LCI Industries (LCII) Q3 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Drew Industries Incorporated 2015 Third Quarter Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference may be recorded. I would now like to turn the conference over to your host Renee Ketels with Lambert, Edwards and Associates. Please proceed.

Good morning, everyone, and welcome to Drew Industries 2015 third quarter conference call. I’m Renee Ketels with Lambert Edwards and Associates, Drew’s Investor Relations firm. I am joined on the call today by members of Drew’s management team, including Jason Lippert, CEO and a Director; Scott Mereness, President; and David Smith, CFO. 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, in 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 thanks everyone for joining us on the call today. We are pleased to announce another quarter of solid earnings growth with consolidated net sales in the third quarter of 2015 at $345 million, 17% higher than the third quarter of 2014. We are also pleased to report trailing 12 months revenues through September 30, 2015 of $1.36 billion, growing $232 million over the trailing 12 months through September 2014. We continue to see content gains, as RV content at September 30 for towable increased the trailing 12-month average to $2,952 from $2,804 in the prior year and content for motor homes increased its trailing 12-month average to $1,807 from $1,500 to the prior year. Our net sales for Q3 of this year were up over last year’s third quarter. It was noticeable drop and high end fifth-wheel content from Q1, which impacted our margins. October sales were strong and point to continued market share and content growth in both new and existing products. Our strong backlog’s following Elkhart Open House should play out favorable for the November and December sales month. As we look forward to coming quarters, we remain focused on our company’s strategic growth initiatives. The first is growth in our adjacent industries and aftermarket. We believe there is about $1.1 billion and potential annual revenues available to us in adjacent industries and the aftermarket if we effectively execute the same strategy we have been successful with in the RV business. Aftermarket, is especially of interest to us and no a trailing 12-month basis we have grown to it to nearly $100 million from only $53 million last year. With our capabilities apply a broad array of components for RV, we believe the opportunity to replace parts supply by our company, as well as our competitors as RVs age and experience normal volunteers are significant and typically at attractive margins. This opportunity will company to grow as we put content into new RVs. As for the rest of the adjacencies, we continue to make great progress in the OEM and aftermarkets for cargo and across new trailers, bus and marine. We also believe we remain in a great position with respect to new acquisition opportunities because of the momentum we are gaining in these new markets, coupled with the strength of our management team and a healthy balance sheet. We also feel that there is a still long way in North America and RV industry for acquisitions and addition to acquisition opportunities in bus, cargo, equestrian, aftermarket and international RV market. Our new partnership with Furrion provides yet another great opportunity. Today we have about $100 in RV content on Furrion line up of electronic products that were added in this last quarter, out of the potential content $500 on the products that exist on Furrion's line up today. We plan on launching several new Furrion branded products at Louisville RV show which will boost the content opportunity for this business. On top of all these, we are now taking Furrion to the aftermarket and adjacent industries, which is very exciting and adds even more potential for meaningful growth. One dynamic which had an impact on our margins this quarter was a change in RV content mix from prior quarters. The primary driver of this was the drop in sales with OEMs the components for larger fifth-wheel that typically carry higher margins, which we believe was due to pulp [ph] order production in Q4 in 2014 and Q1 2015. Last month viewers that came to the RV Open House in Elkhart placed orders for those bigger unit and we now expect to a normalize production level for these larger RVs in Q4 2015, in Q1 2016. We expect based on backlogs for components of these units this will impact our margins positively as it has in the past. As we have all watched RV industry wholesale shipments grow double digits for past three straight years and finally slow in Q3 of this year, we evaluate our expenses and made the decision to trim back on our direct labor cost to regain more operating leverage. In early October, we initiated a reduction in our workforce aimed at reducing annual labor cost by approximately $12 million to $14 million which we plan to complete over the next three months and have already made $9 million in actual reduction in the last three weeks. Due to related severance, we anticipate the benefits of these actions at the end of Q4, 2015 and beginning in Q1, 2016. We anticipate improved incremental margins in the business going forward due to our expected growth in coming months, coupled with this better operating leverage. We also have several new product initiatives underway. The consumer need for electronics in RVs was validated by several OEMs picking up our innovative myRV tablet for the Open House, as well as new competitor entrant into the market. We believe every RV will need this automation an app based technology as a standard item to efficiently control features in the RVs. Based on consumer feedback and considering where electronic controls are going in the auto and home markets with similar technology. And in other month at Louisville, we will be introducing an all new innovative technology for the North American RV market called Sway Control. Our electronic scoop in Detroit developed this product it help sway and towed RVs by electronically adjusting the break - axle breaks on the RV as trailer sway occurs. Europe and Australia already use this technology extensively with great success. It’s a safety related product that the OEMs, dealers and retail customers will understand and we have customers interested once we introduce it. All-in-all, we have a lot of great momentum in our strategic growth initiatives. We also believe that 42 million of CapEx investment we put into the business in 2014, coupled with the success we’ve had in lean manufacturing, which has freed up additional manufacturing space will take us into 2017 with CapEx above normalized levels. In addition, we have favorable - unfavorable material pricing last Q4, last year, and have better material cost going into this year’s Q4. As we look forward, we see many green lights and positives and we'll continue to execute on long-term plan. I’ll recall, by thanking our fantastic management team and all of our employees for their hard work and efforts. Our company will not be what it is without the amazing the group of dedicated employees that we have focusing on the business day-in and day-out. Now I’ll turn the call over to our newly appointed CFO, David Smith. He has ton of energy and he is a welcome addition to our team. And we are looking forward to short/ long term impact he will have on our organization. Dave?

Thank you, Jason. Thank you for the introduction. I appreciate the opportunity to join the team and so driven to serve our customers, great product, great service and great value. Please to everyone are on the phone, over the next few minutes I’m going to add highlight to some of the information contained in our earnings release. This I'll announce for the third quarter and year-to-date are closely aligned and as a result I’ll focus my comment on the year-to-date period for the P&L items. Through the first nine months of 2015, our net sales increased by $157 million or 19% on a year-over-year basis. Excluding acquisitions, our net sales of high end appliances and electronics, Furrion supply and distribution agreement, our consolidated net sales in the first nine months increased by $105 million or 12%, consisting of an estimated $42 million in net sales growth resulting from industry-wide increases in the wholesale production of RVs. For the balance, $52 million, making up nearly 7% of the increase, substantially due to organic market share gains and new product introductions. Acquisition in 2015, sales under the Furrion distribution and supply agreement, as well as the impact of acquisition completed in 2014 also added $52 million during the year-to-date period. Gross profit as a percent of net sales for the year-to-date period was 21.8% and essentially unchanged from year ago earlier same period. Operating income for both periods is 8.7% on net sales, although 2014 include a non-recurring loss in sales of company extrusion asset which had 0.2 impacts. For nine months ended September 30, 2015, SG&A cost have grown by $22 million or 19% over the same period. The increase in spending is primarily fueled by additional and direct labor staff resulting from the high growth trajectory, our business is been on to a last several years. As a result of multiyear double-digit industry growth the company has added staff what they had anticipated growth. The possibility in the 2015 third quarter and increase year-over-year sales confirm its vision mixed with action determine directly labor costs as was mentioned in both the earnings release and by Jason. The target cost savings are $12 million to $14 million annually will come from line steps levels more posted to the anticipated growth. As we mentioned in the earnings release about 70% of the target reductions in dollar terms were implemented in October and we continue during reminder of the first quarter. In connection with the costs reduction the company anticipate including severance charges of at least $2.4 million in the fourth quarter. In some right business is grown by double-digit in both Q3 and year-to-date periods, particularly it remained strong but the company is taking steps to capitalized to opportunities to improve. Net debt at September 30th is $85 million, the debt is made up of term down of $50 million borrowings to net of cash against the $100 million bank credit volume. This balance is up over the same period in 2014 which was 49. The increase is primarily driven by increases in working capital. Working capital doubled nearly $70 million since the end of 2014. As it relates the seasonally business and increase in our sales volume, working capital at the expected level except for the Q3 balances. At September 30th, 2015 inventory increased by approximately $46 million from beginning of the year. Of this increase of approximately 50% was from increases in source products, including inventories to support to the Furrion distribution agreement and acquisitions related to this first half of 2015. As for 30% increase relates to strategic position for certain areas including [indiscernible] and the remaining 20% was relates to organic growth. Including inventory churns is to back to A plus [ph] churns or over the long-term is a top focus area from that. Improvements are expected to occur over the next several quarters. At the end of October net debt was reduced to below $60 million which is the strong material focus on working capital reduction. It’s also important to note that company returns $48 million to shareholders in the form of dividend in April this year. As indicated our adjacent capital spending near $22 million for year-to-date period is in line with company expectations which will remain below the 28 [ph] allocated the level expensed in 2014 and we made several significant investments fiscal year-to-date. The full year CapEx expense anticipated to between $28 million, $29 million. Our top [indiscernible] cash and debt remains the same like attractive investments that we expect at least above average return. Thank you everyone. That’s the end of our prepared remarks. Jason, Scott and I ready to take questions. Operator?

Operator: Thank you. [Operator Instructions] Our first question comes from Daniel Moore of CJS Securities. Your line is open.

Good morning.

Good morning, Dan.

In the press release you mentioned your view of Q4 that travel trailers on fiscal [ph] towable RVs wholesale shipments might return to more normalized levels. Just curious if you might give us a little bit more color on what you consider normalized, particularly in the light of the tough comps from Q4 last year?

Dan, it’s Jason. I think what we are looking at is - orders that we've done in house and that open house orders that we saw from that. As you know we are always talking to customers, our OEM customers out there getting there feedback. So we've got pretty good visibility on what we are seeing today versus what we saw last year and what we saw compare to Q3. So - that's give us a confidence the feel that the orders for Q4 looking forward are in line to what we are seeing over the last couple of quarters with a mid-single digit growth over last year. That's now change obviously, but we've got always having into November or customers were reporting strong backlogs. So you want to add anything on that.

And any change in terms of - you mentioned in mix shift obviously weight on margin a little bit. Do you anticipate any shift back towards higher dollar content at wheels or that probably take another quarter or two to sort of work through?

Yes, I think when you look back Q3 it’s kind of an anomaly I mean you - it was - I think Scott said the number was 30% change in fifth-wheel production over Q2 and Q3, which is well over higher margin, bigger content, bigger items that we produce go toward. And again we look to the backlog that we have today and what customers what our customers are saying from the Open House. And they are saying that they are going to return this [Indiscernible] the luxury fifth-wheels, the higher end fifth-wheel. And we're seeing it in the orders. So that gives us confidence that we can feel that those - orders for those products are more normalized looking in the Q4.

For the quarter fifth-wheel retail sales were up 2.8%, if you compare that to Q3 of 2014, so that’s anytime retail continues to stay positive even though wholesale had a little bit of the drag for Q3, the retail number being positive is definitely a plus heading into the next couple of quarters.

That’s a biggest plus underscoring everything we’re talking about here with what's coming up in the next couple of quarters as the retail remains very strong. It’s outpacing wholesale and that’s always a good thing.

Very helpful. I wanted to return to the cost savings, looking out to next year, to fiscal '16? In the past you've talking about - you talk about incremental operating margin goal in the kind of 13% to 15% range. With the $12 million to $14 million additional cost savings, do you view that as part and partial or part of achieving that type of incremental operating margin for next year or do you think you can move that even higher given the cost savings that you expect?

Go ahead Dave.

Dan this is Dave. I think the answer to that is definitely yes, we think that is part and partial of achieving that incremental margin of 12% to 15% range, but we do think - it does set us up for the opportunity to do better.

And on top of that we’re anticipating growth with the industry and growth in content. So we’re going to see improvements there while we’re taking this special kind of labor and making some adjustments and improving our leverage.

Excellent and then lastly, you talked about or maybe just a little bit about the key products that are really driving that growth in the aftermarket? And how much of that growth is share gains versus market growth? Maybe just we talked about trends and obviously wholesale shipments, but maybe give us a sense of how the aftermarket is growing as well?

Yes. I think there is a couple - the share gains or share are part of ship penetrating the whole aftermarket, there is a lot of channels, there is a lot of opportunities, there is a lot of units out in the field, I mean there is 10 million RVs out in the field. And saying that we’re two years new and to the three years new to the aftermarket share, there is a lot of share opportunities. But when you consider the just five or six years ago, we were only putting $500 million and/or $400 million in RV components in the new vehicles. And you consider today, they were putting $1 billion over the last couple of years anyway $1 billion of RV content in the new vehicles. We expect that to continue to go along with the concept that we continue to pump in the new vehicles. So is that answers your question, Dan?

Yeah. It does at least I guess the second part was simply, if you are seeing an expansion or what type of growth and those numbers are harder to come by, but what type of growth rates we’re seeing for the aftermarket as a whole?

We're after about 90% year-over-year, if you look at where we were last year and some of that have some acquisition in it. But the RV aftermarket is growing nicely just because of the dynamics I just pointed out with what we doubled the content in the last six years that are going into our new vehicles. And all those components are going ware out or break at some point in time or need to be replaced and our ability to be pricing in the aftermarket gives us that first chance to replace our own products.

And we invested in sort of top line service models well, right, so that customer experience.

Absolutely.

Excellent. Thanks for the color. David, look forward to hopefully meeting you at our conference in January.

Thanks, Dan. Take care.

Thank you. Our next question comes from Scott Stember of C.L. King. Your line is open.

Good morning, guys.

Hi, Scott.

Maybe you can just take a step back and talk about the topic of the mix shift to lower price units. And my question here I year of the belief that what we saw the last couple of quarters as more of a short term impact and that for 2016 or at least what you are seeing right now is that we are seeing a return back to potentially similar mix shift or also similar mix profile amongst the product lines going forward?

That's a good question. Let me clarify. There is definitely been a growing trend to entry level products. So that’s not changing. As we have a products over the last several years in terms of recession become increasingly more popular. What we saw in Q3, which is add one more blithe and fifth-wheel. So trying to I can’t explain it I mean it was a significant drop in the fifth-wheel production and if you look year-to-date we also down 3%, wholesale and trailers were up just over 8%. So the mix shift whatever in Q3 all we can tell you is that whether customers told us in Open House and what orders were saying today for this quarters production and this quarters backlog of bigger units. And the peers that they are going back to - what we saw similar to Q1 we have orders for those [Indiscernible].

All right. So I guess in short the shift continues it's an ongoing headwind, but this - what you saw the last quarter was more of an anomaly you are thinking at this point?

It feels that way yes. If you look at kind of what we thought Q1 and Q4, we saw kind of a more normalized level of those units and we are seeing more of that right now for Q4 this year.

Okay, great. And on the cost cuts, I know you said there was indirect labor I guess this is going to be spread out against the gross margin or cost of goods sold and OpEx, these benefits?

Correct.

Okay. 50-50 is a good way to model it or was there one more than the other?

I think it feels more like 60-40, you will see it in the SG&A line from the operating line.

Okay. Got it, okay. And maybe just going back to the after-market, I was asked this question about awnings but it seems as if - I remember the last time we had chatted about this that were a particular opportunity to start selling the awnings in the after-market. Could you maybe just talk about that and how that could give another layer of growth on top of what you have already seen in the after-market going forward?

Yeah, sure. Yes we’ve been saying the after-market for all provides one of the greater after –market selling opportunities on a single product line. And to be able to do that we’ve had to create a full line of awnings and that’s two and a half years it’s been being an awning supplier. So to create a full line and there is a lot of difference products in the awning line has taken this long we are introducing our full line of awning products were released first quarter next year early first quarter next year before all the aftermarket and selling shows hit. So we really anticipate penetrating and seeing our penetration in the aftermarket with awnings looks like throughout for next year. We’ll kind of be able to give you a better feel, but know that the more our awnings need to be replace in the field based on what we put into new vehicles over the last couple of years that will be the core driver. When somebody needs replacement part, they are going to say, hey, my healthy high awning broke, and my Lippert awning broke and I need this replacement part or I need a complete new awning. Today our competitors awnings are the once that are having and chosen the field being replaced. So it’s only going to take some - some of this is going to take the awnings been in the field for a while, until we start to ware out and need replacement parts, before we see the bulk of those orders. And the good news to bottle that this is, our market share today is about 50% after 2.5 years on the OEM market in awnings. So, if we consider that with 50% today and you can kind of anticipate how the need for replacement parts for those awnings are going to work out considering two years ago or two and half years ago we weren’t selling any new awnings into the OEM market. That makes sense.

Yes. It does. Thank you very much. And maybe just lastly, just talk about internationally; I know you’ve been working on new slide-out mechanisms for the European market place. This seems to have been some positive momentum there. Maybe just talk about where it is right now and what the expectations could be in 2015 and beyond?

Yes. Sure. The positive about where we’re at in the slide-out production for Europe today is that by year ago this past September we meant to do some work with a slight-out in a European towable unit that was the - a big win just to get out there and get the market looking at it and excepting it. This past forward a year this past Düsseldorf show in Germany, there were three manufacturers, three of the top manufactures presenting the show with slide-outs, with our slide-outs. So I think that's real positive momentum. And if you go back the North American market made the change to slide-out with a slow process that didn’t happen overnight. There is a lot of engineering and structural changes that need to happen around, the design of the RV to accept the slide-out and considering that the Germans are meticulous engineer. So they are going to go slow with this whole process, maybe even slower than what the North American market was. So we're being patient right now. We're spending a lot of time over there. We're spending a lot of time on product types and working with the designers of the European RV manufacturers to make sure that they understand all things that need to be considered when putting a slide on the new unit. So the momentum is positive where one OEM last year, three OEMs this year, we anticipate having more next year with any more success. And ultimately that's we need more floor plan, more production, more brands to except the slide-out. We really don’t anticipate that it will go much differently than how the North American market wanted, it’s just going to take time. At the end of the day, who doesn’t want more space in their units, so they can figure, how to do it and engineer it properly and service it properly and that will be very acceptable over there.

Got it. That's all I have. Thank you too much for taking my questions.

Thanks, Scott.

Thanks, Scott.

Our next question comes from Kathryn Thompson of Thompson Research Group. Your line is open.

Good morning, I am Steven Ramsey on for Kathryn. I got few questions here. I guess my first one based on your past experiences managing through RV industry cycles, what inning would you say we are in terms of the cycle and in past experience what were some early indications of the downturn?

In our opinion we’ve been - we passed the 2006 peak if you take out the units. We feel on extra innings. That’s the best way to classify it. I think that some of the other OEM talks about this the same way. South Bend has a lot of ways. Retail is strong. The product is strong. The lifestyle is popular, community outdoors, family. We feel that the dynamics and the fundamentals are strong for our industry to continue to move forward. And on top of that the industry continues to develop a [indiscernible] entry level product and bring new buyers into the lifestyle which ultimately leaves them to buy more of these down the road. Does that answer your question?

Yeah that’s helpful. And then as you push into adjacent industries, do you think you will still be able to grow earnings even if there is a cyclical RV downturn and could you add some color on the margin profile for those adjacent industries?

Sure. Well adjacent industry is newer for us then what RV’s is, so there is a lot more - there is a lot more upside as we dig into these new adjacencies and new markets. You file [indiscernible] opportunity on to that and there is a lot more opportunities. You put acquisitions on top of that for some of these adjacent markets there is even more opportunity. For example, we made agreement through some distribution agreement with Furrion Electronic Components in July and that immediately closed into all of our adjacent market opportunities. So, as we continue to make more deals like that and acquisitions there is more and more opportunity it will, it’s becoming more meaningful, I think if you take motorized and [indiscernible] housing and all of our adjacent markets and after-markets our first six months number was about $450 million trailing 12. So, it’s getting to be significant if you consider that total of kind of where we started really growing the business strong. Now we’ve got all these other opportunities and all these markets. And if you think about after-market being counter [indiscernible] then you look at adjacent industry maybe now it’s being related to any type of RV cycle per se, they would - that naturally would be independent of an RV cycle. You look at those two aspects of how we are growing the business and it definitely protects us against any type of RV downturn if there were to be one. And after-market, in particular too, I mean we just started calling that out over the last several quarters and it’s then growing at a very healthy rate for a long time, it’s just the numbers weren’t super meaningful. But now we are talking about 19% - trailing 12 versus something maybe two years ago that we didn’t even call out. So keep your eye on that, because the after-market is exciting. From a margin profile we’ve stated in past call the adjacent margin is relatively consistent with our overall company margin and that would be still - we treated there.

Great. Thanks. And my last question, how much in this quarter, how much of the RV segment was pressured by lower volumes versus higher fix costs?

It certainly have an impact - industry slows down that quick. And I think we call it down in the press release you know 14% wholesale growth from October to April and 4% from May to September. So when things get slowdown that fast, it definitely some impact. We haven't quantified, but one of the reasons we took action in September to reduce some of our labor cost in significant way is to counteract that. But going forward we're still anticipating growth like we said. So we are improving operating leverage while we are seeing an improvement in our top line over the coming quarters.

Great. Thank you, guys.

[Operator Instructions] Our next question comes from Tristan Thomas of Sidoti. Your line is open.

How is everyone?

Hi, Tristan.

Two quick questions, one, first with Giordano, I believe you mentioned, given that $100 split for electronic content, you can grow that potential with 500 is that accurate?

That is accurate today, but it is - I mentioned in my speech we've - we are introducing and launching new products at Louisville show in November early December. So we will be looking and looking to see - looking to call out what that add down the road. But we're going to continue to innovate new products and are doing now it’s kind of one of the reasons we partnered with them to innovate and that obviously add compounds just like our R&D department as well as adding content opportunity through our existing product lines.

Okay. Maybe just provide an example of increase kind of I know you talked that control panel, I am curious what else you can add?

Right now when we did our agreement with Furrion, the key products were televisions and stereo and power cords, specifically build and design for our use of the RVs give the electronic, so but not your standard type of electronic equipment. They are specially designed for RVs. But what they are going to do is here as reason is backup cameras, currently towable, most towable don’t have a backup camera on the unit and you don’t expect what auto having backup cameras that you want something in 30 or 40 feet long. So that’s something that we are really excited about that we are hitting hard, but there is several different products like that they are going to be introducing and we’re making some significant announcement of the legal show and like November, early December. We bought - we did the deal with the guys because of their innovation capabilities and that’s one of the things exciting from a content standpoint. They’ll continue to push new products into their Furrion brand and we will continue to take those not only to RV but after market and adjacent market and industry as well.

If you think about some of the product that they currently sell like take for example in-dash navigation system and stereo equipment. Every single just about every single specialty, I mean, if we talk about a delivery truck or any vehicle and those takes some part of those components including backup camera. So when you look at their products and you apply to the adjacent industries that we call upon, definitely there is some crossover as far as opportunity goes in the adjacent.

Okay. Are there any talk of mandating something like a backup camera on RVs, I think you heard other, you think backup potentially could happen down the road?

Yeah. They have it, but typically the towable and motorhomes business trails auto business. And just to get more an active and all transportation industries, I mean, are you going to see the RV industry follows what's mandate on the auto a little bit more closely same thing with the tire pressure monitoring systems and things like that, things also that we can supply. They can make safer when we look at things like that backup camera stuff that makes sense RVs.

Yes. One final question, you spoke a little bit about kind of your outlook for 2016 in terms of the product mix returning a little more normalized towards some of the higher in towables, motor homes, just maybe looking forward into 2017 and 2018, it seems like there is a lot of growth like you missed out in the lower end RV models, I mean, do you think that's going to be pay a little more meaningful contributor as we kind of go out there a little bit in terms of timeframe?

It’s hard to say - it’s really hard to say. All we have to go on industry and I don’t think that you’re going to see - it’s really hard to say Tristan, what's that going to be, but I would tell you that we’re going to continue to innovate product even for the asymmetry level towables out there. We’re going to continue to look at the products we’ve talk about developing leveling systems for trailers. We had developed leveling systems for fifth-wheel here and the recent past of the fifth-wheel successful we know that it will trains like the trailers that we can design the right system. So even on an entry-level trailer, trailer just 50, 70% of the market and we can get leveling systems on the good chunk of those trailers that's a healthy content for us. So but its leveling or other products are going to continue to go with the market and design products for all of the market.

Yeah even products on travel trailers like RV and back of that we feel like when we look out few years there could be for sure the potential of the high tech rate even on in travel trailers.

Entry-level cost is good I think more people in the market overtime to upgrade [Indiscernible].

Okay, great. Thank you again.

Thanks.

Thank you. Our next question comes from Daniel Moore of CJS Securities. Your line is open.

Thank you again. Jason in your prepared remarks you mentioned input cost of the potential tailwind. Would have expected to see maybe little bit of benefit already in Q3 just maybe talk about the timing do you expect to get incremental benefits as we go out into Q4 in early '16 still illumine?

Yeah, so you kind of look at Q3 and Q4 separately, we talk about the mix shift having an impact from Q3, we talk about slowing growth in RVs and the change - the big change in fifth-wheel and then the overall fifth-wheels. With some impact the materials and Q3 we anticipate continued improvement and materials over the next couple of quarters that's a tailwind we've been talking about for the last couple of quarters as we saw aluminum specifically, [indiscernible] significantly last Q4 and health insurance cost which drives last Q4. So we don’t quantify the improvement, but we have those tailwinds with the paperable material and more normalized mixed and then the sales improvement from strong Open House. So yes, do you have anything to add to that?

I think when you look at - specifically when you look at Q4 last year, a headwind versus this year Q4 is going to be more of a tailwind, so I think it’s important when you look at the fourth quarter is that situation exists.

Very helpful. Good color and then lastly, you just mentioned insurance, health insurance outside of the labor cost savings, general health insurance cost; do you expect a similar increase going to 2016 as you did in 2015 or more manageable?

More manageable. We’ve done some - in the process of doing plan designed changes for the 2016 benefit year. That’s going to largely offset the majority of the cost increases that we expect to have, so we look for efficient participation rates with this enrollment that’s coming out to stay relatively flat and the anticipated inflation would be mitigated by plan design changes.

Very good. Thank you again.

Thank you.

Thank you. Our next question comes from Sasha Kostadinov with Shaker Investments. Your line is open.

Yes, hi. Thanks, guys. Couple of kind of housekeeping items, I guess recently, you've seen a sequential decline in the fourth quarter on your gross margin and also your tax rate, is there any reason why that shouldn’t continue in this current fourth quarter?

Well we’ve got - the last Q4 2014 I can’t remember what our operating profit was, but it was impacted significantly by the health insurance cost, healthcare cost and the materials. So we keep talking about that tailwind and we have got counting in this Q4 that it will be different. It will be an improvement.

How about the tax rate? I mean tax rate….

You expect to see more normalized tax rate in this year 2015 Q4.

Now what is that mean more normalized because normally it does decline in the fourth quarter for you guys?

Sure. Yeah. I think last year we made some adjustments and we are below 30% and I think just to level of those adjustments won’t be quite the same way and I think we are still forecasting into mid-30s.

Okay. And I think you mentioned that the labor cost savings that you’ve achieved there will be some onetime cost in the fourth quarter. Can you give us an idea will it offset in the fourth quarter the benefit or will it be greater than or less than?

I think it’s going to be approximately offset the benefit in Q4, but it is one time non-recurring, so after that it will just slow through.

Okay. And will you call that out on your report?

We will.

Okay. And I think earlier on the call you guys were talking about a new product I’m sorry I missed that can you go over again what that was and maybe what's that opportunity size might be?

Yeah. We talked about the myRV home automation tablet in a Sway Control, speaking of the Sway Control maybe.

I think that might have made it, yes?

Yeah. So most products actually were developed and designed by IDS which is an acquisition we made last March, electronics development company, up kind of in the auto center in Detroit. So they developed a sway control device which is a mechanism that attaches to the unit in the trailer brakes and actually controls the sway or depresses the sway before the sway actually gets the chance to start. So, if you have ever towed a vehicle, winds, big trucks passing your tow vehicle it can start your towed unit swing. And usually, if you don’t have any kind of mechanism to help you, you are kind of doing that manually, you are doing it by feel, you are trying to correct the sway by feel by controlling the vehicle. The sway control device that we developed allows the mechanism to detect straight sway and kind of tap the trailer brakes offsetting to offset the sway. And it really corrects sway before the driver even feels it, because it’s doing it real - it’s correcting it real time. So, an intelligent system, it exists in Europe and Australia right now. A lot of the units in those two world markets use the sway control as a safety device. We feel that anybody towing a trailer that’s towed a trailer before or maybe not towed a trailer before would be - would think this is an ideal product to have either after-market or OEM because who wants to deal with that if they don’t have to.

And can you - since the product’s already being used overseas, approximately can you give us an idea what kind of ASP would elaborate with it?

We will probably start talking about that after the release next month.

Okay.

But it’s coming. We feel really confident about it, it’s just another example of how our R&D teams and our different facilities work to - and they develop meaningful products for the really M&A and aftermarket.

Okay. That's sounds very interesting. Then one last question, I think in the press release you've included the Furrion agreement in your kind of acquired sales number and I guess I wasn't really looking at that as in acquired sales, but anyway, if you could pull that out, so I can get a real kind of acquisition and organic growth for you guys?

Yeah, I mean for the full year we had talked about at a time that we sign the agreement, we talked about annualized run rate of approximately $35 million and we didn't quite have a full quarter with our sale for Q3. So…..

Okay, okay.

And we talked about it, as we do the deal with Furrion that their market share was equal or less than 10%, upside opportunity with their products.

Okay. All right. Thanks a lot guys. Congrats.

Yes.

Thank you. Our next question comes from Scott Stember with C.L. King. Your line is open.

You've talked about in the past about starting to sell some of these higher content product such as the leveling devices for travel trailer, has there been any headway on that - on that headway but any progress on that can we talk about the timing of when you could see that?

Yeah. I can anticipate that we will have a system ready this year. So you know we've got a lot of customers interested and you know we are going to wrapping up the final development and testing on that product and we just needs to be adjusted for the lower profile trailers, so its growth.

[indiscernible]?

And a significant content opportunity as well.

Right.

Thank you. [Operator Instructions] I am showing no further questions at this time. I would like to turn the call back to Jason Lippert for closing remarks.

Okay, well we appreciate everybody jumping on the call today and turning in and we’ll be with you next year when we released fourth quarter earnings. Thank you everybody.

Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.