Renee Ketels - Lambert, Edwards & Associates, Drew's IR Jim Gero - Chairman of the Board Jason Lippert - CEO and Director Joe Giordano - CFO and Treasurer Scott Mereness - President.

Wenjun Xu - Thompson Research Group Daniel Moore - CJS Securities Scott Stember - C.L. King.

Good day, ladies and gentlemen and welcome to the Q1 2015 Drew Industries Incorporated Earnings Conference Call. My name is Mark and I will be your operator for today. At this time all participants are in listen-only mode. Later, we will conduct a question-and-answer session.

[Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I’d now like to turn the conference over to Renee Ketels, with Lambert & Edwards, please proceed..

Good morning, everyone and welcome to Drew Industries 2015 first quarter conference call.

I’m Renee Ketels with Lambert Edwards, Drew’s Investor Relations firm and I am joined on the call today by members of Drew’s management team, including 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 first 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.

And 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 all for joining us on the call today. We’re pleased to announce a record trailing 12 months revenues of nearly 1.3 billion and record earnings growth in our first quarter of 2015 which demonstrates that our long-term strategy is proving to be successful.

We’ve been working very diligently over the last several years and we are starting to really see sustainable momentum in the several key areas of our manufacturing by the way of increased efficiencies and new areas of growth.

Through our steady customer focus, continues investment in our employees and our intense focus on improving manufacturing and product innovation we believe we will continue to see strong results. The RV industry is moving in a very good direction right now backlogs are strong and our customers are confident about the industry and where it is going.

One of the most important factor is RV retail growth numbers are very solid at 12% through the first couple of months of this year. And we also feel that RV lifestyle is continuing to gain popularity and product through continued new products introductions and innovations happening on the OEM side of the business where we play a goal.

In addition the RV Industry Association has done a spectacular job advertising the RV lifestyle of family, community and outdoors. These strategies we feel will continue to attract more new buyers to the RV market in North America. For the first quarter of 2015 our operating profit increased 22% over the first quarter of 2014.

Our team is focused on margin improvements through lean and automation initiatives, as well as continuing employee retention efforts. The local unemployment in Elkhart County is 5% it is essentially really zero.

And if business and the economies continue to grow there will be pressure for companies to retain great people in order to keep their positive momentum.

We have a laser focus on employee retention and are continuing to not only improve year-over-year, but turn employee retention which is directly related to efficiency momentum and margin improvement and be one of our bigger competitive advantages.

Our content for total RV is up nearly $200 for RV since March 2014, clearly demonstrating that there is runway left for us to continue to increase our content for total units. This growth in content for total RV is a great accomplishment for our teams in addition we are up over $400 on our content promoter home since March 2014.

The overall content improvement comes through our focus on innovation and research and development and our highly talented sales team. Our R&D team has new leadership from the automotive industry and we're not only developing new products, but developing them faster than any of our peers.

This industry creates innovation and we believe that our customers come to us first because product innovation is at the heart of who we are. In the last 14 months consistent with our long-term strategy, we completed six acquisitions at an aggregate cost of more than 130 million, two of them occurring in 2015.

While we're seeing solid growth in our RV OEM sales, we're now becoming very effective at growing our adjacent markets and our aftermarket business.

Before 2014 we had only made a couple of acquisitions outside of the RV business, in the last 14 months, five out of the last six acquisitions have substantial revenues in markets outside the RV OEM business. Improving our presence and increasing revenues in adjacent markets and the aftermarket is something we've been working hard on for a long-time.

And we're now starting to see some of the great progress. In our trailing 12 months of sales, 221 million is to adjacent industries and the aftermarket. As we've mentioned last quarter, we spent significant dollars last year to ramp-up for the growth we saw coming.

We still feel confident in the investments we made towards the facilities improvement and adding capacity in 2014 will allow us to grow aggressively well into 2016 without any significant capacity additions. As we look forward to the next couple of quarters we see many green lights.

We continue to see gains in our aftermarkets and international RV markets our efforts in adjacent markets are seeing nice results. The R&D and content growth had solid momentum. Retail and wholesale sales in the RV market are strong and growing close to prior peaks with projections by many showing growth beyond prior peaks.

We have acquired some really great companies recently that have great people and fantastic growth potential and on top of it all the acquisition pipeline continues to look favorable. While we're seeing great times in our business right now we're very focused on initiatives and opportunities that we feel will continue to help us get even better.

We always emphasize our people are the highest priority and the key to our success. We feel privileged to serve our customer partners and are proud to work alongside our extremely talented family of managers and employees.

Above all we continue to build a more successful business by developing strong and lasting relationships with all of these individuals. We are confident that our commitment to this relationship-focused philosophy will continue to yield substantial benefits over the long-term.

Now I’m going to ask Joe to provide a few additional comments and then we’ll take some questions..

Thank you, Jason. The start to our 2015 net sales was strong with first quarter net sales increasing 76 million or 27% on a year-over-year basis.

Excluding acquisitions our first quarter net sales increased 58 million or 20% consisting of an estimated 19 million of net sales growth resulting from industry-wide increases in the wholesale production RVs and the balance 39 million or about 50% of the growth substantially due to organic market share gains and new product introductions.

In particular as noted in the Press Release, our content, our travel trailer and fifth-wheel RV was extremely strong in the 2015 first quarter with content reaching $2,923 for the 12 months ended March 2015.

In addition our content for travel trailer and fifth-wheel RV for just the first quarter of 2015 alone increased 16% as compared to the fourth quarter of 2014.

This increase was primarily due to market share gains and new product introductions, but consistent with the past a portion of this quarterly increase in RV content for the first quarter is seasonal.

In the first few months of each year, our customers replenished their inventory including our products as wholesale RV demand increases ahead of the spring retail selling season.

As discussed previously acquisitions over the past several years have been an important part of our long-term growth strategy, adding existing sales, products and personnel of the acquired companies as well as new customer relationships which provide opportunities to sell our existing products.

Over the past 15 months, the acquisitions we completed added a full year run rate of approximately 109 million in net sales.

Based on these total historical sales of 109 million from these acquired businesses and assuming each of these six acquisitions that was completed in the last 15 months including the recent acquisition of Spectal has been accomplished at the beginning of the 12 month period ended March 2015.

Our consolidated net sales would have increased by an additional 55 million for that 12 month period. In 2015 and beyond as a result of our combined efforts, we hope to increase these acquired sales. Acquisitions continue to remain a key component of the Company's growth plans for the future.

Because so much has changed over the past year including the fixed SG&A and manufacturing costs added to meet the corresponding organic increase in sales, we find it useful to compare our results for the current quarter to the most recently completed quarter in addition to the year-over-year comparison we included in the press release.

Due impart to seasonality and industry-wide production of RVs, our first quarter 2015 sales were $72 million higher than the fourth quarter 2014 levels. Over that same three month period our operating profit increased 14.6 million or 20% of the sales increase consistent with the high-end of our target incremental margin.

The solid growth in operating profit from the fourth quarter of 2014 to the first quarter of 2015 was primarily due to the benefits gained from spreading fixed costs within both cost of goods sold and SG&A over our larger sales base.

SG&A in particular declined from 13.8% of net sales in the fourth quarter of 2014 to 12.3% of net sales in the 2015 first quarter. In addition operating margin in the first quarter of 2015 benefited from the recent decline in aluminum costs from the higher levels we experienced in the second half of 2014 and improved operating efficiencies.

At the end of the 2015 first quarter our net debt was 22 million. That was prior to the payment of our $2 per share or 48 million in total special dividend in early April 2015. In order to provide long-term liquidity for the Company in March, 2015 we did two things.

First, we increased our line of credit from 75 million to 100 million and issued 50 million of five year notes at a fixed interest rate of 3.35% to Prudential under our shelf-loan facility. We are also currently working with our lenders to further increase our line of credit to 125 million.

All those changes of it don’t change our priorities for cash and borrowings, they remain the same; make attractive investments that we expect to produce above average returns. Thank you for your time. This is the end of our prepared remarks. Mark, Jason, Scott and I are ready to take some questions..

[Operator Instructions] Your first question comes from the line of Kathryn Thompson from Thompson Research Group. Please proceed..

This is Wenjun sitting in for Kathryn.

Can you comment on how much will the newly acquired asset contribute to fiscal year ’15 revenues and as well could you clarify seasonality is it similar to Drew’s core business?.

When you say contribute, you are talking about sales, Wenjun?.

Yes, fiscal year ’15 revenue..

Correct. So we acquired EA in January, middle of January and they had sales of about 17 million. So I would expect almost the entire 17 to benefit the 2015 net sales.

Spectal we acquired just a few weeks ago middle of April so let’s say we will have eight months and they were at 25 million of annual sales when we acquired them, so it would be about two-thirds, so we have got $16 million-$17 million.

Again assuming we are able to maintain their historical level of sales we hope to be able to begin increasing that but there is no assurances of either..

And could you clarify the seasonality of those two business are those to be similar?.

Yes, there is not too much seasonality in the business. It’s pretty level..

And how should we approach modeling Spectal margins, are these similar to Drew’s core margins, RV margins?.

Correct, that’s how we would look at this business, generally consistent with our overall RV segment margins..

And lastly what was the impact of raw materials to EPS in the quarter and how is Q2 tracking right now?.

The impact of raw materials in the first quarter when we have not quantified Wenjun it was not at the level of significance of the stuff we talked about last year where we did some quantification.

I think the most important factor really is that aluminum has come down and again in the beginning of ’15 from some of the higher levels in ’14, again it’s always extremely volatile we never know what’s going to happen from month-to-month with aluminum but right now it’s in a back to a good position..

Your next question comes from the line of Daniel Moore from CJS Securities. Please proceed..

Jason, you mentioned both in the prepared remarks the -- obviously invested quite a bit over the last call it six to nine months increased capacity for growth and I think you said that you were now in a position where you didn’t need to make meaningful additional investments through 2016 if I heard correctly maybe just talk about margin expansion from this point forward on a year-over-year basis are we likely to see operating margins start to improve and just kind of your outlook for incremental margins?.

Well certainly we focus on the continued initiatives in lean and automation. The retention, growing retention and lowering attrition we feel that those are all going to have substantial impact on being able to move margins in the right direction.

So, and those three things specifically, our large focus are R&D and Research and Development our new product initiatives we are focused on building a lot of products there that have intellectual property those typically have higher margins, so content where we can take existing products and continue to add value and get more bank for our product and content additions with existing products in all those areas we feel we've got really solid momentum with right now and I’d highlight that retention is probably the big piece, so if we can continue to retain employees better and better each year it makes us look much more efficient.

So we're on a roll that we have had a couple of years of continued improvement and our goal is to continue that moving forward. [Multiple Speakers], yes go ahead..

I was just going to expand on that just in a little bit here on margins and Jason absolutely the start up piece, so in 2014 we've baked a lot of headwinds we've talked about start up and realignment cost.

I think we talked about $0.09 in 2014, as we look to 2015, again being able to now leverage those costs and to gain the efficiencies from those investments. We talked in 2014 about healthcare costs being a major headwind. I think we may have even talked about $0.10 or $0.11 of an impact there.

And for 2015 as we mentioned last quarter, the enrollment has remained steady so far here in 2015 we don't expect it to change. And as a percent of sales we expect our group insurance costs to be consistent year-over-year, again not a headwind or a tailwind but kind of neutral at this time.

We talked in 2014 about aluminum as I did a couple of minutes ago becoming a headwind in the back half of 2014 and those costs again have comedown recently again to become more of a neutral position.

We've talked again at the end of the year about some sales price increases going into effect in the beginning of the second quarter which again provide a little tailwind and recently steel has shown some softness and we should begin seeing some benefits of that in the second quarter of 2015.

So again there is some tailwinds here in 2015 at least as the picture presents itself today we can't say what the picture will be tomorrow but at least as of today we're looking at tailwinds as opposed to the various headwinds we talked about in 2014..

And as a growth company we always have to add a certain amount of modest fixed cost and we always try to do the prudent thing in terms of pertaining it right, but regardless of whether or not we have a little bit of less CapEx this year than we did last year.

We do -- we're continuing to grow and have to look at additional fixed cost additions as we continue grow..

And just to put color on that it is Scott, we still absolutely feel that we're in the middle innings here of this that there is a little of runway left that's what we're hearing from our customers that the feedback we're getting from the retail side of the marketplace.

The consumer confidence type numbers are telling us and that we still feel that we're still well in the middle innings and that these investments still have a long way to go..

Two more and both related just in terms of labor costs obviously market is very tight there as retention is critical in terms of operational efficiency, would you expect the labor cost inflation to accelerate or perhaps remain relatively stable at least in the near-term?.

Yes I think that it can be challenging no question but I think in terms of what I was talking about in my remarks earlier that’s what I feel we’re going to gain a competitive advantage in.

We’re going to do better in that area than our peers, and focused on doing a better job retaining we’ve already got a head start I feel but with the unemployment rate as low as it is.

It’s going to be challenging for everybody because with all the green light in the business we know we’re going to see a good market for the foreseeable future and if everybody in the county here needs more workforce we are drawn from unemployment level that’s basically not a whole lot of employees in the pool.

So we just have to do a great job retaining employees and feel that we’re going to do that, and that softens 90% of the blow that way you’re only looking for mostly people that you need to help grow your business not the regular turnover that you’d expect to have in the business..

But we don’t expect it to grow, increase in terms of able, yes..

And lastly in terms of you mentioned five of the last six acquisitions have significant non-RV content and yet we’re still sort of in the middle innings here and optimism remains very high, is that a function of, it is kind of a strategic decision or more just a function of where the opportunity sets lie and do you expect most acquisitions going forward to be in adjacent or outside markets or is it still just wherever the best opportunities present itself?.

Well I think that’s the real highlight of our story right now going forward as the adjacencies and the opportunities that exists in those adjacent markets that we’re continuing to uncover and get into.

Again we still feel that the RV market has got legs and there is a lot of positive things going out there, retail is still very strong and that’s really the power behind whether or not the industry continues to grow and move forward but retail looks strong there but really the adjacencies are the big part of our story and we’re going to -- as we’ve opened up some acquisitions here in the last year that have been solely focused on revenues outside of the RV.

We’re going to get more comfortable in looking those adjacencies which gives us big opportunities to grow compared to just staying focused on our RV business where we might hold a 60% or 70% market share and then you’ve got limited opportunity to grow these new markets representing some pretty big opportunities to grow.

So as we uncover more adjacencies and get more comfortable developing relationships with customers and acquire businesses that are well planned and those different markets and it makes it a lot easier to get out and grow sales in those markets when you’re starting at a low saturation a low market share penetration point compared to where we are at in the RV business..

And it’s not just adjacent I mean we’re looking at aftermarket growth adjacent industry growth and international growth being through the -- percentage wise through the fastest growing parts of our business. So those three areas are a big focus of growth for us over the next five years..

[Operator Instructions] Your next question comes from the line of Scott Stember from C.L. King. Please proceed..

Can you may be touch based on price increases that you had alluded to in the fourth quarter that was specifically designed to cover the higher healthcare cost and some of the commodity pressures specifically now that we’ve seen some of those cost start to come back in, how should we look at that from a timing and overall contribution standpoint?.

Well as we spoke about on our last conference call we’ve started back in October with certain products and it wasn’t an across the board thing, we plugged in from certain products and we’ve long and short finished that implementation in the month of April, so the increase that was sprinkled in from October of last year through the month of April here last month, so that’s the timing piece..

As you stand right now assuming that there was no further change in commodity cost, would you consider yourself fully covered right now?.

They were pretty close, I mean we have generally when we go out with the price increases we try to cover it as much as we can in the R&D piece, and the growth piece and efficiency piece they help cover up some of the other things..

We always look at increases with raw materials being a little bit of a moving target from the standpoint of where is it going to be by the time the increase actually goes into the fact..

And on the aftermarket side, since you see phenomenal growth there, could you talk about if there is any one or two products that are doing very well or is it just a function of some of these parts starting to fail and you guys being in a number of these aftermarket catalogs for a new seasons now?.

Yes, that said I mean part of it which is getting out and getting our name recognized in the aftermarket and that took a lot of time there is a lot of selling points out there between the dealers and wholesale distributors and Internet.

So that took a chunk of time and then with the rest of spend just gaining momentum and improving sales but most of the sales are coming by the way of replacement foreign opportunities and that covers a lot of products in our product basket.

So, I think we’ll continue to see more penetration especially since the main story is that ever since 2010, 2011 and 2012 we have been putting hundreds of millions of dollars of RV parts into the market on RVs that eventually are going to need some kind of refurbishing or replacement in one way shape or form.

So as that continues to snowball, we can only expect the aftermarket to get busier and they key is the recent over the last few years of spend just to make sure that our products are accessible or able to get products out in a timely fashion for the retail customer or dealer or whoever is asking for the products and as long as we can do that and make products available in a timely fashion then we should be okay..

Acquisitions definitely helped in the first quarter when you look at that number..

Duncan Systems in particular, right?.

Yes, Duncan and Power Gear would be the two big ones as far as acquisitions..

And just a last question on the international side, I know we’ve been tracking the rollout, or what the potential rollout of a slide out mechanism in the European market I know that you’ve alluded to in the last couple of quarters that you have met with some OEMs.

Can you maybe just give us an update where we stand on that?.

Yes, the prior year all we did was take the 2013-2014 we took the flight out.

The many manufactures showed them, we had one try to fly it out last year put in a show that just did one since then that manufacturer has picked it up and running regular production it’s small volume but they’re running regular production now and that’s really the first step as for a manufacturer to pick it up and run with it and since then in the last couple of quarters we have had a couple of other manufacturers start to plan within their product plans and some of their core plans and continue to show at the future shows.

So it’s very small momentum but it’s a good momentum, it’s positive. The more the European see slide outs in care events in their market the more likely more and more manufacturers will pick it up no different than it happened in the U.S. back in the early 90s.

So, really positive right now those are good signs that people are seeing the benefits and trying it and putting it into the production, those are first step..

Your next question comes from the line of Daniel Moore. Please proceed..

Just a quick follow-up on that point, well guys for the time being or foreseeable future, do you continue to expect to serve Europe through domestic manufacturing and what kind of critical mass would you need to consider setting up shop overseas?.

Yes, that’s the way we intend to proceed for now as continuing to work with our boots on the ground over there. The people that we have are talking with the customers and working with the customers on prototyping and some of the early production units.

We do have a partner over there that’s doing a lot of fabrication and working with the customer on the products on the ground in Europe. So we do have somewhat of a presence in Europe with a partner over there that supplies other components of the caravan market.

So we’re kind of going to run with that for the short-term until we decide that there is enough mass over there to just figure out how we’re going to be there in a meaningful way..

[Operator Instructions] I would now like to hand you over to Jason Lippert for closing remarks..

Everybody, thank you for your time and we look forward to talking to you in the second quarter. Thanks for taking the time to call in today. Thanks..

Ladies and gentlemen that conclude today’s conference. Thank you for your participation. You may now disconnect and have a great day..