diluted EPS by 39%, and completed 3 acquisitions, which added a run rate of $40 million in sales. We've taken the next steps to continue to develop and advance our markets, other than total RVs, and the sales to these markets are now over $300 million for the 12 months ended June 2014. While the year's only half over, we continue to look for growth opportunities in the second half of the year, and are excited about the opportunities in front of us. The RV industry is healthy and we are just coming off a record July, posting sales of 17% more than last July. The RV industry, as a whole, is having a great year and the dealers and OEMs in our business are feeling confident about the coming 12 months, fueled by the growing popularity of the RV lifestyle. Among our top priorities for the second half of 2014 is to achieve favorable returns on the acquisitions and other investments…

Thank you, Jason. Our sales growth in the first half of 2014 was strong, primarily resulting from increased industry-wide RV production levels, which added an estimated $43 million to our net sales. Our overall market penetration and the 3 acquisitions we have made in 2014, added an additional $24 million in sales. Net sales acquired through the 3 acquisitions completed this year all relate to the RV segment, which added about $5 million to our 2014 year-to-date sales. Based on historical sales and assuming that each of the 3 acquisitions completed in 2014 had been completed at the beginning of the 12-month period ended June 2014, our consolidated net sales would've increased by $35 million for that period. The largeSingTel portion of the acquired net sales relate to motorhome RVs. For the 12-month period ended June 2014, our actual sales of motorhome components of $55 million would have increased by approximately $20 million, had we completed the acquisitions at the beginning of the period. On a pro forma basis, our content per motorhome for that 12-month period ended June 2014, would have been approximately $1,760 per unit. For this 12 months ended June 2014, our content per travel trailer and fifth-wheel RV continued to grow, increasing approximately $70, to 2772 per unit, as compared to the 12 months ended June 2013. This increased content added $20 million in sales for that period, which included approximately $1 million related to the 2014 acquisitions. And as a result of new product introductions and market penetration, we expect further increases on our RV content for both towables and motorhomes. In addition, actual sales to other industries, included in our RV segment, were $98 million in the last 12 months, increasing 18% from the same period last year. While our sales to the aftermarket,…

[Operator Instructions] Our first question comes from Kathryn Thompson with Thompson Research Group.

This is Wenjun sitting in for Kathryn. Could you give more color on the Actuant RV asset acquisition? What is its market share in the RV industry? And what was the sales price and margin profile of the acquired business? And what is the market potential, do you think, the business has?

We'll start out -- I'll probably ask you to reask the latter questions again. But I believe the first question was regarding market share. The Power Gear business at Actuant was a slide-out and leveling business, predominantly serving the motorhome industry. They've provided leveling and slides and steps -- electric steps to motorhomes. They had a significant share of the aftermarket. They had about -- north of 5% of their business was dedicated to the aftermarket, the rest was the OEM motorhome business. And they were probably a 15% to 25% market share on the slide-outs, and maybe a little bit more in leveling and a little bit more on the steps. But I believe its $28 million in acquired sales.

About $20 million to $28 million in acquired, and it was about 75%, 80% OEM almost all on the motorhome side, Wenjun. Very, very small in the towable piece for RVs, and then aftermarket was the balance of that. So you can pretty easily calculate that.

Okay. Sure. Can you also talk about the margin profile?

And the [indiscernible], about 20% to 25%. Yes.

Yes, 25%. Right.

Okay. Can you also talk about the margin profile of their business?

Yes, we typically don't try to get too specific in terms of any margins of any specific pieces of our business. But if we want to think about an acquisition and what we've looked at, historically, with acquisitions, we're looking for above-average returns. And not that it's the end all, and this is the number, but we generally look for returns above an 18% return on net assets, that's kind of a starting point. Now we understand that may not happen right away. But over the long term, at least 1 or 2 years into it, we're definitely looking for returns that would exceed that mark.

And typically, Wenjun, these products that we acquired, Power Gear, the company of Actuant, they were all protected by patents. And typically, that we're -- products that are covered by patents are a little bit more -- have a little bit more margin than what our typical products might. So if that helps any.

Okay. And my next question is on capacity expansion initiative you mentioned in your press release. Can you comment on the initiative that related to the 2 new leases you recently entered into? And roughly, how soon would you expect to start seeing the benefits from the expansion? And just for modeling purpose, could you provide more color on the short-term margin impact that you mentioned in the press release?

So this is Scott Mereness, I'll start out. In terms of the facility -- our South Bend facility would be just under 300,000 square feet. The Goshen facility that were in the process of opening up would be just under 400,000 square feet. As far as the South Bend facility, it would be largely for aftermarket, as well as a distribution center for some of our inventory components as far as that goes. In terms of Goshen, that will be a consolidated furniture operation that will allow us to continue expanding that business.

And how about the short-term margin impact that you mentioned? Just some clarification to help us with modeling will be helpful.

Sure. So in terms of looking at the cost, Wenjun, for this quarter, we've estimated it had an impact of, give or take, $0.02 to $0.03 on diluted EPS this quarter. I mean, as we look forward, we expect to open these facilities over the coming 2 quarters. So we'll continue to incur some costs here in the third quarter and hopefully that will start to decrease by the end of the year, and then begin to realize the benefits in synergies of combining multiple furniture operations, as Scott referred to, and the benefits of this distribution and aftermarket facility in South Bend.

Okay, that's helpful. One last question. What is Drew's market share in the towable slide-out and leveling systems right now?

There are 2 different category -- product categories, but slide-out is probably north of 80%, somewhere in there, and leveling's probably close to north of, about the same, 80%, north of 80%.

Our next question comes from Daniel Moore with CJS Securities.

Joe, you touched on your content per towable. Obviously, with the acquisition, you'll see a nice bump-up on content per motorhome. In general, the concept per towable has flattened a bit, starting to pick back up. Maybe talk about will there be new products or some of the new opportunities that you have to continue to increase that as we move forward?

Yes, Jason. Yes, we'll start with -- in new products, we're innovators. We spend close to $2.5 million a year in R&D, so we pump a lot of money into that area to develop products for our customers. A lot of the products you guys don't hear about on a regular basis because they're smaller, $1 million to $3 million revenue type projects. The ones we talk about are the bigger ones, like leveling and awnings. Those probably will be the 2 highlights in the last couple of years. We started the towable leveling business just a couple of years ago and we've got that business north of $35 million, kind of trailing 12. And if you add all of our leveling business together with motorhomes, it's closer to $60 million. Awnings, we started February, March of 2012. Our business there is close to $24 million. So which is pretty good for 30% of the market or so, and just about 1 year and 3 quarters -- 1.5 years or 2 years. So those would be the big ones. We've got a lot of products that we're launching, but like I said, they're $1 million to $3 million type revenue projects and typically not worth mentioning. But we've got a lot of activity there. And customers -- I think the takeaway is, the customers put a lot of confidence in us to develop most of their new products because we cover everything from aluminum and steel disciplines to fabric and wood disciplines, to moving parts like slide-outs and TV lifts and bed lifts. So we kind of cover the gamut on any new products somebody might want for an RV.

Very helpful, we spend a lot of time on RVs, obviously, given the size. In Manufactured Housing, content per home has declined each of the last few quarters. Is it simply a function of smaller homes mix? Or is there any market share issues? And maybe just talking general by your outlook for Manufactured Housing back half of the year and into 2015.

Yes, on last quarter's call, we had mentioned that one significant customer had continued its vertical integration activities. That certainly is the majority of the impact in terms of the content per unit.

Got it. And then difficult just -- the crystal ball is cloudy, but we've slowed down here in terms of shipments. Your outlook for the back half of the year in '15?

What was the last part of the question there, Dan?

Just your sense or outlook, but -- after a slow down over the last couple of quarters in...

Yes. We're entering into a kind of seasonally slower time in the industry, all the new models get introduced in September and the dealers are kind of hesitant taking a lot of inventory before all the new product comes out. But for -- as things are slowing down, the OEMs and the dealers seem pretty bullish right now. And typically, they're kind of dragging their feet a little bit. But retail activity is good and the OEMs are excited, some of them are adding capacity. So it's kind of exciting right now, considering the time of year we're at with the cycle.

Okay. And lastly, you just touched on retail in terms of June and July. Do you have numbers yet for June? And any additional color you might have around how that demand has picked up or is holding up after some pretty good inventory build.

Yes. So we do not have any actual data for June and July yet. I think one thing to point out on the numbers, as we look back at the retail data is, it's clear understanding that the initial number that is reported is continually revised upward. And it doesn't -- it may not happen in every month, but it does happen quite often. Take a look at, say, for February, just this morning, in the initial report was that February was flat. And if you look at February now, it's up 6%. Now -- and April was another month which I think was basically flat, and then just 1 later, it's up 3% or 4% for the month. So I think it's important to understand that the -- on the retail side, those initial numbers are preliminary and they generally go upwards for several months after the initial report. Like I said, like February, going from 0 to 6% is pretty significant.

The key is that wholesale is up 10% on the year through June. So I mean, that's something that we can jump up and down about.

Got it. And last one, I promise. Joe, how should we think about incremental margins for Q3 and Q4 on a year-over-year basis, given some of the incremental investments you described?

So when we think about margin year-over-year, I definitely lean a little more towards the 13% to 14% range. That range is combination of our 15% to 20% incremental margin on variable cost, less a 3% to 5% type investment in fixed costs. Again, over the long run when you're growing at -- if we were to take our $67 million plus the $35 million from acquisitions, we've already added $100 million in sales. So there are definitely fixed costs that need to come along with that. And that's where we come with that roughly 3% to 5% range off of the 15% to 20%, comes back in roughly that 13% to 14%. I think if we -- actually that's exactly where the second quarter this year, compared to the second quarter last year, fell into that exact 13% to 14% range. Now one other factor, Dan that -- I'm sorry, go ahead.

Those type of margin are still achievable in the back half, despite the incremental investment you're making.

Yes. Yes, that's why they're lower than just your variable 15% to 20%. And as we do think about sequential, not that we have any exact crystal ball, but typically, and historically, the third quarter sales has seasonally declined from the second quarter. So if we have a seasonal decline in sales, general expectations would be that the cost that are in the system would be spread over a larger -- a smaller sales base, and thus have a negative impact on margin as the business seasonally changes. Again, we don't have a crystal ball, I don't know exactly what would happen, but we have to be careful of the seasonal factors in our business from Q2 to Q3.

Our next question comes from Scott Stember with Sidoti. Scott L. Stember - Sidoti & Company, LLC: Could you talk about -- in the gross margin. I know that some of the other players in this space that are located in the same region that you are talking about some wage pressure given a thin labor pool. Could you talk about how that's impacted you over the last few quarters? Has it gotten worse? And if you have seen it, would you view that as bordering on temporary, as it took a while for some of the OEMs to catch up with a demand from the winter?

Well, the unemployment in the 5% range here, so that makes it tough. I mean, we think that there's probably more people in the workforce than that, that don't want to work. But -- so it's been challenging. And the industry around here, over the last several years, obviously, has continued to grow. So we continue to go back to a smaller and smaller group of people that are willing to get up and work hard everyday. So, yes, challenging, but I think that if you listen -- one of the things that we have said in the prepared remarks was that our turnovers improved 40% over 2 years ago. We added some HR resources over the last couple of years. We added a VP of HR who's come in and really helped develop a team and do a good job. That turnover has allowed us not to have to spin our wheels quite as much as we did in the past. And I would suggest that our turnover is as good as anybody in the county today, and continuing to improve. So the fact that we don't have to -- we're not turning over as many people, as what we were a couple of years ago, has made a huge a improvement to consistency and efficiency and ability to not have to continue to train new workers and buy new workers. So -- but it is a challenge for everybody around here. That might be one of the difference-makers and uniqueness that, I think, we have to do that we didn't have 2 years ago. Scott L. Stember - Sidoti & Company, LLC: Got you. And moving to some of the verticals that you have, awnings and the aftermarket in general. Can you talk about what products continue to move the needle in the aftermarket segment? And have you started shipping any awnings into the aftermarket yet?

Yes, we're shipping awnings in the aftermarket that started this year, on a small-scale and it will continue to grow. Obviously, as we continue to gain more awning OEMs share and our awnings make it into the retail cycle where people need to replace parts and replace awnings years down the road, will become even more of a player in the aftermarket. But we're selling awnings in the aftermarket. We're selling a lot of other products into the aftermarket, and aftermarket replacement business continues to grow at 20%, 30% every month over same period last year. So we're seeing good activity there. We're getting to develop relationships with a lot of players in the aftermarket business because they're a totally different group of customers. So we're really pleased with the efforts that we're making and the results that you're seeing. And right now, we're increasing big percentages on small numbers, but that's going to continue to increase and we'll continue to find ways to bring our existing and new products to aftermarket customers. Scott L. Stember - Sidoti & Company, LLC: Just remind us, the aftermarket, or at least the awnings within the aftermarket, that's equal of the size of the OEM. I think it was 75 million for the OEM?

Yes. Yes, you're right. And we'll continue -- we're going to continue to attack that aggressively because that's obviously a big opportunity in the aftermarket. Scott L. Stember - Sidoti & Company, LLC: Okay, and I know this is looking out, but are there other verticals that you can do with awnings, maybe into the Manufactured Housing side that you guys have looked into?

We've got opportunities in the specialty trailer side. The aftermarket's huge. I'd say, internationals, a big opportunity to use awnings all over, from an RV perspective. And Australia, Europe, they all use awnings. So we've got lots of potential to go to different markets with a similar product, it would've been necessarily the same as what the U.S. RV manufacturers are using. But they're certainly a lot of other opportunities. And it's good product, we've developed a lot of improvements and features and benefits that didn't exist before we got into it, and customers are starting to recognize that. So the quality has been good. So it's been a great product launch, as good as we could've anticipated when we launched it. Scott L. Stember - Sidoti & Company, LLC: Great. And one last question. I guess it's following up on the commentary about international. Could you talk about how you are setting up currently? You talked last couple of quarters about entering Europe and a few other markets. Can you maybe talk about the potential with items like slide-outs and where you stand right now?

Sure. We've released a couple of press releases just in the last quarter or so regarding setting up an exclusive relationship with a distributor in Australia that supplies a real large percentage of the market. We're already selling slide-outs now into Australia. We're working on getting other products, but we've -- like I kind of was mentioning a minute ago, we have to do some tweaks to some of the American products to get them to fit international requirements in RVs that they build there. So Europe, the same. We're really trying to influence the introduction of slide-outs into the European market. As you know, for years, they've not had any slide-outs except on the very, very expensive motorhomes. We have a slide-out today that's 14 kilograms and able to fit European applications now for the lightweight unit. And we're prototyping with several manufacturers over there right now, we'll introduce a couple at the Düsseldorf European RV show, which is the largest European RV show. So that happens in September. So we're excited about that. There's a lot of momentum with opportunity for Europe especially, and it's a 150,000 unit market. So the fact that we've got no percentage of that market in any of our products currently, we're really optimistic about that. There's leveling opportunities in Europe. There's window opportunities in Europe. So we're really looking closely to those opportunities and feel very positive about what can be done there. In China, that's a very young market, but the government's putting a lot of money into campgrounds and manufacturing, and they continue to do that. Certainly, they've got a population to sustain a pretty intense level of units being produced there. So we're going to keep an eye on that. We've got an exclusive arrangement in terms of supply with a supplier over there that's going to start supplying several RV manufacturers that have already fired up production. So when you look at those 3 markets: Australia, Europe and China, those are what we would consider big opportunities in the shorter long term. Scott L. Stember - Sidoti & Company, LLC: And what's the size of the Australian market? And is there any data on what the China market is?

It's 20,000 in Australia, give or take a few points. But -- and again, that's the market that we don't have very much time going into today. So -- their RVs are more American -- like American units there than what Europe would be. And China it's just a few thousand units there, actually bringing a lot of units than some American RV complete. The Chinese manufacturers have just started to build RVs there this year, and put units offline. So they're investing in large facilities and a lot of workers and a lot of equipment. So they're not working out of 10,000 square foot garages trying to build 1 or 2 a week if that says anything...

Our next question comes from Greg Badishkanian with Citigroup.

This is Travis Harbauer in for Greg. I just had a couple of quick questions. You guys mentioned in the release that retail demand has been improving. And I was just wondering what you thought about promotional environment, both for towables and motorhomes? And then, if you guys could share any insight into retail credit conditions as well.

On the discount environment, we're hearing it's not getting any better. That's probably the short answer to the question. Still very competitive out there. And there's a lot of dealers and a lot of manufacturers all competing for the best price, so I don't know if you want to comment on the credit.

Yes. Really not much changed in the credit. Again, if you want to look long term, 4, 5, 6 years ago, it's significantly better. I think if we look over the last 12 months, it's loosened a little, but I wouldn't say it hasn't been any insignificant change.

Okay, perfect. And then just a follow-up. Just in terms of the acquisition pipeline. What's it looking like? Are you looking at more deals today versus what you're looking at 1 year ago? And then, naturally, are you seeing valuations kind of increase as the market has kind of improved during the last 12 months?

I probably answer that and say, over the last 20 years, we've always been looking at opportunities. It's no secret that the M&A activity is pretty high right now all over the place, not just in our business. But we're always looking at businesses. The acquisition opportunities seem pretty good right now. There's a lot of opportunities and businesses looking to kind of kick the tires, and we'll continue to evaluate the opportunities as they come. The valuations have obviously gotten a little bit higher than where they were 3 years ago, but I think that's not just exclusive to our business. It's nice to have options, more options today, that's for sure.

Our next question comes from Barry Kaplan with Maple Tree Capital.

I just wanted to clarify on the incremental operating margins. Does that 13% to 14% number, is that what you would consider your normalized rate if you -- assuming that you continue to grow the business at about the same rate you have been growing?

Gary, I would say it's, more often than not, yes. There are a lot of factors that go into that, Barry. But I think we assume a lot of material costs, what you're were saying, remain relatively constant or were pass on increases. I'd say that's generally the right range. Correct.

Okay, fair enough. And then a simple accounting question. These 2 new leases that you signed, I presume they're operating leases, so the expense goes through the P&L above the EBITDA line?

Yes, sir. They're operating leases.

Okay. And then finally, can you -- just generally, the stock came down quite a bit leading up to the reporting, and I guess it's down today. Would you -- from a capital -- from return of capital standpoint, you've generally chosen to do the special dividend. But I wonder, if you, the board, might contemplate doing share repurchase? Or is the liquidity just too big of a constraint?

The short answer to your question is we're always going to spend our money to provide the best shareholder return. And typically, historically, that's been acquisitions and capital improvements, and then dividends. But no, it's a board-level decision, and we typically look at that from time to time and evaluate it based on those other circumstances. So...

We have no other questions in queue. [Operator Instructions]

Other questions?

Looks like there are no other questions. Now I'd like to turn the call back over to Jason.

Well, we appreciate everybody's time. I hope you have a good summer, and we'll be talking to you in our third quarter earnings call. Thanks, everybody.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may disconnect. Have a great day.