Good day, ladies and gentlemen, and welcome to Q2 2016 Drew Industries, Inc. Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. And as a reminder, this call is being recorded. I'd like to introduce your host for today's conference Renee Ketels with Lambert Edwards. Ma'am, you may begin.

Good morning, everyone and welcome to the Drew Industries 2016 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 Jason Lippert, CEO and the Director; Scott Mereness, President; and David Smith, CFO. 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, 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?

Thanks, Renee, and thank you everybody for joining us on the call today. Once again, we find ourselves in a very fortunate position of being able to release another record quarter to investors. In addition, we posted the best first half results in Drew's history. Among the big highlights were sales growth for the second quarter and first half of 2016, which were $441 million and $863 million respectively. Operative margins improved over last year's quarterly operating profit by $26 million or 77%. In addition, Drew's content per travel trailers and fifth-wheels grew to over $3,000 over the trailing 12-month period, while motorhome content jumped to $1,920. We're off to a fantastic start this year and the industry is seeing greater than more normal volume in the summer months. RVIA just announced that the first six months of 2016 represented the largest six months wholesale consolidated numbers since 1977, which is another sign that the industry has fantastic momentum. All the other lights are green at the moment and retail traffic is strong, inventories are balanced, and OEMs and dealers continue to add capacity to meet growing demand. When people ask how the industry is doing, we often reply by saying for the last two years the industry has continued to add capacity. Ultimately, when our customer's add capacity they have enough industry intelligence to gather that were pointing to longer-term improvement in the business, which is great news. Many of the industry leaders feel as we do that the industry in the coming years is headed to a wholesale of 500,000 units based on all the indicators. We are already looking to breakthrough 400,000 units this year which would be an industry record and more importantly, we are achieving this without significant Canadian market contribution. As you know, Canada…

Thank you, Jason, and good morning to everyone on the call. Over the next several minutes, I will discuss our second quarter and year-to-date results. Our segments change, which will represent in our second quarter 10-Q and was reflected in the earnings release. I will also likely touch on the credit agreement amendment completed in April as we covered previously and give some highlights from our balance sheet and cash flow statements. As we look at second quarter 2016, results at a high level, net sales are up and earnings are up over the prior year's Q2 and net debt is lower and factoring a net cash position at the end of June 2016. These same metrics are improved sequentially over the first quarter 2016. Other things of note, since beginning of the year, our inventory balances are down by over $25 million. Our capital spending plans are on track. Two quarterly dividends were paid off during the second quarter, totaling close to $50 million, and the company is well on its way in integrating the three acquisitions completed so far this year. As Jason mentioned, our consolidated revenue in Q2 2016 was up nearly $80 million to $441 million, representing an increase of 22% over the second quarter of 2015. This result was achieved by the company through its continued growth initiatives and was aided by strong wholesale shipments to OEM, as well as acquisitions completed by the company over the 12-months ending June 30 and also increased content. Wholesale shipments of OEM components for towable RV, which were up nearly 12% over the prior year second quarter, contributed $44 million to the net sales increase or about half the year-over-year total increase. Aftermarket net sales increased over the prior year second quarter by more than 30%. The growth…

Thank you. [Operator Instructions]. And our first question comes from Scott Stember with C.L. King. Your line is open.

Oh, good morning guys, and congratulations on another great quarter.

Hey, Scott thanks.

Good morning. Thank you.

May be if you could touch on the gross margins a couple of items here, one of the other players in the space talked about seeing the issues of de-contenting, starting to run its course and anniversarying. So maybe just talk about you're sitting on that front? And then secondly, may be just talk about raw materials and the givebacks? And, you know, what the trajectory of gross margins going forward? Thank you.

Well, let's take the first question on the content. Obviously, we've been talking the last several quarters about more and more entry level products. In some cases, they yield less opportunity for content. You know, as you know, we're continuing down the road of product development and what I don't like travel trailer leveling we can actually improve content on some of these entry level products. We've seen fifth-wheels. I have a significant exchange quarter two this year over last year quarter two, but still seems there are fields, like, fifth-wheels production is still taking a little bit of a backseat, seeing improvement and increase in trailers and specifically entry level trailers. So we expect the trend of trailers to go forward. There is no signs that fifth-wheels are going to pop back up and take more of a part of the total towable market share. Feels like trailers are going to continue to be marketed and sell nicely as we see all the new entry level buyers and millennials come into the market to buy. But what was the second question you had Scott?

Yes. Just on raw materials. I know that raw materials have started to come back up. And was wondering where you guys are in the process with any potential get-backs on price? And then just trying to tide-in the general direction of gross margins for the back half of the year?

So with respect to raw materials, yes, I mean raw materials have come back up. I mean, but they remain volatile for quite a long time now. Our pricing structure is setup so that as raw material goes up and as we told you last -- I think last quarter, last quarterly earnings call, we had given our decreases out for a second quarter based on raw material move downward. So we index a lot of our increases or decreases. So as the prices still moves, we're able to get back or give back depending on the direction that the raw material is moving.

And it's a -- Scott this is Scott. It's a portion of our raw material movement, so when you look at decreases; it represents a portion of that. Like, Jason, said because it's volatile we don't always do everything all at once. One other thing going back to the content, the de-contenting, we noted in the second paragraph of our Press Release that our travel trailer content was double-digit growth, partially offset by flat fifth-wheel content. So I think that's a testament to being able to grow in the environment that we sit in today. So we're proud of the fact that we can post double-digit growth numbers in the majority of what's on in the marketplace today. One other quick comment in terms of kind of the de-contenting, we've got 900 fifth-wheel units up over Q2 of last year. So Q2 of this year versus Q2 of last year, which is a positive sign that fifth-wheels have begun to rebound granted, that's a low comparison from Q2 of last year, but that definitely is a positive sign for the industry.

You're getting back to the point that it looks like things were least bothering on that side, right?

Sure.

Okay. And just one last question, then I'll get back in the queue. May be just talk about couple of new products that you guys have recently put out there, the sway control and the leveling devices for a travel trailers? I know that you were aggressively rolling out both and may be just talk about how things are going on that front?

Sure, sure. Well, fifth-wheel leveling continues to get more and more popular. We launched travel trailer -- like, we launched travel trailer leveling this summer most of which will be viewed at the -- on the products at the open house in September. So we're excited to announce that there is -- we got approximately 20 brands of trailers going to be open house with leveling, it's going to completely change the way people look at trailers, and the functionality that trailers have tomorrow versus what they had yesterday with a one-touch leveling device versus having to manually crankier unit to stabilize and level, like, people have had to do for the last 60 years. So that's a real exciting development for us, that's a relatively higher price product for us, so it's not a $20 or $30 item it's a $1,000 item. So we have the chance to significantly impact a travel trailer content like we did fifth-wheels and we have no reason to think that it won't continue to grow rapidly after the launch in September just based on what fifth-wheels did when we launched that four years ago. Now, we've got a lot of other exciting products. We got My RV, and sway control, we're launching some step -- new step products at Louisville or at open house as well. Furrion products continue to gain popularity and we launched some appliance products here at open house as well, which is going to be exciting for us, which is again another significant piece of content that we weren't selling yesterday, but will be selling tomorrow. Our R&D remains in full swing and we're looking at new products and just as importantly like we always talked about adding features and contents to our existing core products, this is important as we develop new features and thousand whistles for our existing cores products it allows us opportunity to meet every sell those -- sell those through and make those new features standard items going forward.

Thank you. And our next question comes from Daniel Moore with CJS Securities. Your line is now open.

I wanted to switch gears a little bit, may be just talk a little bit about the decision to resegment the RV business and kind of highlight the aftermarket a little bit more, what drove that and talk about the opportunity there?

Thanks Daniel. This is Dave Smith, I will talk through that. I think over the course of last several years, you can see that we really open our eyes, the opportunity in that space. The focus was we have on customers and as we started we are putting more and more projects into the marketplace some with high yields [indiscernible] there potentially not recognized. But we are potentially serving the market, it's really aftermarket. So you know probably over the last couple of years, we have been building out teams and structure including significantly very large warehouse and sell to service needs of those customers. And for us seeing the opportunity there and recognizing what we're putting a full service operation in place, can do really help to trigger for us if that was an area of business to focus on and really from there just down to make the change to create aftermarket as a segment.

And I would add also Dan that manufacturing housing, while we're still optimistic about it and it's still a small chunk of our business and our margins are good there, isn't going to grow as fast as aftermarket. We talked about aftermarket and opportunities there and we just spent the last few years really getting it some of that opportunity with really great margins and have a long runway left yet. But we look at some of the matured companies, manufacturing companies out there that have had aftermarket businesses for a long time and their percentages of their total revenues in aftermarket can range anywhere from 15% to 25% on a pretty difficult basis. So that's where we're going to drive towards and aftermarket is significant because it completes part of the customers that we weren't touching which is really important for us to continue to pull new business through on the OEM side as well as continue real profitable growth long-term.

Dan I think the, this is Scott. The resegmenting when you look at today, we're kind of trading one 90:10 for another. But the most important part about the resegmenting is why we did it and what the future holds, it's the sign that the investment in aftermarket, the growth in aftermarket both top and bottom line is significant and for our shareholders that's a positive sign over the next five to seven years. We're optimistic that we can continue to grow as quickly as we have in the past and we're really getting -- just getting started and we've got the facilities to be able to leverage that growth over the next five years.

Very helpful and in terms of opportunity obviously you anticipate continued strong growth from margin profile that you sort of laid out or broken out in this reporting. Could you talk about may be opportunity, how much upside is there to we know where the current level for margins are in the aftermarket side?

I think what we talked about in the past is that the margin opportunities significantly greater than our OEM. Our OEM have typical margins and we've got lots of -- when I talk -- when we talk about runway for aftermarkets, there is still lot of channels that we haven't tapped completely acquisition opportunity and the aftermarket is still very untapped for us and that's something that we are looking hard at right now. So we would expect the margin profile to continue along the same lines and obviously we're going to try to improve but as we get more knowledgeable in the space.

Got it. Taking that up to you mentioned peak margins of 11% and given that the mix of the business and then the size and scale might be some upside, any sort of target in mind over the next two to three years if we think about what the next sort of peak margin profile is going to look like?

No I mean we gave the guidance there and we don't know -- we don't know, I mean we are -- it is a lot of it depends around the products that we get big into down the road whether it's your product development or acquisitions that we make that might bring new products into our profile markets and how get into some of these adjacent markets with different margin profiles. The aftermarket international, it's all going to because this is not just one pronged attack on being now with a pretty known margin we've got all these different areas and acquisitions across those areas that present different margin profile. So in our goals to continued to improve on, on our prostate margins and we've been talking since the recession that, if you followed our -- our key initiatives and our long-term strategy that we could get there and we've done that and now it's time to built to on that so, this is going to have follow quarter to quarter and see what we were -- see what we're up to with respect organic growth and acquisitions and that situation will probably play out more clearly.

One other key comment there, when we talk about past peak margins one of the things I have encourage shareholders to think about is the past peak margins was in the ‘06, ‘07 timeframe and our company has completely different than what it was back then. We did have adjacencies, we didn't have aftermarket, we didn't have some of the other product lines that we have today. So I encourage our shareholders to think about what we're doing right now and how the company is made up right now as more of an indication of what we can do and how we can improve a fund what we were doing as opposed to comparing ourselves to a company that was 10 years ago that was very different than what it is today. So that version of ourselves today and we always try to be better going forward. So, that's how I would want people to think about our company not necessarily peak, prior peaks from 10 years ago from the largely different structure then we are today.

And really the true opportunity there executing the strategy that we've been successful at in all these different markets and we've got a successful track record there and there is a lot of opportunity in these other markets and we've proven that we can execute the strategy that think that's a lot of success both on the top-line and the bottom-line and its created a great growth story that we've had. So now it's time to execute in those -- these other markets with still a lot of run rate left in each of these different markets that we have included in our new strategy.

Got it very helpful. Last question, cash generation was off the charts in the quarter and despite paying a regular dividend now, cash is building rapidly once again almost $80 million. In terms of priorities beyond the regular would you still consider special dividends or would you prefer to try, kind of build dry powder for M&A at least in the near-term?

Well, before we get to that I just want to give a quick shout out to inventory management team here at Drew, purchasing teams and also operational teams we've got the lowest inventory balance in the last 15 months. One of the highest cash balances in over three years. And from a working capital stand point we're proud of our margins but we're also extremely proud of what we've been able to do from a working capital standpoint. I'll let Jason comment on what we will do with the cash.

And I don't have anything exciting to add there. It's same old answer the Boards look at these types of things regularly and we generally consider, consider these matters at the quarterly board meetings and other board meetings. So if cash builds and we decide, whether we've got better uses of capital and special dividends or dividend improvements or whatever the cash might be we evaluate those things based on the opportunities that are sitting in front of us. So a lot would to be more to come on that subject as we keep moving through the year.

Look forward to hearing congrats and I look forward to seeing you in Elkhart in September.

Thanks Dan.

Thank you. [Operator Instructions]. And our next question comes from Kathryn Thompson with Thompson Research. Your line is now open.

Hi, thank you for taking my questions today. Acquisitions are a important part of your growth strategy and what would be get better clarity on how much did acquisitions contribute revenues in the quarter importantly if you can give some clarification on the margin profile of these contribute to revenues understanding that a portion of them likely should improve, because they are earlier in the integration process? Thank you.

Kathryn this is David. So in the first paragraph of our press release we included that acquisitions contributed $29 million. Acquisitions including Furrion that is and the vast majority of the sales increase of roughly $20 million was due to acquisition with the balance being to Furrion.

Margin wise, Kathryn all of these companies that we've bought over the last couple years have done well even though this year acquisitions are still early they are performing well and we're pleased with the progress that they're making.

Are the acquisitions this year for the margins more comparable to your current core margins or is there upside is no 100, 200 basis points opportunity for upside?

We've got a lot talking about that and I think that the common theme is a lot of these businesses that we've been purchasing outside of our core RV OEM total markets the margins have been and better in some of these adjacent. That's only attraction and part of it too depends on are we buying companies with intellectual property [indiscernible] allow them to command more margins in their markets because that I've --

[Operator Instructions]

Is anybody on the line?

Yes. Can you hear me?

Kathryn?

Yes.

Hey is this Kathryn?

Yes.

Hey, so did you catch that. I don't know where we breaked out on you guys there, I don't know what happened. There was just some interruption on the phone line.

Yes. So little bit instantaneous but it was basically you're wrapping up on the margin profile of your new acquisitions and you said that most of this is outside the OEM markets actually better margins.

Right. Then what you've got.

But that may segway into the follow-up question I had in that, I know you addressed early about aftermarket versus OEM. But if you look at this quarter on average, how much higher on a basis point standpoint or aftermarket margins relative to on average OEM op margins?

Do we have that or do we give that right now?

We can't give -- what the quarter end shows you're seeing, aftermarket margins is 15.7% versus OEM margin of 15.1% and again the aftermarket business has grown building and driving bigger aftermarket numbers and it's still volatile --

At the year-to-date number.

Correct.

Do you hear that Kathryn?

Yes, yes. So the aftermarket still probably I guess kind of a point, I'm pointing to is aftermarket is your fastest growing segment and also just curios to have a structurally higher margin and so that should be -- you should see incrementally greater earnings growth because of that aftermarket relatively?

Yes that's fair and I also say that our adjacent markets are growing almost as fast as aftermarket, so our adjacent OEM business.

And what's the margin profile of adjacent OEM?

What's the margin profile; we give that in the estimates in the general OEM. But like I said some of the adjacent markets acquisitions that we made, it's traditionally as margins traditionally higher than our core of the OEM markets.

Okay, great. Final question just on raw materials have been a tailwind for you and you touched on earlier but with comps essentially wrapping in Q4, how should we think about the anticipated impact to margins as we think about modeling?

Yes I mean no I think it's going to be modest -- it's going to be a modest impact like Jason said, Jason and David said we got five or six key things that lead to our margin improvement over the last couple of quarters and we still feel like the majority of that is going to contribute to third and fourth quarters. So we really need to think about it as just a portion of five or six things. It does last we've talked about this for a couple of quarters. We talked about Q3 of 2015 being half a quarter worth of material improvement. So Q3 of 2016 would be half a quarter but there is -- these other five things that really contribute quite of that margin improvement. So you can't really underestimate what these additional things that are sustainable can do going forward to our margins.

And on top of what Scott said, like I said in my earlier comments when somebody asked about materials, we do index many of our customers on the raw materials movement. So as it goes back up, we will capture, recapture some of the decreases that we gave out when it went down, so some of that will be ultimately neutral type movement.

Thank you. And we do have a follow-up question from Scott Stember with C.L. King. Your line is now open.

Hey guys just a quick update on the international expansion may be just talk about where you're seeing right now?

Yes, no problem. Well obviously in May we made the acquisition of Component Supplier I believe and that has build the step components and step components in establishing mechanisms, lot of intellectual property protected products over there which is in our sweet spot, kind of going to be our -- they are going to be our boots on the ground. So that's two strategies now, we have got the LCI strategy that we have been at in slide outs for the last three-and-a-half years now. Adjusting slide outs and traditional LCI products and then product development and existing core products movement and Project 2000 product. So we feel that due to [indiscernible] European LV Show is in another four weeks and we're going to launch even more slide out products there on the top OEM products over there. We feel that slide out strategy is going to continue to gain momentum just like it did here in the U.S. couple decades ago. So we're excited about slide out strategy, we excited about Project 2000 in there, product development as well as continuing to look for companies that might fit in the family of our LCI with respect to potential acquisitions down the road to grow our strategy in Europe.

Scott with the acquisition of [indiscernible] were above on an LTM basis were give or take $25 million in international revenues.

Thank you. And our next question comes from [indiscernible]. Your line is now open.

Hey guys thanks for taking my questions. I just want to be clarify on organic growth quickly, looks like you guys are up about I think 12% in the first half and I think Dave you mentioned that basically all of the aftermarket growth has been organic but can you just give us a sense of how organic growth is looked across adjacent industries and just clarify the comments on aftermarket and just have a quick follow-up?

Yeah, I think just in real rough terms adjacent sales is roughly 50-50 which means acquisitions and organic. And then I think that as you look at the OEM RV business that is roughly 70% after you take up industry growth the growth is about 70% organic.

That might differ a little then historical if you look at the RV growth that was more 70:30 probably 70% organic, 30% acquisition but as we try to get into adjacent markets a little bit more quickly acquisitions are going to play a bigger role than what they did in RV growth?

The trend we had two, if you look at over the last 12 months we had two key adjacent acquisitions on Signature Seating which would have been August of 2015 and then we had High Water which was January of 2016. So for the quarter those would be the two key acquisitions that would be acquired revenue and then the rest would be organic. So those two businesses combined had revenues, had acquired revenues of roughly $35 million.

Okay, great. Perfect.

Yes.

And then just quickly and as you guys sort of think about your organic content per unit, I guess specifically in towables you guys of sense for how they perform the quarter was that sort of low single-digit, mid-single-digit and how do you guys think about that?

Well the wholesale is up 10% year-to-date retail is up 8% which is significantly better than the initial RVI projections that they gave in Q4 last year. So in all that I think that the most important thing to note on towable volume right now is that retails had were getting reports weekly from our OEM customers and dealers that retail activity is high. This time of the year typically the wholesale OEM production it's low but we get customers working Saturdays. We've got customers running, at the volumes they were running back in April when we were traditionally running at peak. So I think it's important to note that this is the first time I can remember in several years where we're running it at peak type volumes versus what we've seen in the past when I typically slow this time of the year, just good news.

And I'm showing no further questions at this time. I would like to turn the call back over to Jason Lippert for closing remarks.

All right, well we appreciate everybody be on the call today. Start with a brief introduction and we look forward to talking to you in next quarter's earnings call. Thanks again everybody. Bye, bye.

Ladies and gentlemen thank you for your participation on today's call. This does conclude the program. You may all disconnect. Everyone have a great day.