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

Travis Harbauer - Citi Daniel Moore - CJS Securities Scott Stember - C.L. King Peter van Roden - Spitfire Capital.

Good day, ladies and gentlemen, and welcome to the Second Quarter 2015 Drew Industries Incorporated Earnings Conference Call. My name is Kwanda 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 would now like to turn the conference over to Ms. Renee Ketels with Lambert & Edwards. Please proceed..

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

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

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?.

Jason Lippert:.

For the second quarter of 2015 our operating profit increased 15% over the second quarter of 2014. Our team is focused on margin improvements through Lean, automation initiatives and efficiency initiatives as well as continuing employee retention efforts.

While we faced some headwinds in the second half of 2014 with some high material costs, consolidation cost in certain business units and an increase in health insurance costs, some of those factors have now turned into tailwinds.

As we look forward to the coming quarters we see many green lights, one of them being solid double-digit growth in the retail RV sales for the first five months of the year. The growth is a key indicator that the RV lifestyle is continuing to gain in popularity.

We believe dealers will come prepared to purchase units at the Open House in Elkhart in September or they have to move out. RVs are becoming incredibly functional with more upgrades than ever seen before in the RV industry many of which we've had a hand in developing and supplying to the clientele market.

In the last few years the RV industry developed more entry level products specifically targeting elder families in both towables and motor homes. We feel strongly that the RV lifestyle which embodies outdoors, family and community will continue to attract more potential buyers to the market.

One other key point I want to bring to everybody's attention are some results of the annual RV dealer survey, highlights that I thought worth sharing from 75 or so dealers that responded are 94.8% of the dealer survey said they had a profitable year in 2014.

All dealers recorded an average of about 15% growth over prior year, 67% subjects saw 2015 overall being better than the year of 2014. 77% said they plan on adding staff, and 46% said they are going to add extend their facilities or add-on.

To us, these specifics represent some positive insight into the mindset of the dealers that are out there driving the retail demand. Analyst and investors [indiscernible] without the outlook for acquisitions and what we'll say today is that the pipeline remains full.

One important note regarding our acquisition strategy over the last two years is that we have been able to complete several acquisition outside our RV core business. Expanding our prospects to other markets and industries opens up a significant amount of additional possibilities so we can look to acquire great businesses.

Acquisitions have been key in our decade-long strategy to become a great supplier in the RV space and we believe acquisitions will provide us the same benefits in adjacent markets as we look to become a great supplier in those businesses; mainly marine, heavy truck, equestrian cargo trailer and the bus market.

We're continuing to gain traction and are well on our way to becoming a key supplier in these markets through our focus on innovation, listening to what customers want and developing trust and relationships with these customers. In addition to adjacent market growth, we've also seen impressive growth in the aftermarket.

As most of you know for many years, we had not expended the lot of resources on the aftermarket simply because we've solely focused on driving OEM market share.

The increased focus on the aftermarket is clearly reflecting in our results as our aftermarket sales for the first six months of 2015 were $47 million compared to just $24 million in the first six months of 2014, nearly 100% increase.

As we mentioned last quarter, we spent significant dollars last year to ramp up with the growth anticipated in 2015 and '16. We feel confident the investments we made towards facilities improvement and adding capacity in 2014 will allow us to grow aggressively well into 2016 without further significant capacity additions.

We spent $42 million in CapEx last year and through June this year, our CapEx was just under $15 million. It's also important to mention that we continue to implement Lean programs across the company; as we do that, we free up capacity.

As an example, we recently completed a project at one of our larger facilities and took one department from 33 people down at 26 and reduced square footage by 15,000 square feet. The more capacity we free up through Lean events the less pressure we will have to spend more capital and add more building space in the future.

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

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

I also wanted to take a second to thank Joe Giordano for all the service and dedication to the company. Joe has added a lot of value our company over the last decade plus and develop a lot of great relationships in the investment community. While we are sad to see Joe go, we know he will have a bright future with his career and family.

We are truly thankful to Joe for all the great things he has done over the last 13 years of his career here. Joe you'll be missed. Now I will ask Joe to provide a few additional comments and then we’ll take some questions..

Thank you, Jason. Through the first six months of 2015, our net sales were strong as you've seen. With consolidated net sales increasing a $116 million or 19% on a year-over-year basis.

Excluding acquisitions, our consolidated net sales of the first six months of 2015 would increased $77 million or 13% consisting of an estimated $29 million in net sales grow resulting from industry-wide increases in the wholesale production of our RVs and the balance $48 million was substantially due to organic market share gains and new product introductions.

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 12 months, we have completed three acquisitions, which at the time of the acquisition had a full year run rate of approximately $66 million in net sales.

Based on the total historical sales of $66 million from these acquired businesses and assuming each of the three acquisitions completed in the last 12 months has been accomplished at the beginning of the 12-month period ended June, 2015, our consolidated net sales would have increased by an additional $31 million for that 12-month period.

And what that implies is that $35 million of that sales has already been recognized in our financial statements. In addition, the recently signed agreement with Furrion also provide Drew with about 40% of annual run rate net sales. So combined there is about $71 million in net sales to be added.

For the balance of 2015 and beyond, as result of our combined efforts we hope to increase these acquired sales. And 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 and cost added both organically, as well as cost added through acquisitions, 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 included in the earnings release.

And due to the seasonal shift in the production of RVs from the second quarter to earlier in the annul cycle, our net sales only increased $1 million from Q1 2015 to Q2 2015. And for those that have been following the RV industry for a long time that small increase is very uncommon.

We go back we typically see a much more sizeable increase from Q1 to Q2 in terms of sales of our RV segment. And over that same period despite the despite the negative impact of the shipment sales on our fixed cost and capacity planning efforts our operating profit increased $1.8 million which was largely due to lower material costs.

Further, our results in the second half of 2014 were negatively impacted by higher raw material costs, which based on charged market prices is not expected to recur in the second half of 2015. And if you recall specifically in the third quarter, we talked about raw material costs having negative impact of about $0.05 per share during next quarter.

And as I just said we do not expect that recur here in the second half of 2015. In the first six months of 2015 inventory rate seasonally increased by $31 million of which $7 million was from acquisition.

The balance of the increase or $24 million was primarily due to an acceleration in purchases, primarily due to purchases made prior to resolution of the West Coast port issues, as well as an increase in steel inventory on hand due to the favorable market conditions. The company is working to improve inventory turns in the coming quarters.

Thanks for your time. That’s the end of our prepared remarks. Kwanda, Jason, Scott and I are ready to take questions..

[Operator Instructions]. Your first question comes from the line of Greg Badishkanian with Citi. Please proceed..

Good morning. This is Travis Harbauer in for Greg. Just had a couple of quick questions. So July sales were of about 11% with organic growth of 5%.

How do you expect this to trend and play out for the rest of the quarter? And then in terms of Lean, how big of a longer term opportunity is this? And if you can quantify any ranges or types of margin upside that would be great. .

Yes, sure. I'll start with your first with a spec on sales. I think we're typically entering a period in Q2 living up in the open house where dealers are typically waiting to place their big orders for the next model year in September. The recent years we have seen big October if you go back and look.

So, I mean, I don’t think we’re expecting any different turn this year. So I would expect the Lean, your Lean question, I kind of outlined in my speech an example of one of the bigger events that we conducted that happened to the second event in that department that we've done over the last two years.

So Leans is not a one-time situation where we hit a department and then we don’t have to look at it again, we're continually go to go back and hit every department at every plant. We are really just two plus years into the program, so we've got a long way to go.

There is lot of run way left at all the facilities, some facilities we haven't even touched yet. So something we're going to be talking about for many years to come..

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

Thank you. And just wanted to echo Jason's sentiments. Joe, thank you for all of your help with us CJS over the years. Clearly, there has been a lot of moving parts and shifts in timing that you to manage this year.

But if we take a step back, first half of the year as a whole compared to H1 '14 operating margins generally flat near incremental margins, slightly below 10%, below your kind of low to mid-teens goals.

Maybe just talk about biggest challenges you're running up against to achieving those? And secondly, your level of confidence that you can get back closer to low-to-mid-teens incremental margins in the back half of the year?.

Sure. I'll start on that. I'm sure everybody else wants to comment here. But if you look at sales are probably going to lay the challenges of [recent] obviously.

We added $42 million of capital last year, specifically for capacity editions and prepared for the growth that we saw coming, the sales becomes a challenge for when we're trying to show you the results that we talked about. So I think part is just letting the industry play out the rest of this year and in the next year.

We've talked pretty confidently over the last couple quarters that we're going to use the capital that we invested last year to carry us forward well into 2016. And I think we're all expecting the industry to expand. We've looked at the industry estimates and it's up this year, we're projecting up next year.

We've got already prepared for that, we did that in 2014. So what we're really going to capitalize is over those increases in the industry and some of the other things that we're going to continue to do to grow our business organically in adjacent markets and aftermarket.

And growing to the space we already have is rather quick process and [indiscernible]..

And I'll add to that, Dan. Heading into Q2 as I noted in my speech, we typically expect a sizeable, decent sizeable increase in the seasonal sales in Q1 and Q2. And in capacity planning, you're prepared for those months of April and May as typically your annual highs that you have to be prepared for to meet industry-wide demand.

And when you see the little bit of softening, by the time that comes around it's impossible to turn the ship and you have those costs there.

And looking at the numbers, if we had say, I'd say $15 million more in sales, which is probably in line with kind of that 5% seasonal increase we may have seen historically, you would have expected a very strong incremental margin, because the fixed cost were there.

So probably the closer to the upper end of the range at 15% to 20% range, which puts $3 million more roughly in operating profit. Running evaluations based on that, you would have seen pretty much dead on targeting incremental margin increase with that extra $15 million in sales and $3 million of operating profit.

Now, I mean, [indiscernible] 2020 knowing that okay, there was some flattening and some seasonal movement and shift in production, but we still had to be prepared in coming in for that type of an increase.

And as Jason said, if we looked at the back half of the year, knowing what we know about strong retail at this point, dealer inventories based on some recent surveys are inline and I think some may even say our dealers are holding back orders till they see the new models in September.

And we're optimistic that we'll have a strong October production, October and fourth quarter production coming out of that open house, which again we have to be prepared for..

And just to tag on what Joe said, we can have anticipating, a normal type of Q3 and most importantly Q4 with the change the model year and give us some -- really place the orders based on the strong retail that we're seeing, which is the best news that we have, we've got -- we can't just let our labor force go away, we got to kind of hold and be prepared, that’s the part of seasonal part of our business that we've got to be ready for that.

And we had some transitions too. With all the CapEx that we spent to add capacity we had business transitions, we had plants consolidating and closing and moving and that was a lot of cost within the first quarter that won't repeat again in the next year.

We're planning on just to keep the momentum going with facilities that we have to take on all those extra business we see coming, so with outcome of the repeat that we saw on Q1 will transition..

Yes. Some of those facilities that we brought online last year was large facilities and those particular plants will be able to grow into before the next coming years..

And maybe just switching gears one other, can you elaborate a little on the recent agreement with Furrion? How big an opportunity can that be over time? And I think you've alluded to the fact that margins are similar to your core business.

What is it about the products that you're selling that enable you to generate those type of margins via a distribution agreement or shed it?.

Yes. We're really excited about this. I mean the most exciting part of the business is the feel of the product in a marketplace, maybe there is a lot of chatter and talk in the marketplace about Furrion product. They've got an amazing innovation machine, an R&D machine.

So they're continually cranking out new products, the customers, our customers are excited always to see what's coming next. And just is that overall the design look and feel of the products, give them unique advantage over lot of the other players in the business that have more stale product that haven't changed in a long time.

So the product mix is going to change significantly over the coming years, because there is plans in put out lot source of different products. Most recently they've started to add a kitchen line, which is you can imagine would be other significant business opportunity in terms of content.

We were seeing right now that the content is approximately $500 a unit with the business or the products that they have today, but that's changing every month.

So we've recently added backup cameras and observation cameras and some other exciting products that today aren’t really standard in all our RVs, but tomorrow would be all really good if we push hard like we have on a lot of other new product introductions. So hope I'd give you some color..

One more. One more quick point is after market and adjacent market Furrion have the potential to be able to grow quite a bit in the existing vehicle market that we serve as far as the adjacency and after market. So beyond RV, we've got content to be able to penetrate into those markets as well..

Absolutely..

The further the numbers here make it clear, in the release we talked about $500 and again, as Jason indicated that kind of today's number and growing every day, but if we take $500 content potential per unit times call it 400,000 units, this is today of $200 million opportunity of which assuming we can at least maintain the share that’s $40 million.

If we can get that share to our average of $50 million or $60 million, which -- there is no guarantees, but again is what we've been able to at least do successfully with many, many product rollouts over the decade, the last decade. That’s a very significant opportunity.

Let alone what Jason is talking about, down the road with more and more products, the aftermarket and the adjacent industries as Scott indicated and this is potentially very significant opportunity..

Your next question comes from the line of Scott Stember with C.L. King. Please proceed..

And Joe, just want to echo those thoughts, has been great working with you. And I wish you the best of luck in the future..

Thank you..

Just a question a bigger picture here. I know that there has been a talk about a mix shift to less expensive units that have lower content.

Could you talk about how that's been impacting your content notably on the towables? And how you expect that to play out over the next year or so?.

Well, I think from our perspective and lot of things have changed over the years, but the positive about it is that there is a lot more RVs getting to the marketplace hitting price points that are lower so that lot of younger people and younger families can look at RVs that might have looked away or not looked at the segment years ago, because the entry prices were too high.

But because there are so many entry points today, it's brining more people to the market we are seeing a shift toward smaller vehicles on towable side. And the -- there is -- take for example, there is lot of 12 to 14 foot trailers out there today, that didn’t exist a few years ago.

There was one brand couple a years ago or a couple brand couple years ago $89, $100, or $9,000 retail trailer and today just about all the big manufactures are making a version of that. So it's not terribly saturating in terms of entry level products, but there definitely is more entry level trailers out there and available.

You just look at the color. There is more color, there is more choice of interior, there's more choice of credit point, just more choices all around on -- just within the entry level.

So this goes to somewhere having to look at $25,000 to get into a trailer like they used to where $18,000 retail you paid to get in for $10,000 today, which is a big shift..

Got it. Thanks.

And next question on the SG&A, just referring to some of these infrastructure costs that you have been talking about over the last year and for the first half of this year, is there any way just to parse out how much of that potentially goes away in the back half for the year? And how much is going to be here for the long haul just because it's part of the new infrastructure of the company?.

Sure, Scott. I'll give you just a little bit of color on that without getting too granular. And -- it's difficult or it's not highly -- it's not looked upon highly talk about things being nonrecurring, but there are some costs relating to a particular acquisitions that if we were to stop doing acquisitions those costs could go away.

In particular, in the second quarter, cost related to some current acquisitions, some cost of some prior acquisitions probably was in the range of about a $1 million to a $1.50 million during the quarter.

Now, we're not saying we're going to stop doing acquisitions, but it gives you some magnitude to some of the costs this quarter that we had incurred related to that.

We also had one other big item that did come in this quarter, that will continue is related to the -- some of the stock comp plans, a new plan that was put in and there was releases on that earlier on the year. So that will continue, was in effect really for the second quarter and not in the first quarter.

So I think if we look at the increase in SG&A from the first quarter to second quarter, was up maybe $3 million. That's probably 70% of 75% of the increase just in those kind of two categories.

And part of it, probably the last piece, maybe little bit more is some of the fixed cost that come along with acquisition, so we are acquired a company like Spectal. In April, we're going to have two months of their SG&A that come along with the -- come along with that acquisition..

Got it. That's very helpful. Thanks. And just last question then I'll jump back in the queue.

On the international side, Jason, can you give an update on the slide out that you've been -- I guess as an OEM or so over there in Europe that's been testing this soon, can you just talk about that and some of the other international opportunities?.

Yes. Still -- we still -- would classify it an early earnings and we're about to approach -- it's I think [indiscernible] show, which is [audio gap] in Europe, which is in late August or early September. And there will be -- there is a big difference between this year and last year.

The manufacture that was top three in all of Europe, they typically slide after the show last year, is actually producing some units. They've got units of production this year where last year they did took a unit to the shell. So they're going to start our retailing soon.

There are couple other manufactures that are starting to prototype for show type unit, so we anticipate that over the course of next year there will be shows and more production with other manufacturers. And that's when we always start to see the dominoes start to fall, but we have got to get the units out there, we got to be positive experience.

I'm really confident in the way the -- it's pretty traumatic for European caravan manufacture to cut a hole in the side wall unit and try to figure out the supply box; we've been doing it for long time over here, but they wanted to do it a little bit different and a little bit tighter construction.

And it's been really good to see them turn out the quality products they turned out, which will help retail confidence level and retail exception. So we're really positive right now. We're just kind of in the leading team to get it out there.

And the more people that hear about, the more the manufacturers are asking hey, how do we proceed, how do we look at this and then we walk them into our presentations.

And I think the more these people see it out there the more trust will be, because there is really no reasons not to be able to have more space in those small towable units and motor home units over there..

Got it. That's all I have..

[Operator Instructions]. Your next question comes from the line of Peter van Roden with Spitfire Capital. Please proceed..

Well, first question on the Furrion deal.

Do you guys have to invest anything to get that deal or is it all just incremental sales?.

We use the facility in south, van, one of the ones that we put up last year. And we created space up at that facility and some room to grow into, so we've got to take a little bit more on that building on in terms of additional lease later on the year.

But right now, we've got it operating at a facility that we have running and with the management team that we had in place and management team was excited to take on more. And we are happy to plug it in some place that we didn't have to dedicate a separate facility for us..

Just their inventory..

That was really investment [indiscernible]..

Got it. Okay. And then second question just go back to the SG&A increase.

Is $48 million run rate a good number using going forward?.

Well, of that $48 million there are variable components there, so we include our transportation cost in our SG&A so give or take is about 30% or so of the SG&A, which is typically transportation, which is variable with sales.

So not necessarily a perfect run rate, but if you take in the variable plus we've got in sense of compensation, which is based upon operating profits, again, that's a variable cost that we'll move with the profits. Other than that, I think those numbers are pretty indicative of the type of run rate.

Again, we're considering what I talked about with some acquisition related costs that did happen this quarter..

Got it. Okay. Thank you. That's all I have..

And with no further questions in queue I would now like to turn the conference over to Mr.

Jason Lippert for closing remarks?.

Yes. Well, we just want to thank everybody for coming on to the call. And we'll see you next quarter. Appreciate it..

Thank you for joining today's conference. That concludes the presentation. You may now disconnect. Have a great day..