LCI Industries (LCII) 2005 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2005 Drew Industries Incorporated earnings conference call. My name is Candice, and I'll be your coordinator for today.

[OPERATOR INSTRUCTIONS].

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

Thank you, Candice. Good morning everyone, and welcome to Drew Industries third quarter conference call. I am Ryan McGrath with Lambert, Edwards & Associates, Drew's investor relations firm.

And with me are members of Drew's management team including Leigh Abrams, President, CEO and Director of Drew, David Webster, President and CEO of Kinro and Director of Drew, Douglas Lippert, Chairman of Lippert Components and Director of Drew, Jason Lippert, President and CEO of Lippert Components, and Fred Zinn, EVP and CFO of Drew.

We'd like to take a few minutes this morning to discuss the results of the quarter. However before we do so, it's my responsibility inform you that certain predictions or projections made in today's conference call regarding Drew Industries and its operations may be considered forward-looking statements under the Securities laws.

As a result I must caution you that as with any predictions or projections, 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-Q filed with the SEC.

With that I'd like to turn the call over to Leigh Abrams. Leigh?

Thank you, Ryan. And good morning and welcome to all of you on this call, and to all of those listening on the Internet.

We're again proud to report another quarter of record sales and net income. Our sales were up 15% from last year's third quarter. They were $171 million. While third quarter 2005 net income increased 30% to 9.8 million or $0.45 per share compared to 7.5 or 35% per share last year.

I have two points to add that all of the per share amounts have been adjusted for the September 7th, 2005 two for one stock split. And this year's third quarter also included a reversal -- $700,000 or $0.03 per diluted share relating to a settlement of a jury verdict related for a workplace accident. The costs relating to this jury verdict have been recorded in last year's fourth quarter and this year's first quarter. And without that reversal or that charge, our net income would have been up 21%. Should like to point out though that for the 12 months ended September 30th, '05, our sales were $621 million and our per share earnings were a $1.29 per diluted share. And if you had included the $0.08 for the lawsuit, our earnings per share without the litigation would have been a $1.37.

This year's third quarter was really, extremely challenging with our July sales and profits both being quite weak. But then August operations rebounded somewhat and September was very strong because of the emergency housing needs made necessary by the hurricane Katrina. And the resulting response by the Federal Emergency Management [Agency] or FEMA.

This strength, our sales strength has continued into October with our October sales increasing more than 30% from last year. During the second quarter and continuing into July and August, industry RV sales both at the retail and the wholesale levels had been weak due to a combination of factors, which included excess RV inventory at dealers. It was weak retail demand, which resulted from increasing gas prices and interest rates. And it was also falling consumer confidence.

Further, manufactured housing sales through July and August were fairly flat. And unfortunately statistics of the manufacturing housing industry are not yet available for September. We'll talk in a moment about the RV statistics for September.

In any case after the devastation that was caused by Hurricane Katrina and Rita, we all shared the desire to help. And the scenes were horrible on television that we saw. And we're all doing our part in the recovery, by helping our customers to build and revive, the replacement housing for the victims of the storms. And Drew as a company and us at the management as an individual, we've all contributed to relief agencies and the company has actually adopted several families that were in need of help.

During July and August, both of our subsidiaries, Kinro and Lippert began to feel the effects of the RV slowdown that I spoke about. And they actually started to prepare to cut back on inventory and personnel, when all of a sudden there were huge demand of RVs and manufactured homes that rose from the tremendous damage caused by Katrina at the end of August. And the resulting orders that came from FEMA to our customers. Both Kinro and Lippert were forced to really quickly ramp up production and to hire additional staff. And as a result, we incurred substantial amounts of overtime and had to pay higher prices for certain of our raw materials that were in short supply. Both of these conditions have now eased and we expect our production to be more efficient during the fourth quarter.

Estimates of demand for temporary housing for storm victims vary widely. And in times of a crisis, it has been my practice to kind of ignore early estimates of damage and needs until the dust settles and the real numbers become available. And this seems to be the case in this situation and where initial estimates were wildly overstated. But currently, based upon recent industry information, it now appears that FEMA may have [overall] purchased as many as 25,000 manufactured homes and a 100,000 RVs. Although we're unable to independently confirm these numbers, we can report that we have received substantial orders from our customers that are supplying FEMA.

Unfortunately it's currently difficult to estimate how many of these RVs and manufactured homes will be delivered in 2005, versus 2006. However, the one thing that does seem clear is that a result of this year's devastating hurricanes, both the RV industry and the manufactured housing industry will see an increase in business during the rest of 2005. And probably a good portion of 2006.

After Katrina hit at the end of August, FEMA first purchased RVs and manufactured homes directly from the dealers. And then FEMA began to release orders to manufactures of RVs and manufactured homes. And the manufacturers are now faced with a dual problem of having to supply both the FEMA units and restocking their dealers. So they're quite busy.

I should note that [shipments] of RVs and motor homes were basically not affected by FEMA's requirements. And thus is probably still suffering from some inventory over supply at the dealer level. In this regard, about 67% of our sales are from our RV segment. And of that amount slightly more than 90% are from total RV sales and less than 10% are from motor home sales.

During the last 10 to 15 days of September, we shipped about 6 to $8 million of product related to the storms. And we expect to ship more than $20 million of storm related products in the fourth quarter. Most of the manufactured homes that had been ordered by FEMA had been bare boned single section manufactured homes, which use less of our product than the larger multi section manufactured homes. And likewise the bare boned travel trailers ordered by FEMA may also use less of our products than a traditional travel trailers. And an example of this would be they don't use slide-out systems for the travel trailers that they've been ordering.

However we expect, when the demand for the temporary housing eases, probably early 2006, we expect that demand for permanent replacement housing should begin, just as it did after last year's Florida hurricanes. We're unable to predict how strong this demand would be, but based upon Florida's demand for permanent housing after the hurricanes, it could be significant. Florida's permanent housing demand was generally satisfied with the larger multisection homes that use more of our products than do the single section homes.

As far as our normal business is concerned, we are pleased with our results. Our new products sales have continued to grow, and that's of course in part because of our great customer relationships as well as our extensive R&D department.

We previously stated that our new products represented market potential of more than $600 million. And at the end of June, we disclosed that we had captured about $40 million of annualized sales of this product group. But by the end of September, our annual -- our annualized sales had grown to more than $60 million. And we continue to be optimistic that we'll continue to increase our market share of these new products.

Ignoring the effects of the hurricanes, our RV, and manufactured housing sales both outpaced the industry growth rates during the third quarter of 2005. And we expect that, that will do so at least for the balance of 2005. This is result of our continuing market share gains, continuing new product introductions, and this year's acquisition of Venture Welding.

We believe that the long-term industry trend appear to be very strong. We just look at the demographics for the industry and they continue to be very favorable. The economy continues to staying good, and it appears that the general public is continuing to prefer the RV lifestyle, and domestic rather than foreign travel.

Another plus for the industry, and we spoke about in the past was the recent purchase by Berkshire Hathaway, a privately owned Forest River RV products, which is one of the largest RV manufacturers in the country. And Berkshire Hathaway now is the owner of significant companies in both the RV, and the manufactured housing industry that they had previously acquired Clayton Homes, and Oakwood Homes. And we are proud that each of these companies is a Drew customer.

With respect to manufactured housing, before the storms we had expected that the industry would achieve a slight increase in wholesale shipments over the 2004 total of a 130,000 homes. It now appears that the industry may ship as many as a 150,000 homes this year, and it's conceivable that they could ship the same number in '06.

We continue to hear from many of our industry sources that another plus for the industry is that repossessions of manufactured homes are continuing to drop from the 80 to 85,000 homes repossessed in 2004. And probably most important of all is that manufactured housing and financing seems to be readily available today.

I am also happy to note that Drew has recently added to the S&P 600 SmallCap Index. And we believe that this combined with our recent two for one stock split has provided the investment community with a much more visible, and liquid stock.

And then finally as I say, as often as I can, Drew's success is really attributable directly to our extraordinary operating management team, that's on the call with us today. And that's headed by David Webster, and Jason Lippert. There is just no other way to explain the continued market share gains in new products success at both Kinro and Lippert.

As always, good management in my opinion is the key to successful business, and I believe that we have the best. And over the last several years, both Kinro, and Lippert had gained market share, they continue to introduce new products, they've made great acquisitions, and most importantly they simultaneously kept their course slow, and their quality of their customer service high.

And with that, I'll now ask Fred Zinn, our EVP, and CFO to review our financial results in more detail. And then we'll be happy to answer your questions.

Thank you, Leigh. As leigh said we are pleased to report another quarter of record results and also to discuss our opportunities for continued growth this year and next.

The RV segments, as you knew grew substantially again and there were some new products, new markets and through more related demand. The operating margin of this segment improved also, went to 11.2% of sales from 9.9% in the second quarter this year. And that was despite constraints on the production due to the FEMA related demand in the later part of September.

We estimate -- in terms of the FEMA demand, we do estimate that our content for recreational vehicle for the travel trailer actually sold to FEMA has been about $750 to a $1,000. That is less than our typical content for a traditional travel trailers.

The manufactured housing segment also grew, although more modestly as you saw. This was in part because the FEMA orders had less of an impact on manufactured homes, than it did on RVs in the third quarter. Although our sales of manufactured housing products for these homes has increased in the fourth quarter. We estimate that our content from manufactured homes sold to FEMA has been from about 700 to $900 less and that's again less than our typical content for a manufactured home.

Despite the sales growth in the manufactured housing segment, during this quarter excluding the impact of the settlement of litigation, the operating margin in this segment declined to 8.4% from a very favorable 12.6% we achieved in the second quarter of 2005.

While our material costs have remained very volatile, and timing of how those material costs impact our income statement, combined with the timing of sales price changes, it accounts for a significant portion of the variability in our segment results.

And I should also point out that segment results are by their nature somewhat less precise than consolidated results and that are based on a number of allocations. We have quite a number of plans that produce both RV and manufactured housing products, [expend] their costs the results are, in some cases allocated. These allocations are reviewed and revised periodically to account for changes in plant operations.

During each of the second and third quarters, we incurred about $850,000 of start-up costs for new products and new plants in Arizona and Indiana. We had expected that these costs would decrease during the third quarter and that these operations would be either breakeven or perhaps profitable in the fourth quarter. So we now expect to incur further start-up costs for the operations for the fourth quarter although they will be less, unlikely less than they were in the third quarter showing that the operations to be profitable in the first quarter of 2006.

Of the $850,000 start-up costs about $500,000 was in the RV segment and the balance within the manufactured housing segment. During the second quarter we also reported that our provision for bad debt had increased by $850,000. And I'm happy to report that through the effort of the management team and the credit staff, our receivable aging has improved significantly. And our bad debt provision related charges were down by about $500,000 this quarter. And about two-thirds of that is in the RV segment. We do expect further improvements in that area as well.

Warranty expenses on the RV segment, it remained high during the third quarter but we continue to improve the quality control and safety procedures and that's added to our SG&A costs. But again we expect that this will improve customer satisfaction, reduce warranty claims, there's a [side plan] that reduce Workman's Compensation expense in the long term.

I just like to remind the stock holders that Drew began to expense stock options early back in 2002, well ahead of the requirements. For 2004 our option expense was about $900,000. This year, for the nine months it is about $700,000. Next year's stock option expense, 2006 is expected to increase by $1 million. And that's because of new option grants that we are making in November and December. It's been our practice to grant employee stock options, primarily every two years. And the last significant grant was back in November of 2003. So we'll have another grant this November. The grant this year will be for about 550,000 shares or a little bit less than 2.5% of our total outstanding.

On the balance sheet it is noteworthy that our total debt's gone to $62 million, from nearly $81 million at the end of this second quarter. And that was despite the fact that inventories increased nearly $ 12 million this quarter. The increase in inventories was partly do to an increase in raw material purchases prior to the effective date of the announced price increases and was also partly do to the increased inventory required to fill the FEMA related orders.

Because the inventory increase occured right at the end of the third quarter, accounts payable also increased, as you saw on the balance sheet, was of about $15 million during the quarter. So we continue to pay our payables within terms and we maximize our early payment discounts.

As we mentioned, accounts receivables agents improved significantly since the end of the second quarter. And as a result, day sales and accounts receivables decreased down to 22, more typical for us, at the end of September from the 25 days we reported the end of June.

In terms of capital expenditures, we have implemented several new projects. And our capital expenditure forecast for this year has been increased to between 18 and $20 million. Last quarter we reported $15 million budget.

For the nine months through September, capital expenditures were about $16 million. The increase in capital expenditures has been partially offset despite proceeds of about $2 million on the sale of several facilities. And in October, after the end of the quarter, we closed on another facility, with proceeds of about $700,000. And further we have facilities with a market value in excess $3.5 million, that we are hoping for sales. So some of the capital expenditure increase will be offset by these proceeds.

Depreciation and amortization this year should be about 11.5 million for the full year. We [haven't had our forecasts completed] for the next year. So I can't report the capital expenditure or depreciation announced for 2006.

On the balance sheet, the increases in goodwill and other intangibles was primarily due to the acquisition of Venture Welding in May. Other current assets were up $3 million. And that's because of the increases in deferred taxes. Deferred taxes also added about $1 million to -- over our other non-current assets. And the balance of the increase in other non-current assets is due to the reclassification of the facilities I mentioned that [had helped] the sale out of expenses and into other assets.

Related to the Venture acquisition, the amortization expenses we incur on the Venture acquisition will aggregate about $450,000 in 2005, that's for seven months. And those for the intangible assets like patents and other related tangible assets. For 2006 we expect the total amortization on those assets to be $750,000.

Now I will turn it back to Leigh.

Thank you, Fred.

Candice, if you could now on the lines up for questions, we will be more than happy to answer them.

Sure.

[OPERATOR INSTRUCTIONS].

Our first question comes from the line of Richard Paget of Morgan Joseph. Please proceed.

Hi, good morning everyone.

Hi Richard, how are you doing?

Good, and in your press release you said that sales in October are up by about 30% and I'm assuming that has a lot to do with the hurricane orders. How does the breakdown between RV and manufactured housing -- I mean is it still -- ?

It's relatively strong in both segments. And it's very difficult to break down FEMA orders versus traditional orders because a lot of the orders, from our customers are going via customers directly to dealers. And we do not know whether that was to replace inventory or that was for additional FEMA orders. So very difficult to break it down.

And in terms of RV versus manufactured housing, we don't have a break down, Richard. But certainly manufactured housing has been more impacted in October than it was in September. September took a little while longer for where FEMA could finish ordering directly from the dealer lots before they started ordering from the manufacturers. So we didn't feel that much of an impact from FEMA in September. But October has been very strong.

And then in terms of the longer terms effectiveness, I mean, what's going to happen once people, who are currently in the traveler trailers, eventually move to more permanent housing?

Well, I was actually with someone last night, who had just toured the area. And he said he's just never seen such devastation, and its going to be a long time before they are able to start really rebuilding. The clean up, just the clean up alone could take months, months and many months. So we really can't answer specifically, but we can tell you that people will live in these temporary houses for possibly a year. The people from last year's Florida hurricanes are still living in temporary housing.

But once the clean-up, actual land clean up occurs, we believe there will be extensively building and we hope that manufactured housing takes a big portion of that rebuilding.

Okay. And then moving over to raw material costs. I think in your RV segment, you said that raw material costs actually helped margins but over manufactured housing, it kind of hurt margins. I mean, in manufactured housing, can we assume that for the vinyls and the kind of plastic type materials?

Well, a lot of the numbers that you see in the reported quarter relate to inventory. It depends on how much of that inventory you have in stock as to what the costs are. I can't tell you, and I will ask both David and Jason to comment on this. But prices are very volatile, with a lot of the oil-based products increasing and we are expecting increases for the balance of this year.

I don't know, if David and Jason want to add anything to that.

I hope I misheard him, because we have not had any decreases in raw material to the RV side that I know of.

I don't know, whether I would make any comment either on our end.

That may have been more of an accounting --

Yes, more of a mix between products in the various groups and also, as we said, the timing of how we use [steel]. But David and Jason are right. There hasn't been decreases in the prices we paid for for these raw materials. And in fact we are looking at, again, increases in the upcoming quarter.

Bottom line is that it's just real volatile right now?

Yes.

Unpredictable.

Okay. And then the CapEx for this year that went up, that incremental 3 to 5 million now what exactly are you guys spending that on?

To a certain extent, a good portion of that is just for efficiency improvements. Throughout the year we try to identify areas in the operation that are prone to more automation, or where equipment can be upgraded and improve our efficiencies. And those are the types of things that we have experienced. We also have probably pulled some of their projects from 2006, into 2005. And we are [inaudible] [accelerate them] as we can.

So we need at this point quite a bit of production for FEMA units.

There wasn't any one major project that we can comment on. But there were quite a number of 3 and $400,000 projects that we did accelerate.

Okay, great. That's it from me. Thanks.

Our next question comes from the line of Scott Stember of Sidoti and Company please proceed.

Good morning.

Hey, Scott, how are you?

Pretty good. Could you maybe just talk a little bit more about the raw material costs, just trying to ascertain how much we have actually seen of the process we've passed through, how much actually came through this quarter. And if you could quantify in actual dollar terms.

And is it safe to assume that we would see some gross margin pressure in the fourth quarter, if you haven't actually cycled through a lot of that inventory yet?

Let me start with the second part of the question, which I will ask both Jason and David to respond to. As to how you see pricing to customers versus pricing of raw material in the fourth quarter.

Jason you want to start on that?

Well, again, we are kind of watching the whole market right now go up and down. Part of our major component of our RV products right now, and our housing products is during junior I-beam. And those prices have continued to go up over the last couple of months. And we're kind of waiting to see what happens in December and January. But we have some inventory. And we're just trying to do the best we can to manage inventory and new costs that are coming in to us.

David, you want to add anything on your end?

I think that pretty well sums it up, Leigh. One of the things that we're getting hit with forced measure on a lot of our -- especially in the vinyl side of it. And the aluminum products still continues to go up, I think its like a ping-pong ball -- you hit it and it bounces.

And both companies are attempting to obtain price increases when they feel that the material costs that they have an inventory is high enough that it warrants to have some price increase.

Have you been successful in the passing some of those costs too?

They have been somewhat, yes.

Okay. So I guess the first part of my question will be now that we actually saw in this quarter price -- it sounds as if we haven't really seen that much as far as that you are working off an inventory that you had in stock which was probably high to begin with?

Yes, there really definitely is some of that. But I think we worked through this, the higher cost of inventory that we did have in the early part of the third quarter, we worked through most of that. Now we have to deal with the increases coming up in the fourth quarter. I think in the past David and Jason have done a great job of passing through those higher costs to our customers. And we hope and expect to go through the same. And the question of timing, whether you get the sales price increases to match when the cost increases hitting the P&L. And that is a little bit what we saw in the third quarter, but ...

Just the other thing too is that, I mean when material pumps up and spikes, we don't always buy at those high levels. So typically it is kind of a waiting game to see if there is going to be a trend up over the course of several months and then we have to make a decision.

Now as we said in our release, we did pre-buy a lot of this merchandise that is going up. So we have a little leeway before we have to really push for price increases.

And we will do the same, if there's something else, price increases throughout the fourth quarter and we try as best as we can to stock up the inventory. But if we can afford to do that, try to stock up before the price increases.

But at this point with what's announced and what's planned -- what's announced in price increases and what's planned in selling price increases, I don't see a major impact on the fourth quarter.

Little too early.

Okay.

Okay. And what was the option expense, some of that you were looking for again, for '05 and '06?

'05 it will be, over $1 million close to $1.1 million and then in '06 it will be about $2 million.

Yes and you should point out, we started expensing in '02, and it'll probably - it takes you six years until you get the full brunt of all the expense in your income statement. So there is this grant and then the grant that will occur in '07, will further increase expenses a little bit for one year and then it will level out into that.

Yes, and as we close the numbers, and Leigh's correct, and as we close we have grants that we invest over five years. So if it's grants that we issue this November, we will amortize that value over five years. And if we do the math, because we grant options every other year, there are bumps as we said. And there will be another bump in 2007.

So you are looking at a couple of pennies here.

Yes, I guess.

All right. And last question, can you just maybe talk a little bit in more detail about these new products that are going out specifically motor homes slide-out mechanisms, the trailer axles and how close you guys to making some in-roads on the bathtubs for RVs?

I will start with Jason on slide-outs and axles. And then I'll ask David to talk about the bath products.

On the - in the motor home products, the slide-out and the leveling systems that we are doing right now are still, they can get headway along with that project and have solid products and service for that now. And we are working on a couple of comps every quarter and trying to get what we can now on the trailer axles out, [turbo] axles for RVs. That's been a real big hit for us. Everybody that we sell on the [turbo] side, for chassis and slide-outs, which is the largest part of our business, it's been, the relationships are all there, the strategy has been relatively simple to execute because our customers are all there in front of us and they are familiar with us and there is a lot of market potential there.

So that we are continuing to go after all of our customers that we already supply products to and try to supply them one of the additional component there, I mean, axles. So that whole program is going on real well right now.

As I pointed out in my remarks, we have increased our new product penetration by $20 million on an annualized basis in the third quarter.

David, would you want to comment on bathtubs?

As far as the RV products market for the bathtubs and fronts and things that Kinro composites and Better Bath, we've started -- we have penetrated the market but still at the same time with this FEMA and hurricanes it has put it on the backburner a little bit because of all the rush to get the FEMA RV products out. So we are continuing to get the new products and developing the new products but FEMA has sort of put a slowdown to it.

That's all I have thank you.

Thank you, Scott.

Our next question comes from the line of Kathryn Thompson of BB&T Capital Markets. Please proceed.

Hi there, thanks. Just one quick housekeeping. Of the 200,000 of interest -- reversal of the interest expense, where does that sit on the P&L?

It's in the interest expense.

That's why you see this quarter it's a lower on it.

Okay. I think that was pretty basic. On the margin prices on the manufactured side is it a correct assumption that what's driving most of this margin pressure has there been raw material increases. And if not, if there is something else, could you please clarify that. And do you see this getting better in the upcoming quarters?

I think it has been largely in material areas, as you pointed out. Steel has been extremely volatile. And all of the other raw materials used that are energy based, the glass, the vinyl, the raw materials are [protected up] and down. And it did hit us a little bit in the fourth quarter. I don't see the pressures nearly as significant in the fourth quarter in the manufactured housing segment.

And we did have start-up costs in that segment as well for the Arizona window factory that's opening in -- Kinro's has opened a number of factories over the years and every one of them has always been successful. And this one I'm certain will be as well, we're guess at early fourth -- early first quarter of 2006 that factory will be profitable.

Okay. And you assume to allude that there may be greater pricing pressure on the RV side than the MH. But, is this a case? And if so, then why the difference?

There are more pricing pressures from the customers?

No, more, just on the raw materials on the RV.

I think that was just really a timing issue of when we used, how much inventory we had at some prior price.

Okay.

Raw materials, in the 2 different segments. I don't think it's necessarily true that the manufactured housing segment or the RV segment has more price, more costing increase.

As we said, we don't expect that based upon current trends right now, any significant effect in the fourth quarter form material costs.

Okay, okay. As far as -- and I know you're introducing, can you talk a little bit about your new motor home product? And then [try shopping] for motor homes. On and annualized basis what do you think will be the pick-up for '05 and '06, for those new products in motor homes.

We just don't give projections.

Okay. Well, how about mix?

But we did pick up, we did pick up $20 million in market share in the third quarter of those new products. And on a history basis, we look back at our product lines and we see that we have 40% of [that] market shares in many of our product lines and we would expect to get the same here. But we don't give specific numbers.

Okay. And then finally, given you're getting the bigger slug of FEMA orders going into the fourth quarter, this offsets some seasonal numbers that we see going into Q4?

Yes.

And we said in the release that we expected our fourth quarter sales related to FEMA to be $20 million or more. It is a little early to give a hard number. But that I think is pretty conservative. And you can add that to the numbers from last year and the growth is, you're absolutely correct. The seasonality should not nearly be as significant.

There will be some, but it will not be as significant as in the past.

So you do see a fourth quarter number that's more closely reflective of say, your Q3?

It is kind of reasonable to expect that, if you are talking [$20 million].

Okay, thank you very much.

Just point out at last year's fourth quarter we had earnings at $0.16 per share.

Right.

Okay, great thank you.

[OPERATOR INSTRUCTIONS].

Our next question comes from the line of Jamie Willen of Willen Management. Please proceed.

Hi nice quarter, fellows. Last question about pricing. Your customers have obviously long-term relationships with all of them. But do you have -- how long in the contract for what you sell can change prices on --

With very, very few contracts with customers.

Okay. So you basically might supply all the products, but you tell them when the prices are changing?

You have to be reasonable with customers. And [inaudible], start with David, if you want to respond to that at all.

Or Jason?

It's something that you got to work out with them and mutually agree to. It's not anything we walk in there and lay it on the table and say, it's -- this is the way it is. This is just a mutual ground where we sit down and talk about pricing pressures and what we can do to make it the best situation for both the customer and us. So that's pretty much how it works with all of our customers on our end.

Given the way the world is changed with the increase in prices in 2004, and this year, is it easier to then sit down at the table and say, we got to talk now?

No, it's never easy to put a price increase in. And we don't like to do it. But there are times you're forced to do it. I mean, if we're going to continue to keep our factories current with the latest equipment and be able service our customers as well as we do, then we have to have some price increases to offset the huge price increases that we get on the supply side.

But as Jason said earlier, you just don't rush in and do a price increase until you know if the trend is real. We're able to buy some inventory, we have inventory in hand that's reasonably priced. And there is a blip-up in a lot of forces right now. And if they hold, then we will be forced to put through some price increases. And if they're only temporary, then we can work out the period over the next couple of months. But that's something that you just have to do by feel. And there's just no set policy on how to handle it.

Got you. As far as capacity goes, do you run all your plants two and three shifts and have you been adding shifts or adding kind of physical plants? And lastly, obviously you need a bunch more employees. Are there any difficulties in hiring?

Employees, I'll ask David and Jason to comment on. Not all of our plants are running two or three shifts. The plants where we have had specific orders, those are running two shifts or sometimes three shifts. But all of our plants are not. It depends on the area of the country the plants are running in as well.

Well we do find they were more efficient obviously on the first shift. So, we try to avoid [inaudible] go through the other shifts?

David, have you have any trouble hiring employees?

Oh yes, we have trouble, because here again getting back to the hurricane disaster, we have a few plants in the second and third shifts and it's hard to get employees in. So it's been difficult.

Jason, your experience?

It depends upon which region of the country you are talking about. But over the years we've gotten a lot more efficient at building products. And we have been able to free up some capacities. So we are not working as much, second and third shift. This is what some of the other vendors in the area might be -- so we are not obviously the easiest way to get the job is if we can get as much done in one shift as we can. But, in northern Indiana, it's been extremely hurried to get products if the OEMs and the vendors are all fighting you know, to get ...

... same employees.

Same employees.

In terms of the impact on the financials, certainly it will make these new FEMA orders less profitable. But it won't be, I think margins won't be as high.

Lastly, on the field inventories of a bunch of these products, obviously FEMA took a lot of inventories from the dealers. And now these other orders are, I guess going straight from the manufacturers bypassing dealers and going straight to FEMA. Does that mean that the field inventories are extremely low, but they won't be able to be replenished till let's say spring of 2006, and there's some pent-up demand for rebuilding those inventories?

The answer is yes and no. The inventory of travel trailers has certainly been greatly diminished at the dealer level. Again that's area specific, and I'm sure FEMA bought most of the inventories from the -- the travel trailer inventories from the dealers surrounding the hurricane area but can necessarily come up to the Northeast or the Northwest to buy dealer inventory. So I guess there's some spottiness in the dealer inventory.

I was speaking with some people last night, who said that they thought motor home inventory had even come down although FEMA did not buy any motor homes for hurricane relief. And likewise fifth wheel items, there was really no increase in volume in fifth wheel in September. But as I pointed out before, the travel trailer usage went up from 11,000 units that were shipped by the industry last September to 22,000 units that were shipped this year. So there is a lot of shipping. It is going primarily to FEMA and to the dealers. So the manufacturers have been able to do both. They are re-supplying dealers with inventory, probably at a lower level than they had before the hurricane so that the inventory situation at least in travel trailers should be in good shape, going forward.

Okay, and last question. What happens a year, two years down place after the hurricane with all the FEMA products --?

The FEMA products that's being built is truly bare-boned. So if you look at the travel trailer there is no slide-outs, there is no amenities, those trailers will probably take a beating and will probably be scrapped by FEMA or sold to the people that are actually living in the temporary shelters at this point, from anywhere from a dollar to a very nominal amount.

Okay, great job, thanks fellows.

Ladies and gentlemen, this concludes the question and answer portion of today's conference. I will turn it back to management for closing remarks.

So again we thank you all for listening. And we look forward to speaking again to you in February for our year-end conference call.

So have a good New Year and healthy time, thank you.

Thank you for your participation in today's conference. This does conclude the presentation and you may now disconnect. Have a great day.