LCI Industries (LCII) 2004 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Drew Industries' Yearend 2004 Conference Call. My name is Rachel, and I'll be your coordinator today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. If at any time during the call you require assistance, please press "star" followed by "zero"; and a coordinator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's conference, Mr. Jeff Lambert. Please proceed, sir.

Thanks and good morning, everyone, and welcome to the yearend and fourth-quarter conference. I'm Jeff Lambert with Drew's Investor Relations from Lambert, Edwards. And I have with me, today, members of the Drew management team: Leigh Abrams, President, CEO and the Director of Drew; David Webster, President and CEO of Kinro and a Director; Douglas Lippert, Chairman of Lippert Components and a Director; and Jason Lippert, President and CEO of Lippert Components; as well as Fred Zinn, Executive Vice President and CFO of Drew.

We want to take a few minutes this morning to discuss the results for the quarter. However, before we do, it is my responsibility to inform you that certain predictions and projections, made in today's conference call, regarding Drew Industries and its operations may be considered forward-looking statements by the securities laws. As a result, we must caution you that as with any prediction or projection, there are a number of factors that could cause results to differ materially. These risk factors are identified in our press release and our Forms 10-Q and 10-K, filed with the SEC.

With that, I'll turn the call over to Leigh, who will begin with a brief conference from management and then followed by Q&A. Leigh?

Thank you, Jeff. Good morning and welcome to all of you on this call as well as all those listening on the Internet. As we said in our press release, we're really extremely proud to report our third consecutive year of record sales and profits. Net sales were up about 50% and exceeded the $0.5 billion mark for our first time. And likewise, net income increased 29% to 25.1 million, or $2.37 cents per share. Our management team accomplished these results, despite many difficulties during 2004.

As we've discussed many times, steel prices from our suppliers increased numerous times throughout the year, eventually aggregating 100 to 200%. Other raw materials also increased, but not at the same rate as steel. We were successfully in quickly passing along most of these increases to our customers. However, the steel price increases that we -- were received in the summer of 2004 were the most difficult quest to pass along, and our price increases really were not fully effective until the first few weeks in 2005. We estimate that the second half of 2004 was adversely affected by between 15 to 25 cents per share as a result of the steel prices. Assuming that steel prices stabilize during 2005, which is currently our best guess, we would not expect to experience a significant negative impact on our earnings for 2005 due to steel.

Our fourth-quarter results reflected sales of 132 million, which was also a record. We had net income of 3.5 million, or 33 cents per share. In fact, in last year's fourth quarter, net income was 4.2 million, or 41 cents per share. However, despite the 53% sales increase this quarter, the fourth quarter's net income decreased by approximately $750,000, or 8 cents per share. In Fred Zinn, will surely discussing the rate of detail to various reasons for our less than expected fourth-quarter profit, which included several items aggregating at least between 18 and 23 cents per share.

With respect to industry trends during 2004, the RV industry continued strong. Wholesale sales of fifth-wheel and travel trailers, which is the segment that the most of the Drew's sales are generated from, were up about 19% during 2004, while motorhome sales were up about 16%. Retail sales, just as important as the wholesale sales, for 2004 were also strong; although some weakness was seen in September through November, but towable retail sales were stronger than motorhome sales. Unfortunately, December and January statistics are not yet available. Dealer inventories, although high, seem to be in line, especially for most of our larger accounts.

We once again outperformed the industry, as our RV segment sales were up 58% -- of which, more than 35% were generated from organic internal growth without giving effect to acquisitions or price increases. Our RV segment represented 65% of consolidated sales, which is up from 62% last year, and our segment operating profit for 2004 was 63%, which is consistent with last year. Industry trends in the long term appear to be very strong, and we've said this over and over. Again, the demographics for the industry are favorable. The economy seems to continue to improve, and it appears that the general public continues to prefer the domestic over foreign travel and as well the RV lifestyle.

In the near term, the RV Industry Association is projecting a slight decrease in industry shipments for 2005 from the 25-year record of 370,000 units produced in 2004. I should point out that the 370,000 units includes about 5,000 RVs that FEMA ordered in this plunge to the series of hurricanes that hit Florida and the surrounding states. If the industry projections hold, retail sales are expected to stay strong in 2005, which could lead to the industry's second best year in the last 25 years and the 2004 being the best year. We also expect that 2005 RV segment sales will again significantly outperform the industry. We base this on our continued ability to take market share as well as our move to offer more products at both the motorhome and towable markets.

In our Manufactured Housing segment -- I guess, we're probably most proud of -- sales increased nearly $49 million, or 37%, during 2004. Excluding price increases and the Zieman acquisition, our sales were up more than 10%, despite flat production by the industry for 2004 as compared to 2003. And in fact, 2004 was the first year in the last 5 years that the industry did not experience double-digit declines in production. However, it should be noted that manufactured housing industries for 2004 also included between, say, 3,000 to 5,000 homes that were purchased by FEMA for the Florida hurricanes.

We continue to hear from many industry sources that repossessions of manufactured homes are down substantially from about 100,000 homes in 2003 to about 80,000 or 85,000 homes in 2004. Although, the number is still very high, the trend is in the right direction, and in addition, more importantly, manufactured housing financing seems to be more readily available.

Finally, the Florida hurricanes were terrible strain on the southeastern US, however, the new building process has begun and many of these new homes will be modular and manufactured housing which should help spur manufactured housing sales during 2005. Due to these factors, several analysts and several of our larger customers are predicting that the industry will ship between a 140 and 150,000 new homes in 2005, compared to the 131,000 new homes shipped during 2004. As you'll recall, last year I was somewhat pessimistic on the industry projections, but this year I'm intending to agree with them.

As I have said before, because of our product content per home, Drew would expect to realize sales increases of about $13.5 million for every 10,000 homes if 2005 industry production exceeds 2004 production. As far as manufactured housing is concerned, all of us here at Drew continue to evocate for an industry public relations campaign. An advertising campaign, which would be very similar to the very successful go RV campaigned instituted and paid for by the RV industry, would or not the opinion really significantly helped the manufactured housing industry recovery. And in fact, the manufactured housing industry is presently awaiting the results of a formal study to determine what the public perception with manufactured housing industry is, and what the industry should do about it.

You know, today's manufactured house can be large and with a great flow of plans with many archinal features. And best of all, today's manufactured house represents a great value to the buyer of the home, all of which is making great impression on consumers. And I think one of the clear clarifications of the post 1995 manufactured home as viable housing sources was their ability to withstand the hurricanes and winds alongside cycle terms. Certainly, many homes were destroyed then, but both - they were both cycled and manufactured homes, but the post 1995 manufactured homes did not experience a higher incidence of damage ended the cycle terms which I believe is good news long-term for the industry.

The operating results of our 2 segments clearly reflect our efforts to supply our customers with quality products at reasonable prices along with the best possible service seems to be working. As we continue to focus on our 4 main goals which is to gain market share by increasing our business with existing customers. Secondly, to win new customers who know our reputation and our dedication to our customer needs. Third would be to increase sales and market share of our new product offerings that we developed internally, as well as those that we acquire. And fourth is to growth through acquisitions of strategically some of the businesses that we purchased at reasonable prices and that expand both our product offerings and territory.

The combination of these factors led to a $177 million or 50% increase in sales during 2004, including over 90 million of organic growth excluding acquisitions and sales prices increases. With respect to our acquisition of Zieman, which we completed in May '04, that continues to perform well and we are on target with implementation of various efficiencies. And we have also recently introduced a variety of other new products for both towable and the motorhome, RV's first real entry by us into motorhomes, which are just now beginning to gain acceptance by our customers. And our R&D department is continuing to develop new products that we expect to bring to market in 2005.

And finally, Drew's success, as always, is attributable to ours really extraordinary operating management team, headed by David Webster and Jason Lippert. There is no other way to explain the continued market share gains and the new product successes at both Kinro and at Lippert. As always, good management is the key to a successful business and I believe that we have the best. And over the last several years both of our subsidiaries have gained market share, introduced new products, made great acquisitions and most importantly have simultaneously kept costs low, and quality and customer service high. And now, I am going to ask Fred Zinn, our Executive Vice President and CFO, to review our financial results in more detail.

Thank you, Leigh. Most of the important issues are described in the press release, so I will try to be brief. It is, as Leigh mentioned, very important to keep in mind, that this was a great year for Drew, despite extremely difficult circumstances, net income increased 29% to a record $2.37 per diluted share. We also believe that the primary factor, which kept this from being an even better year for us, which, of course, is the lag between increases in raw material cost and the implementation of higher sales prices is largely behind us. If raw material cost stabilize and we expect that they will, we believe that the final round of sales pricing increases that we recently implemented will offset raw material cost we have experienced to date.

While our primary raw materials have historically been somewhat volatile, aluminum, steel have always been somewhat volatile, particularly, aluminum. We have never really seen anything less the wild ride we had in steel in 2004. As we said, we experienced enormous raw material cost increases. They aggregate over $45 million last year, that's more than twice our entire net income for 2003. The operating management was able to limit the impact on our net income to only about $2 million after taxes and that's just a small fraction of the total cost increases we experienced.

The most significant other factor that impacted our fourth quarter earnings was the adverse jury verdict in the workplace accident that we described in our press releases. The accrual we established in the fourth quarter was determined based upon consultation with our attorneys. And while we believe the amount we have accrued for this matter will be adequate, it is an estimate. We hope the actual damages will be lower but it could be higher.

Our fourth quarter net income was also reduced by nearly $300,000 after taxes due the factory consolidations. As we mentioned in the press release, we fully expect these consolidations to improve future results by far more than the short-term expense. The factories we closed were profitable but not to the level we expect to achieve their full consolidation. In the second half of 2004, our consolidated operating margin, excluding the impact of the adverse jury award and excluding the higher raw material costs, was between 8.3 and 8.9% of sales. That's down from the 9.7 level achieved in the comparable period in 2003 primarily because in the second half of 2004 we implemented more than $25 million in sales price increases that as know included no profit margin.

Further, the profit margin at newly acquired Zieman was less than those of our other operations. However, the acquisition of Zieman was accretive to Drew's earnings this year and we fully expect Zieman's margins to improve over the next few quarters. As we mentioned previously in 2004, we had an extensive capital extension program designed to enable us to increase our capacity and to improve margins through better efficiencies. Capital expenditures for the year were $27 million, and we expect the return on these investments to be favorable. Capital expenditures for 2005 are expected to be 12 to $15 million and depreciation and amortization will be nearly $11 million.

In the past few days, we completed refinancing of our existing line of credit facility and that increased our borrowing capacity to $60 million and it also allows us to quickly increase the line up to $90 million with bank approval. Interest rates under this new line of credit will also be lower than former agreement. Simultaneously with that bank credit agreement we entered into a $60 million shelf line with Prudential and it also allows to quickly take advantage of any extension opportunities. At this point, we haven't identified any significant acquisitions or other expansions that would require us to use this additional availability of cash, but in 2004, we invested nearly $54 million between the acquisition of Zieman and our capital projects, and we feel that it's prudent to be prepared for further expansion in the future. Both the $30 million are accordion feature on the bank line and the Prudential shelf loan are not legally committed by the lenders so we won't incur additional commitment fees.

As I mentioned last quarter, in October 2004 we swapped $20 million of our variable rate debt to very favorable fixed rates, which was only helped in the rising interest rate environment. On the balance sheet, inventory balances came down $7 million at the end of the third quarter to $72 million at December 31, 2004. But yearend inventories were still $35 million higher than last December. Of that $35 million increase more than $9 million is due to the acquisition of Zieman, and the $12 million is due to the increase in our unit sales volumes, excluding Zieman, and about $12 million is due to the increase in raw material costs. Inventories are also somewhat higher than last year, because we've recently introduced several new product lines, as we've mentioned, and good customer service requires us to maintain higher inventories, while new products are being introduced.

Accounts receivable, I mean, its current, its 21 days outstanding, a decline of $13 million into the end of the third quarter due to the seasonality of our business. And because of the timing of payments, most of the benefits from the reduction in payments during fourth quarter, inventories and receivables will end up reducing accounts payable as opposed to that accounts payable is down $14 million at the end of the third quarter that came down only $3 million.

Our tax rate for the quarter was 37.2% and that resulted in an effective rate for the year of 38.5%. It's up a little bit from the 38% that we experienced in 2003. And that's primarily because States continue to seek new revenues at the price of the effective tax rate.

For the year, our return on equity was over 23%, 23.1% actually. It was down slightly from the 23.8% that we achieved in 2003, but if we exclude the costs related to the workplace accident, our return on equity would have actually slightly exceeded last year's. Now, I'll turn it back to Leigh.

Thank you, Fred. We'd now -- we're now happy to take questions.

Thank you, sir. Ladies and gentlemen, if you wish to ask a question, please key "star" followed by "one" on your touchtone telephone. If your question has been answered, and you would like to withdraw your question, please press "star" "two." Again, ladies and gentlemen it is "star" "one" for any questions that you have at this time. Our first question comes from the line of Michael LaTron of Excalibur Group.

Now again my name is changed.

How are you doing, Mike?

Hi, Guys.

How are you Mike?

I'm feeling well. Overall great year and adverse situation, fourth quarter was good. I don't needed to finish that at all. But yes, I'm going to push on this part a little bit. Now to give me some more color on this real situation, you were able to reduce the net impact to $2 million after-tax, but why did it take so long, was it customer pushback or was it some other reasons or...

I'm going to ask Jason to answer it. I'll give you a brief summary on it. When you get very big price increases, you go to your customer and say, "we have to put that increase through." And obviously increase was a smaller then maybe a 10% increase, and we had already given customers 3 to 4 increases during the year. And the last one they just port us on and it took longer to implement. And Jason, do you want to add to that?

Yes, it was -- I mean, it was primarily customer pushback but you know, the national tradeshow was in the tailend of November and product pricing was done near the time that we gave actually passed our second round of increases in August. So that made a -- I mean, the customers didn't want to go to the shows and have to announce price increases at the show. So that's one of the reasons I think, that took a little bit longer but...

There's always, you know, when you use surcharges or price increases like that there's always kind of a bow wave impact, and as we go into 2005, do you expect any kind of a catch up?

No, I've just retract a little bit too. I mean, one of the other difficulties is that we haven't thrown our price increases in 6 or 7 years. So it's been a tough thing for the customers to swallow in the first place. But with respect to this year like we had mentioned earlier on the call, you know, we expect to cover our increases now that we've got everything put in as effective 1st of the year.

We believe that steel is now fully passed along. There were other price increases and other materials that are still being passed along but they were at a much smaller level and those increases are going into effect. So we feel very confident that there'll be little or no effect on the first quarter.

Okay. Now using that information because there's no margin on the price increases that you passed on, should we be modeling something along the lines of that 8.5% margin on sales instead of something closer to 10% on a going forward basis?

No, you have to look at it in total. This year we've had give or take $40 million of sand price increases and that really was a two-third of the year for us, because I think started through the spring. If you're looking at $60 million, so total projection for our sales for 2005, take out the $60 million and then trying and apply an operating profit rate of up to 10%.

Okay. All right. And Fred, on the factory consolidation that you've done, I understand that you expect to get more than an offset to the charges that you have taken. Do you think that's a phase in through the course of the year, as you get up the curve or is that going to be something really immediate, because you consolidated 2 existing factories now?

Yes, I think, Jason is probably better person to answer that, but I will say that there will be, there has been earlier this year and they will be in 2005, probably other factory consolidations. I don't think you'll see a huge swing either way from them really though. Jason, do you think that...

Not fair.

Okay. And my last question has to do with tax rate, for instance, we're looking at something similar to this year or should we be building in some more state revenue grab to that number?

Well, it's very hard to tell, but I got to tell you, in my mind, I'm going to build in, probably slightly less than 39%.

Okay.

Return on the state.

All right. Great. Thank you very much.

Thank you, Michael.

Very, very good year guys.

Thank you, sir. Ladies and gentlemen, as a reminder it is "star" "one" for any questions that you have at this time. Our next question comes from the line of Richard Paget of Morgan Joseph.

Good morning, everyone.

Hi, Richard. How are you?

All right. Looking at the Zieman acquisition, you guys said through the first 8-month you did about 40 million and that's versus 40 million last year -- total year.

Right.

So, lets -- pro forma let's just say, about 50 million, which is about a pretty good organic growth rate to about 25%. Now is that - is some of that price increases or is that just you guys...

Some was price increases, some was just increasing in volume, because we were able to have Zieman sale some of our products that they were not selling in the cash.

And actually, Richard, the increases is a bit more than 25%, because the current pro forma that's better than 55 million.

Okay. Yes.

But some of it actually set your scale.

Okay. And then going back to lead up plant closures, for Lippert, were they more RV or manufactured housing charities (ph) - what kind of a split?

They are little bit of both. You know, we had Fleetwood, as you are well aware, did some consolidating last year, closed some plants down and they were mainly a couple of satellites that were servicing the Fleetwood RV facilities.

I think the important thing to note though that these factories were profitable. They just were not profitable to the level that we were used to seeing, and accordingly we closed them. And by combining sales volume with other factories we believe we'll get the profit margins that we like to see from factories.

In addition, we're getting a lot better using utilizing capacity. So, it's actually paid us to consolidate some of the management teams and free up some managers for growth and things like that.

Okay. Great. And then, I noticed in a recent presentation that you guys have upped your RV peak potential content per unit from 1,500 to 1,700 up to 1,800 to 2,000 per unit. Now, is that reflecting new products I would assume?

That's a whole bunch of new products from Bed & Bath entering into the RV market as well as Lippert entering variety of new products for both motorhomes and travel trailers.

And Richard, I haven't worked up the new numbers, again, but I'd just like to spin -- it's one-off again.

Okay. And that has nothing to do with cost?

Sure. It's really just our sales number divided by the total unit, our RV sales or our manufactured housing sales divided by the total industry units. So, certainly, somebody increased that here with the price increases.

Okay. And then, with the bath unit, who would be your biggest competitor in that market right now?

David, do you want to answer that or -- we don't usually like to talk about competitors.

Did you say in the bath?

Yes, in the -- Yes.

Well, as I said, we usually don't talk about competitors, but David, if you want to add anything on that.

I don't. Since we don't talk about them, I don't like to talk about them.

I would say, Richard, though, in the bath products made out of the thermal plastic material that we make now for manufactured homes, we have a very high market share.

Okay.

So, there isn't any -- I mean, there is always competition, but we have a very high market share in that market.

Okay. Great. That's it. Great quarter.

Thank you.

Thank you sir. Our next question comes from the line of David Bove of Paradigm.

Hi. Good quarter. I got on the call late, but I was just wondering, RV industry shipments in the fourth quarter...

Right.

...is that industry as a whole?

Yes.

Yes. The industry -- it was fairly strong. I don't have the exact number, but that was particularly in towables and the fifth wheels that we supplied on 15 or 18%.

Really?

Yes.

Because your industry was up 6% in the third quarter, right?

Well, I think you're probably looking more at the motorhomes -- motorhomes slipped a little bit. But lets see, in the -- maybe I'm overstating a little bit, in October the industry as a whole was 2%, 8% in November and 16% December. So, I guess, I'm -- I overstated a little bit.

Okay.

But, I mean, the industry travel trailers were up 19% for the year, motorhomes were up 16%, and we expect to see much slower growth in '05. But the level of shipments, I believe, will be very, very strong, probably, the second best year in the last 25 years.

Okay.

And what I was thinking about -- I'm sorry -- I think that was the towables and fifth wheels, which actually were up 17% in the fourth quarter.

Okay. That's great. And what's the outlook for '05? I think at one point we were thinking 313...

Yes, the industry, initially, had been talking about a decline of 8 or 9%, but now they are talking about a very small decline; just a few percent, and that would be after taking out the shipping FEMA units. There were 370,000 units shipped less 5,000 FEMA, so 365,000. I believe the industry is talking somewhere near 360,000 units for the year, which would be a great year for the industry.

Okay. And then, if we were looking at content for RV for next year, excluding the steel price increase, what would you -- on a percentage basis will -- what do you think it will be at?

Yes. We don't issue forecasts like that. But we can tell you we had entered a number of new RV markets that we've talked about from slide-out to motorhomes and leveling devices for motorhomes and RV bathtubs, steps. We have a lot of potential, but we don't give guidance on how much of that potential we're getting.

So how about in the fourth quarter, content for RV excluding the steel volatility?

I honestly don't know that answer. I don't look at it that way because there is some slippage. We don't ship our products directly in line with the monthly channel sales of the RV industry. I tend to look at it a little broader here, but it has certainly increased throughout the year. Our run rate at the end of the year was higher than it was at the beginning of the year.

Okay. And then, were there any FEMA units in the fourth quarter industry?

Yes, but I believe in the RV industry, it was probably 2,000 or 3,000 units. So there were 2,000 to 3,000 units in the third quarter.

Okay. Great. Well, great quarter. Thank you.

Okay.

Thank you, sir. As a reminder ladies and gentlemen, any question you have to ask its "star" "one." Our next question comes from the line of Arnold Brief of Goldsmith & Harris.

Hi. Could you review a little bit more detail the products that you're introducing in '05, and give a little bit on the new products that was introduced in '04, how they seem to be doing?

I'll summarize, and then I'll let David and Jason correct me if I missed anything. We are introducing leveling systems for motorhomes, we're introducing slide-out systems for motorhomes, pursuing steps for RVs. We've purchased a new large thermoformer, and we'll be introducing a number of products that that thermoformer can make. We're introducing RV bath products, RV axles and we're also trying to expand our territory expansion for the specialty trailers that were made by -- Zieman does it for both snowmobiles and other leisure equipments. I think that's most of the items -- again, I'll ask David and Jason if I missed anything?

No.

All right.

I don't know if you can answer this question with the topic, but if you took a look at all the new products, what would be the size of the markets they serve?

As we said $250 million.

That was in your release.

Yes.

Okay. I understand.

And -- I can only give you history, we've had very high market shares in products. Whether we'll attain high market shares in any of these products, I can't tell you at this point. But it's certainly our goal to do that.

David, do you have anything easier?

No.

I mean, in the sense of given your size and your increasing importance for the industry, is it getting easier to get new products accepted?

Well, again, I'll ask David and Jason. But that's always a very tough process. Customers are loyal to us, and sometimes they are loyal to our competitors. We tried very hard when trying to convince a customer of our ability to serve them better, but it's a very tough task. But we've been very successful in the past and we hope to be very successful in the future. I don't know if David and Jason want to add anything to that.

I think a lot of them are just, you know, continuing to build up their customer relationship that we're developing and that we developed over the years, and the industry, especially, is a big market for both Kinro and us. And, now, we continue to use those relationships that get in and build up and then generate more products ideas.

Is there any movement in other industry or both industries to consolidate suppliers, I mean, you feel a supplier to try to, you know...

We saw that last year with 1 or 2 customers who put out the entire -- their entire business for bid to 1 supplier rather than 2 or 3. And happily, we were the winner in at least one instance that I know of. I don't think we lost any.

Is there -- are there any competitors that have this diverse product line you're seeing?

No, in other products, but not in our product line.

Not across the board

No, not in our product line.

Okay.

Thank you. Our next question comes from the line of Jessica Paige of Pike Place Capital.

Hi. How are you doing?

How are you?

Can you talk a little bit about on the backlog that you're seeing in the manufacturing housing in the market?

David?

Segment?

I'll ask David and Jason. David, can you comment on backlog manufacturing housing market?

That was -- I don't think we're seeing a whole lot of backlog in the manufacturing housing side. Jessica, I think we'll more than likely see some later on during the year. We hope that it's a -- if we are going to see between 140,000 and 150,000 units built there because of the close down of some of the factories, we will see some backlog there. But backlog is healthy.

We've never really worked as far as Drew's Companies were concerned with the backlog because we tend to get orders on a very short notice.

I see.

And we require -- had to ship on a very short notice. But -- and, of course, January and February are probably bit of the slower months for the industry, so you're not going to see backlog now. But as David said, as the year goes on, we'll probably see more and more backlog.

All right. Thanks very much.

Okay.

Thank you. And our next question is a follow-up from the line of David Bove from Paradigm.

Well, I was just wondering on the improved industry outlook for RV volume next year, you know, it was down -- if that was going to be down 9% year-over-year now, I guess you're saying its going to be down in the low single digits. And I was just wondering, what they were thinking of as far as changing their projections

Looking at trends? No. They've looked at the economy, they've looked at trends, they've looked at a variety of sources, which I can't give you. I don't know all of it; they're thinking but -- I don't know. We see a change in the market place on a constant basis. Suddenly dealers will have too much inventory, it will slow down for a little bit or it'll be world event that slows it down. But, overall, what we're seeing is that business is good. It's not nearly as strong as it was last year in the sense of growth, but it is very good. Obviously, we're not seeing the growth that we saw last year, but we're seeing very good sales in RVs.

In a short...

And we're taking market share. So we see even better growth in the industry.

All right. That's good. And your inventories are in what kind of shape versus last year?

You'll need either David or Jason to answer that question.

I don't think there is much change.

About an equal number of units on the dual lots you'd say.

Yes. I mean we'd know from our customers if there was -- if they were gone, dipping one way or the other.

I think, probably, inventories are up but that's because the retail demands is...

Sure.

...dealers have to carry forward. It doesn't seem to be a problem though as Jason said.

Although, we watch it closely, we've had concerns throughout the year that inventories were high but it doesn't seem to excel. So, apparently, retail sales are continuing good, except for the slowdown in October, November. But it was a very minor slowdown. So, overall, we continue to remain optimistic.

Great. Well, thank you.

Okay.

Thank you. Our next question comes from the line of Jamie Wilen of Wilen Management.

Hi fellows.

Hey Jamie. How you doing?

Very good. Yourself?

Good.

You've had some great success, and obviously, engineering new products to meet the needs of your industry. And you'd been able to manufacture those products very efficiently. Are there other markets that you currently don't serve, other industries whether they be marine or specialty vehicle markets that you're looking at, to be able to take some of the capabilities you have and develop new products in other areas?

We haven't talked a lot about that, but we do. There are other fringe industries that we do ship to and we're not looking to go into residential housing, but there are a lot of other smaller industries that we are certainly, presently shipping, but are small enough at this point and it's not worth talking about. But, of course trailers, is an area for intense that we looked at and probably do some products for them. And marine industry we certainly do it through Zieman and its an area that we've considered, but we've been so busy on our existing products that we haven't focused a lot on those areas, but there are areas that are very closely aligned to our present business that we have looked at, and once our R&D department frees up we probably will spend more time on that.

With the -- where the plants are currently situated and given current pricing, what would be the current volume that you could do if your plants were up running flat out?

That's a toughie because some plants are with very high capacity and some plants are with 50% capacity. So you have to get along in the right factories. That's why even though we've closed and consolidated certain factories, last year we also opened a bunch of new factories. So we would have our factories in the right place, for instance. We didn't have a factory in Arizona, which we're working on. We had a relatively small factory in Idaho. We've expanded that factory dramatically for windows. So we tried to add capacity where we needed it and deleted capacity where we thought we can buy in the factory, so that's an ongoing process. So it's very hard to answer a question like that.

I think, Jamie earlier this year we talked about having about 50% factory utilization manufactured housing but you'll that our sales were way out this year in the manufactured housing. So, our utilization is probably up from there, but as we say it we have selectively added some capacity where we needed it.

Okay. You won't run up against any capacity constraints in some of your factories, you're already prepared for that?

All I can say is I hope we do, but if it happens we've always been able to maneuver because we have so many factories to make sure that our customers are taken care of.

And in addition, it doesn't take as long as in many other industries for us to build additional capacity. We're not talking about a year, we've got a a few months to -- and this year we added factories within just a few months.

Okay. And lastly as far as inventories go, I understand why they are at the current levels, but are they -- is that the right level for you to be at, given your current level of business and what is your objective for yearend 2005 and inventory levels?

Well, I would say they are within 5 or something less than 10% of where it should be. We might be a little bit over, a little bit under spottily, but basically they are where they should be. In terms of 2005, it will depend on what we -- what our volume is. In terms of working capital in total, we tend to add about 10% to our working capital relative to our sales increases. If sales go up $100 million you can find $10 million more worth of capital on our balance sheet. Inventory generally, turns 5.5, 6.5 times a year which I think should add, which is down from the 7 or 7.5 that we used to get and that's primarily because you have higher priced steel inventory.

But you can use those pretty much predictive depending on what you think and what you're estimating your sales increases are.

And your receivables are run about one-third of what your inventories are?

Well they run 21 days so. Yes, it's correct.

Okay. Great job. All right. Thanks.

Thanks.

Thank you. Our next question comes from the line of George Mayloff (ph) of New Industries.

Northview (ph) Industries. I missed - I'm sorry I missed the prepared remarks, quick question, do you guys give guidance or not?

No, we don't give guidance.

On the CapEx line, Fred did you talk about how much...

Yes. It was 27 million in 2004. We're looking at 12 million to 15 million in 2005.

A lot of that 2005 is what we call maintenance CapEx.

Yes.

And 8 or 9 million of it is maintenance CapEx.

So for '05 its roughly 15, isn't that quite a bit less than you had earlier forecast or...

No. I don't think, we had forecast 2005 until just now.

Okay. Great. And then a quick question about the large thermoformer that's quite separate from the VC process like the fiberglass alternative?

It's still not working.

Okay.

We were hoping to get it working, although the glass division has introduced a new composite material that can compete against fiberglass, and we're looking for success on that product line. I don't know if you want to add anything on that, David?

No, not at this time.

Yes.

Any idea there this would be sort of -- perhaps for RV, is that right?

Well, it would be for manufacturing housing and for RVs, the composite material brand.

Okay. Great.

But, we still are hoping to get that process to work but it hasn't -- we have not been successful so far.

Okay Jason. Okay. Thank you very much.

Okay.

Thank you, sir. As a reminder, ladies and gentlemen "star" "one" for any questions you may have. Our next comes from the line of Doug McLane of Sirios Capital Management.

Well, I was wondering, if you could actually give the dollar impact of raw materials on cards in the fourth quarter, and how that broke out between the RV and the manufactured home side?

Yes. We didn't really say that. I don't have those exact numbers, but I think we may have mentioned this here in remarks that it probably wasn't far from 10 cents a share.

Okay

Both quarters. So it grows with backup.

Okay. It grows with backup. Okay. And with the...

It's mostly RV term.

It's mostly RV. Okay. So that it seems when that it's on the third quarter, it would have been more towards the RVs than in the fourth quarter?

Both of them were mostly RV; both the third and the fourth quarter were mostly RV.

Okay. And then, on the price increases, when did the last price increase go through?

Well, we had price increases put to effect at January 3rd

Okay.

And then, on some of the smaller materials they're picking the effect right now.

Okay.

We have some more additional plans for next few weeks as well.

Okay. Just small additional ones?

Yes.

Okay. And, obviously, we're seeing in the RV industry that there's been some extra days being taken off by a lot of the manufacturers. Have you responded in kinds, taking the additional days off for the new plant?

No. Jason, so you want to add to that?

No, I mean, we're busy.

Okay. And then, I was just curious on, you know, looking at the EBIT margin in the RV industry, RV segment, a lot of it -- there are a lot of pressure in the last 2 quarter of the year. Should -- are you trying to expect that kind of flow through to the first half of next year, and then, kind of even out as we get the raw material behind us?

No, I think most of the impact in the RV segment was in the second half of 2004. It should improve substantially in the first half of 2005.

Even year-over-year, I mean, does the thinking of...

No, I don't know if they'll be back up to -- they won't be back up to the early 2004 level.

Right. Are you guys are still more tight pressure, and then, kind of an evening out as we get our cycle through?

Well, you know, we did pass along for the year; $48 million of sales price increases, really, without any margin in it.

Right.

So -- and a lot of that is in the RV -- not all of that but certainly a fair portion of it is in RV segment. So you won't see, at least in the short term, margins return to the level that they were in the beginning 2004.

Okay. So, it will be lower there. Do you have any ideas to when you actually would be able to put the margin into those price increases?

It's difficult, but as new models come out -- we design, and if we, maybe, get a little bit margins back up. Customers -- they have to sell their product to dealers and to consumers, so they have to be careful so. So it's a tough process. David, if you want to add anything or, Jason, do you want add anything to that?

The only thing I would say, we, as a manufacturer, both Kinro and Lippert have been extremely successful at kicking cost out of the product. So, we may not get it quickly back to the margins because we're increasing our selling prices, but we are making -- trying to reducing their materials cost that are in their current balance.

We'll gain some of this anyway. That takes a little longer, of course.

And your visibility on steel pricing? I mean, you mentioned that you're hopeful and expected to stabilize but how far out...

3'o clock this afternoon.

Is it really? Okay.

Yes. I know the indications are that it will be stable as far as I know.

Yes. I know that, Winterbago had commented, they maybe thought that it might be a resumption of high levels of steel this spring and summer, that is kind of -- Chinese New Year is over and demands starts to pick up out of that region again. Is your outlook different in there's or...

No, we're just following what the industry -- steel industry has been saying, where China, actually, that used to be a importer of steel has now become an exporter of steel which certainly should take some pressure off the steel market. And I think the economy in the US is continuing to grow but certainly not at a huge pace. So overall, the indications are that steel should be leveled. We've been surprised in the past and what we have to try to do is we're keeping a little higher inventory of steel to protect against that but it's very, very hard to do.

Yes. We really don't have a whole lot of insight into that. We don't which are the current seasonal change.

I mean, just one last one, as you talk to your -- some of your customers, obviously there was a dramatic slowdown in the RV industry you know a little bit more on the motorized side than on the towables as we got into the fall period, and obviously inventory levels built up a little bit. When you talk to them, do they give you insight as to what they were seeing as far as you know, why customers weren't transacting anymore and what gave them confidence that the customers will be coming back?

Well, firstly, I think I agree with your analysis, there was a dramatic slowdown. As you're saying the increases are not running at 18% to 20%, I'd agree with that, but they're still running at pretty much the same level that they were running last year. Yes, and even on the retail side the slowdown was like 1% in 1 month and 0.5% the other month, it was not big numbers on the way the slowdown occurred and as we said it occurred mostly in motorhomes.

And since we're just going into the motorhome market the fact that there's a slowdown in motorhome shouldn't effect our business because our sales still primarily come from towables, and they have continued to be relatively strong -- not at the 18% and 20% rate that you've seen last year but you're seeing sales at very high levels and we'll be very happy to see them stay there, of course we'll be happy if they went up but if sales can stay at last year's levels it would be great for us.

Okay. Thank you.

Thank you, sir. Your next question comes from the line of Arnold Brief with Goldsmith & Harris.

Not as a prediction but so that it goes up eventually it comes down. Would you describe the process that you've experienced in the past when the raw material prices, and particularly steel, were start to decline, how fast you have passed it on?

Its not the next day but your customers pick up the phone pretty quickly, and as you see a delay in implementing sales price increase there's somewhat of a delay, probably not as much in implementing the sales price decrease, but that's all the question of negotiation, how many orders we have in-house, how much inventory we have on hand. David, do you want to add anything to that?

Not really other than, normally you don't have some decreases unless your competitors out there pass their own decreases. We try to stay above our word (ph) and try to keep things going, you know till the time you absorb all the increases; and it's not necessarily just the raw material increases that you have to deal with but its gasoline, delivery, labor, the whole nine yards. So and they don't all hit at the same time just because raw material prices go up does not mean that that you can adjust prices one way or the other.

Jason, do you want to add anything?

No, I mean a lot of it depends upon inventories that we have on hand, I mean, you know we keep different inventories for different plans based on who we're supplying. And when prices start to decrease our customers expect us to be fair with us and we expect them to be fair with us and I think that those partnerships work good that way. I mean have worked good for us in the past that way so.

I hope that answers this for you, Arnold.

Okay.

Thank you, sir. Gentlemen, at this time you have no further questions.

Well, again I thank everybody for tuning in and we look forward to talking to you at the end of the first quarter. Have a good day.

Ladies and gentlemen, thank you for participation in today's conference. This does conclude you presentation, and you may now disconnect. Have a wonderful day.

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