Good afternoon, ladies and gentlemen, and welcome to the Third Quarter 2014 Drew Industries Incorporated Earnings Conference Call. My name is Chris, and I will be your conference moderator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. And at this time, I would now like to turn the conference over to your host for today, Ms. Renee Ketels. Ma'am, you may proceed.

Good morning, everyone, and welcome to the Drew Industries 2014 Third 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; Jason Lippert, CEO and a Director; Scott Mereness, President; and Joe Giordano, CFO and Treasurer. Management will be discussing third 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, 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?

Thank you, Renee, and thank you all for joining us on the call today. Before I get started, I just wanted to say a quick thanks to Leigh Abrams. Many of you know Leigh. He stepped out of the Chairman role, as a lot of you know, this year and thought it was noteworthy to add that he has not missed one of these calls in 30 years. So we know Leigh's out there listening and we just wanted to thank him for all the support he's given the company over the years in that role. But we are pleased to -- with our announcement this morning of consolidated net sales for the third quarter of 2014, up 17% year-over-year on continued improvement in the underlying business. Our success at Drew has largely been based on the quality of our people and the unique culture we've developed, and we expect continued success going forward as a result of this focus. The RV industry is strong and wholesale production was up 9% for the first 9 months of 2014, which points to a total wholesale production forecast for 2014 of about 350,000 units, the highest level since 2006. We firmly believe the RV Industry Association advertising through its Go RVing campaign, the growing popularity of the RV lifestyle and the rising number of baby boomers hitting retirement age have resulted in the RV industry growing faster than most consumer discretionary industries. We also believe the RV industry will continue to grow in the future because of these favorable demographics. Since the recession, the RV industry has expanded its product offerings to include more entry-level units to reach broader expanded market and encourage more people to enjoy the RV lifestyle. These smaller units are very popular to first-time buyers, which we believe…

Thank you, Jason. During the first 9 months and the third quarter of 2014, our sales growth was strong. Our growth was due to increased industry-wide RV production and increases in content as well as the 4 acquisitions completed here in 2014. On the date of acquisition, these 4 acquisitions added a run rate of approximately $67 million in net sales. Specifically, the net sales resulting from the 4 acquisitions completed this year all relate to the RV segment and added about $20 million to our 2014 year-to-date sales, including approximately $15 million in the 2014 third quarter alone. And based on this total historical sales of $16 million noted above and assuming each of these 4 acquisitions had been accomplished at the beginning of the 12-month period ended September 30, 2014, our consolidated net sales would've increased by an additional $47 million-or-so for that 12-month period. Our most recent acquisition, Duncan Systems, with annual sales of approximately $26 million is included within the aftermarket portion of our RV segment. As noted in the press release, the third quarter of 2014 was impacted by the cost of growing and expanding consistent with what was noted in the second quarter of 2014. And we believe these costs will decrease over the coming months as the projects are completed. The third quarter of 2014 was also impacted by health care and other costs rising more than expected. The increase in health care costs was due to increased claims, primarily as a result of increased enrollments. We have and we will continue to be extremely diligent and take measurable steps to contain these costs as best as possible. However, maintaining competitive benefits to attract and retain employees is an important component of employee retention and satisfaction, both of which are important factors in…

[Operator Instructions] And our first question comes from the line of Daniel Moore with CJS Securities.

Just a clarification. What -- Joe, what percentage of the raw material and health care cost increases that you called out in Q3 do you think you can recover through price increases as we look out to 2015?

I'll start with an answer, Dan, and I know Scott and Jason can chime in. We've begun to implement certain sales price increases here already beginning in the fourth quarter. We will continue that over the coming weeks and months and again, hopefully, we -- while we anticipate having these implemented by the end of the first quarter fully and we expect to fully offset the cost of our raw material and other rising business costs.

Dan, it's just -- in the natural course of our business as we see these costs increase like we have, we watch them close, but at the same time we're working with our customers and our customers are working with us and it's obviously not all products, but it's just a normal course of doing business. And historically, we've always come up with a good result for both us and our customers. So I hope that answers your question.

It does, very helpful. And in terms of incremental margins, you've talked about, including growth-related investment spends, incremental margins being in the mid-teens. As we look out to '15 given the investments you've already made here in '14 and some of the price increases you're putting in, do you think you can get closer to your sort of historic 20% range? Or should we be thinking slightly more conservative than that?

Dan, I -- well, when we look at incremental margins, there are absolutely a lot of variable costs in this and costs that we think may be non-variable like material costs and other things that can creep up. So I don't want to get too specific. The fundamentals of our business continue to support incremental margin on pure variable costs of 15% to 20%. However, raw material costs have been extremely volatile and there are other rising business costs. I mean, fundamentally, we see no reason to deviate from that, but there are just lots of moving parts. And as -- aluminum is a great example. It's become a bigger part of our cost of raw materials here and that particular raw material has been very volatile as of late. And we're -- again, we're operating this business on a long-term basis. We're not as much focused on quarter-to-quarter and when we look at a movement in the raw material, and this is a prime example of a quarter, we're not running out changing pricing with our customers every time there's a movement one way or another. We want to make sure that, that is more of a long-term type of a change before we make that change. So there may be some quarter-to-quarter impact on items, but again we'll address once we know they're more permanent and long term in nature.

Okay, and one more, just focused on content. Content per towable started to pick up once again growing 4% in the quarter. Maybe talk a little bit about some of the newer products in the pipeline, be it automation, waste management, other products. And what type of growth in content for RV do you think is sustainable as we move forward?

Well, with the new products specifically and some of those products you mentioned that we're just in the process of launching, it's really hard to determine what the take rate is going to be in terms of content. There are some areas that we see that continue to grow like our awnings. But I would say with some of the brand-new products -- IDS was a company we purchased back at the end of Q1, and they have a significant amount of new products that were -- we're putting into the marketplace as we speak. One of those products is a tablet kind of a home automation tablet that allows you to control a lot of the functionality in your coach from a tablet that comes with the coach, but also gives the user interface to solve problems through videos and just frequently asked questions and things like that. So trying to put more information in the users' hands. We expect that product to take off. Our IDS company has also come up with some tire pressure management systems and some axle control technology and things like that, that we'll be implementing over the coming months. So just from an electronic standpoint, our IDS has really got a handful of products that we're excited to introduce to the market and as the products in general become more geared toward your phone and the Internet, we're going to have products tomorrow that support what people are using today, so -- but there's a -- waste management just got introduced in -- at the Elkhart open house in September, had good response there, but with any new product, it takes a couple of years for us to really start gaining traction.

Furniture also had a positive impact on content for the quarter.

And I think, Dan, we looked at content for years and years. We averaged $170, $180 type of growth in every year content per unit for a dozen years. Probably about 2/3 of that was organic, maybe 1/3 or so from acquisitions and 2013 saw a little bit of a flattening, but I think we're right back if we look at the first 9 months or the trailing 12, I guess, here at September. We're up a little over $100 a unit back on that type of trajectory we've seen for the long term in terms of content growth.

And next question comes from the line of Kathryn Thompson with Drew Industries (sic) [Thompson Research Group, LLC].

This is Wenjun sitting in for Kathryn. For the $0.11 EPS impacted by insurance and raw material, can you provide us a breakdown between these 2 items?

So the raw materials and health insurance combined were about $0.11 as you noted. The split was, give or take somewhere down -- probably down the line between those 2. It's not an exact perfect number, but I'd say it's close enough to the 50-50 marker, so -- and that again can change a little bit by quarter, but that just happened to be for the third quarter.

Okay. And then for next quarter, you expect these to continue, so would the 50-50 be fair to model into our models?

Scott, do you want to comment?

Yes. I was just going to make the comment that specifically in terms of health insurance, we -- the increase in participation rates that we saw this year, we expect those participation rates to level off in future years. So the impact in terms of the EPS, we feel like will begin to be less of an impact year-on-year when you look at future years as compared to this particular calendar year compared to last year.

We don't expect the participation rate to continue to increase at the rate that it did this year. We just had a significant amount of employees join into the program this year because of all the things that are happening in the health care world. So we saw a jump for that reason, but, like Scott said, don't expect that rate to continue quarter-after-quarter.

It also, Wenjun, is a factor related to employee retention. As we've talked about in the past, we've had increased employee retention, which has had an impact on the participation rates in our plan also.

The next question comes from the line of Greg Badishkanian with Citigroup.

[Audio Gap] sales a little bit. You had a 15% organic growth I believe. That's the most kind of recent trend, a nice pickup from the third quarter. And I'm just wondering, are your customers and dealers that you speak with also is kind of seeing that same acceleration. And maybe just kind of a little bit of color in terms of what's been driving the industry the last few months.

Greg, we didn't hear the first -- the very first part of your question.

Basically, the acceleration in sales growth and what kind of drove that. Are you seeing that with your dealer and as well as your customers, are you seeing that with them?

Well, first off, Q3 typically a slow month for us. Everybody's kind of changing over their model year, but right now, I mean, we've posted October numbers. They were really good. We're seeing the same thing, the same kind of robustness and momentum on our dealer and OE partners. As we've said, inventories are in line. Our OEMs are adding right around 12 production facilities right now nationwide, which would lead to their optimistic feeling on where the industry going and where capacity and production is going. So all in all, the feeling of optimism is out there across the board.

And just to add on to what Jason said about October. October, for a single month, was a record for us with $115 million in sales is the single highest month that we've ever had in terms of net sales. And I'm sure that if Leigh was here and talking with us, he would chime in and say that he remembers the day when Drew used to do less than $100 million in a year, let alone $115 million in a month on the sales. And the other positive factors that are out there in the marketplace today, which I didn't even know that we felt the full effect of, has been the price of gas and oil dropping here in recent months I think is a little bit of a tailwind for the industry, and interest rates continue to remain positive and some favorable lending conditions again are positive factors for the industry today.

At the open house when all the dealers were in town, to answer your question there, I mean most of them were talking about having record years in their businesses, but it's the 15% number that you threw out. I mean some dealers are probably better and some not as good. It just depends on where they're at in the country and what types of products the dealers are selling. But the OEMs are certainly enjoying some good momentum right now.

Yes, and I would make one more comment that a lot of our customers, both in the RV and even in adjacent industries, would be making fixed investments in their -- in the growth of their facilities. So if you look at 2015 and a lot of our top customers feel positive about where their businesses are headed.

Our next question comes from the line of Scott Stember with Sidoti. Scott L. Stember - Sidoti & Company, Inc.: Could we talk about the aftermarket side? Just tell us how the new awning is going. I know that within the last couple of quarters, you started shipping that product. How is that being received? And maybe also talk about Duncan on the windshield side and maybe some of the demand drivers, whether it's insurance related.

Yes, sure. Well, aftermarket is a huge initiative for us right now and we've been focused on it pretty heavily for the last couple of years and we're seeing a lot of good traction in all of our products. I'd -- you specifically called out awnings, and we do have customers picking up awnings. We can't speak to the actual sales of that product right now. But blended, if you look at our numbers in aftermarket, we've talked about a trailing 12 of $75 million in 2014. And I would say organically without the acquisition, we're in the neighborhood of 20-plus percent year-over-year and that trend seems like it's going to continue. We're -- we were 97% with the acquisition in Q3. So we're seeing a lot of positive things happen on the aftermarket side of things where we've got trained aftermarket salespeople out in the field now calling on dealers, not only to sell aftermarket parts, but to help service and create better relationships, develop better relationships with our customers, partners and really help them carve a path to how they get replacement parts from Lippert, which is the chunk of our aftermarket business. So Scott can comment on the Duncan side.

Specifically in terms of Duncan, those guys are having a great quarter, so we're happy with what we've seen so far out of those guys, but in terms of growth next year, we're positive that they're going to -- or we're optimistic that their business will continue to grow. Typically you'd see a few years -- the average life of a motorhome, you typically would see replacements lagging by a few years when something gets replaced in terms of a windshield. So when you look at motorhome growth over the next few years, that'll definitely be a tailwind for Duncan's replacement glass business.

And Scott, on -- you fixated on awnings. I'd say probably more importantly than anything else I said there was the fact that we're surpassing 35% of the OEM market is just going to drive the need for more Lippert awnings in the aftermarket as awning parts and whole lines need to be replaced down the road. So obviously there's no aftermarket for our awnings when there's no OEM market share, but as we continue to drive the OEM market share up, there's just going to be an automatic need for our product down the road. Scott L. Stember - Sidoti & Company, Inc.: Got you. And next question on the adjacent side, you talked about Blue Bird with the school buses and the $10 million opportunity for windows. Are there any other content opportunities within a school bus that you guys can go after?

Well, I'd say there's a lot of school bus and bus business out there that we can go after. So we've talked about seating and things like that on the side before, but we're just not ready for it. But buses and a lot of specialty vehicles out there have a lot of opportunity and Blue Bird is just the beginning. I'd -- I like telling the story of Blue Bird on our end because we had our engineers and our sales team work with -- work in an industry that they had never even really set foot in before and create a pretty cool product and get a pretty sizable contract. And I think that shows and demonstrates the talent of our R&D capabilities and our engineering teams and our sales teams and our ability to get out in those adjacent markets and really develop new sales. Scott L. Stember - Sidoti & Company, Inc.: Okay. Just one last quick question on Europe. You mentioned that you were at the European RV show and just talk about, maybe a little bit more about the excitement that's being generated from the slide-out unit given the fact that most units, if not all units don't have any slide-outs whatsoever over there.

Yes, that's kind of the way it's been over there. There's not been hardly any slide-outs and definitely no slide-outs in the towable units over there. There are some slide-outs that are very expensive on some of the high-end units, but the volume on those are pretty low over there. So for us and our partners over there that introduce slide-outs on towable units, it's kind of really caught a lot of people's eyes because people haven't seen that before. So our OEM partners over there are very excited. More prototypes and more shows are coming up and we're really excited to see what awaits us there as that product makes it to the retail shows and we start seeing more retail and dealer and OEM demand for that product in the coming 12 months.

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

I had 2 questions for you. The first one is just could you give us a little bit more color on kind of what's behind the raw material price increases for aluminum and steel in an environment where commodity prices generally have been going down? And then my second question is, in the press release, you referred to contingent consideration for Duncan and I just was wondering -- presumably you have contingent consideration for other acquisitions as well. And I was just wondering what you are carrying for a sort of the total of contingent liability for payments for acquisitions?

Well, Barry, specifically in terms of raw materials, aluminum is currently been averaging about an 18-month high as far as aluminum goes, so aluminum definitely is up in the last 18 months. Some of our key steel commodities that we're purchasing have been averaging 7% to 8% up over last year. But we definitely are seeing -- we're not seeing commodities down. We're actually seeing commodity pricing up, so as far as that goes -- does that answer your question in terms of raw material?

Yes. I was just kind of trying to understand what's sort of driving it. Is there that much demand on the manufacturing side in general?

Yes, yes. So specifically, in terms of aluminum when you look worldwide, more and more automobiles are taking aluminum component, some of which are all aluminum-based chassis. The new F-150 is an all-aluminum based chassis. Aluminum continues to be a go-to material for a lot of commodity or a lot of manufactured products worldwide. From a steel standpoint, we don't -- I wouldn't say there's any one particular thing that's driving that in particular like the comment about aluminum, but we might see steel pricing fall back down to a more normal level, but...

And the conversion costs of aluminum are going up as well, so they're not specific related to the material costs in general. It's the cost of processing the products.

Yes, I would say that our belief, specifically in terms of aluminum, we feel like there's probably going to be a new normal in terms of conversion costs and albeit higher, maybe a little bit more stable prices, but definitely higher than what we've seen in the past.

And I think one thing to watch on aluminum too, which sometimes goes under the radar screen, is there's the price of aluminum and then there's the Midwest premium and that particular cost of piece of aluminum has been going up significantly over the past time period too. On the second piece for contingent consideration relating to Duncan, we estimate that number is going to be give or take around $2 million associated with that business. There'll be more detail in terms of our entire contingent consideration related to acquisitions in the footnotes to the 10-Q, relatively consistent with last quarter updates for Duncan, the additional $2 million-or-so.

Our next question comes from the line of Sasha Kostadinov with Shaker Investments.

Thanks for sharing the October sales information, but I have a question about that. I was under the impression that dealer inventories are probably now kind of in line with where dealers would like them to be and probably will be replenished on a retail demand basis based on a comment from one of the OEMs recently. Can you provide a little more color on why you're seeing such strong growth or saw such strong growth in October? And is it perhaps a function of the fact that you're going to be passing through some price increases? Could there be some pull forward of demand as a result of that?

Yes. I'd first say that inventories coming into the September show by our counts were low. They were kind of waiting for the show to see the new products to stock up. So we've seen the inventories come back to more of a normal rate, but the last couple years since the September show, the volume through Q4 has gone up significantly. So it's not a huge surprise that October is up. So Joe, I know you've got some comments as well.

It's definitely a function of the industry looking to flatten out its production into the slower time period of the year. A few years back, October, November, December, the fourth quarter was much slower, much bigger drop-off from the other quarters of the year. The industry in total has realized that and to keep their efficiencies and keep people employed throughout the year has pushed production into the fourth quarter. So the fourth quarter is again the time to build the inventories back up in anticipation of the spring and summer selling season, so that the units -- the unit can't be produced by the industry all in the month of March and shipped for April 1 and hit the prime selling season. It has to be done on an even basis. So we see between October and March wholesale shipments exceed retail sales. And that's happened every month of every year going back to 2006 or 2007 and it could be prior to that. I honestly haven't looked. And then the months of April through September, retail exceeds wholesale, again, bringing that inventory back down. That's the kind of the 12-month cycle, so seeing October be up is again just the beginning of the complete restocking for some winter selling season in the southern states and the shows that take place and then the, I guess, I'll call it full nationwide spring and summer selling season.

I would also add that the dealers needed product early first quarter last year or this year rather and should have placed orders in the prior quarter. And I think we're seeing the dealers continue to get more trained to buy product Q4, so they got it in Q1 when the demand really hits hard at show season. So -- and I'd also -- you made the comment about maybe buying ahead of price increases and things like that and certainly that -- none of that's going on.

Okay. Well, that's very good to hear. Secondly, your comment about the health insurance, it sounds like it was like a $2 million additional cost that you hadn't factored in before. I haven't really heard that from other folks. Is it perhaps because you guys are such a large employer in the area that you're getting more of an impact from that? And maybe can you share what your health care insurance participation rate is currently?

I don't know if we'll get into the levels of our participation. I mean to say that it's up significantly this year from last year is the factual impact. With employee retention, employee turnover having been complete turnover -- having been a higher number a couple of years ago, people were coming in. They were working. They were leaving. Now that we've lowered that number, as Jason I believe mentioned in his speech last quarter, by 40%, we're retaining people much more on longer-term basis and the people that we're retaining again are helping our efficiencies, helping our customer service, helping the quality of our products. But there are also people that are now looking to have benefits and take advantage of those benefits and want more of a long-term place to be. And as a result, it's driving that substantial increase in our health care costs.

And for whatever reason our -- historically, our participation rate probably hasn't been as high as what a lot of other companies are and we saw that jump this year. Again, we feel it specifically because of all the information that's out there on health care and people starting to think more about it and probably the ones that didn't have it, whether they fear penalties or what's going to happen down the road or just coming to the realization that it's a good decision, we saw -- we probably saw the participation rate jump at our company much more than what other companies that would have a normalized participation rate.

And I just have one last point on that with HR. We've invested, as we've talked about too, in our HR team. And our HR team is now out much more in our plants, much more educated, much more knowledgeable, and our HR team has done a wonderful job of making sure our employees understand the benefit in what they're getting over the past year or so. So it's part of -- part of it is those guys doing a really good job. It's part of just them increasing enrollment.

Yes, I think the -- our health care enrollment happened late in the calendar year and if you go back to last October with the health care mandates -- the national health care mandate, I think that when the national enrollment website came online, I think it was September, October '13. When you look at that and the timing of our annual enrollment, I think a lot of employees felt that they needed to have health care and the easiest way to do that was to enroll in our health insurance plan which is fine by us. We can't control the participation rate, but we can control are things like wellness and consumerism, and we're going to continue to focus on the things that we can -- that we do have control over. And I think that you would see future years more modest cost increases.

Okay, that's helpful. That's good detail. One last quick question. What is your capacity to push through price increases? And what's the sensitivity of demand to that?

Well, it's not something we're doing every year. Our customers understand, as kind of I explained a little bit ago, that they typically know that when we come to the table that we've seen a long-term impact because we're not in quarter-to-quarter or even year in, year out looking for price increases. So it's just one of those -- it's a process where throughout a couple quarters we work with our customers to explain where we're at and whether there are material related costs or increased business costs, we sit down and explain it. We always come to a compromise. We've always been successful coming up with a compromise that our customers understand and that we can live with.

[Operator Instructions] And our next question comes from the line of Kevin Leary with Spitfire Capital.

Just a couple questions on growth in the quarter. So starting with towable content, up about $100 year-over-year. Can you tell us what the contribution was from acquisitions on that rough $100 increase? I know most of your RV acquisitions were in other reported RV segments, but I'm just curious what the actual number was.

Yes. Kevin, this is Joe. That -- it was very small. I can...

Like a couple dollars? Just order of magnitude.

Yes. It was not more than $10 of that $100. I can tell you that. Now on the motorhome side, it was a little bit bigger on the motorhome side as we had talked about last quarter so...

Okay, got it. Bigger on motorhomes. And then similarly within adjacent industry, what was the organic growth in the quarter under RV?

So you're talking RV adjacent industry just for the quarter. So acquisitions for just the adjacent piece of the RV segment added $2 million to $3 million in sales and the balance again about $2.5 million, $3 million dollars of sales growth for just the quarter was organic growth.

Great, that's helpful. And then one quick question on the manufactured housing side. So content has kind of continued to trend down and I presume that's mostly because of this single large customer we've heard about vertically integrating, but do those declines lap or go away at some point as that vertical integration anniversaries? Or how should we think about content for the next year or 2 years on the manufactured housing side?

Yes, so that vertical integration largely started in October of '13. But when you look at the Q4 impact this -- for '14, should be beginning to level off as far as that goes.

And we have no further questions at this time. I would now like to pass the call back over to Jason for any closing remarks.

I just want to thank you all again for your time, and we look forward to seeing you at the 2014 year-end earnings call. Thanks, everybody.