LCI Industries (LCII) 2005 Q4 法說會逐字稿

Good day ladies and gentlemen, and welcome to the fourth quarter 2005 Drew Industries Incorporated earnings conference call. My name is Colby and I will be your coordinator for today. At this time, I would like to turn the presentation over to your host for today's call, Mr. Ryan McGrath of Lambert, Edwards & Associates. Please proceed sir.

Thank you. Good morning everyone, and welcome to Dew Industries Fourth Quarter Conference Call. I am Ryan McGrath with Lambert, Edwards & Associates, Drew's investor relations firm.

With me are members of Drew's management team, including Leigh Abrams, President and CEO and a Director of Drew; David Webster, President and CEO, Kinro and a Director of Drew; Douglas Lippert, Chairman of Lippert Components and a Director of Drew; Jason Lippert, President and CEO of Lippert Components; and, Fred Zinn, Executive Vice President and CFO of Drew.

We want to take a few minutes this morning to discuss results of the quarter. However, before we do so, 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 under the Securities laws. As a results, I must caution you that as with any prediction or projection, there are a number of factors that may cause results to differ materially. These risk factors are identified in our press release and in our form 10-Q and 10-K filed with the SEC.

And 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 those listening on the Internet. We're again, extremely proud to report another quarter of both record sales and net income, which resulted in our fourth consecutive year of record sales and record profits.

Again, we're especially pleased that our profit gains this year exceeded our sales growth. 2005 profits were up 34% on a 26% increase in sales, and at the same time, as we were doing that, we were gaining profitable market share in many of our established product lines.

We introduced lots of new products, and successfully completed an accretive acquisition that expanded our share of the manufactured housing chassis, that was back in May of '05.

As noted in the news release, our fourth quarter sales were up about 37%, while net income for the quarter more than doubled to $9.3 million, or $0.43 per diluted share, compared to $3.5 million, or $0.16 per diluted share last year.

I should note that last year's fourth quarter includes about $900,000 or $0.04 per diluted share relating to a settlement of litigation, and the quarter was also negatively affected by steel cross increases, which last year we had not yet fully passed on to customers.

For the year ended 2005, sales were up $138 million or 26%, while net income improved 34% to $1.56 per diluted share compared with $1.18 for 2004.

Our year-end results for 2005 were adversely affected by the same litigation I just referred to, and that was about $0.04 per diluted share, which was the same as last year. And by an after-tax start-up cost this year, which related to two new factories and to new products of $1.7 million, or $0.08 per diluted share in 2005. That compared to about $200,000 after taxes or was $0.01 per share last year's fourth quarter.

For 2005, about 67% of our total sales were from our RV segment, and of that amount, slightly more than 90% came from towable RVs and less than 10% from motor home sales. But the remaining 33% of sales was from our manufactured housing segment.

A word about the impact of FEMA orders on our business. As I discussed during our last quarterly conference call, it's been very difficult to get exact numbers relating to FEMA orders, and this is especially true for us. When we get an order from a customer, such as an RV window or a door or a manufactured housing window, we really cannot determine whether that product will be used in a traditional RV or a FEMA unit. I should note that the bare-bone FEMA units are generally referred to as Emergency Living Units, or ELUs, and they are not included in our regular RV statistics.

It's a little easier for us to know when we sell an RV chassis, since these are specifically built for the FEMA orders. Further complicating the situation is that FEMA's purchased a portion of their RV and manufactured needs directly from dealers rather than from the manufacturers. That's when the dealer places an order with one of our customers it is difficult for us to determine if it's a traditional order to replace a normal retail sale, or an order for restocking a unit purchased by FEMA.

I can tell you though but for the four months ended December 31, 2005, we're estimating that our sales increased by about $32 million to $35 million due to hurricane related orders, which represents about 5% of our 2005 sales.

We're further estimating that these FEMA sales increased 2005 EPS by $0.11 to $0.15 per diluted share, including about $0.10 to $0.13 per diluted share in the fourth quarter. These gains occurred despite the fact that our content per vehicle is lower in the units ordered by FEMA than in traditional travel trailers.

For example, a FEMA unit does not use a slide out system. Likewise, the manufactured homes ordered by FEMA have been single section homes, which use less of our products than the larger multi-section manufactured home.

Further exaggerating this situation was that sales of multi-section homes declined during the last four months of 2005, as we believe many manufacturers diverted a substantial portion of the manufacturing to supply the FEMA with the single section units, and therefore were not producing the multi-section homes.

As we look forward, we expect 2006 sales to be strong as there are still some delivery of FEMA units that will continue, and dealers will probably continue to restock their inventory that was depleted by FEMA.

During 2006, we also believe that the manufactured housing industry will begin selling new homes to replace those that were damaged by the storms. That's very similar to what happened in '04 after the Florida hurricanes of last summer.

With respect to retail sales, we've heard reports that retail sales of towable RVs are probably about the same as last year, which of course was the best year in the last 25 years for the industry. But that sales of motor homes continue very soft, and I think they were down 14% for 2005.

As of now, we don't serve a significant portion of the motor home market so that does not have much of an impact on us. As far as our normal business is concerned, even excluding the impact of FEMA orders, we're really very pleased with our results.

Our new product sales really continued to grow, in part because of our customer relationships, as well as our extensive R&D efforts. We previously stated that our new products represented an estimated market potential of more than $600 million, and I think we had previously reported that at the end of June we had captured about $40 million of that $600 million market on an annualized basis. But by the end of December, that number had more than doubled, and we now have more than $70 million in sales and we are fairly conservative on that number. And we are really fairly optimistic that we'll continue to increase our market share with these new products.

If we ignore the effects of the hurricanes, our RV and manufactured housing sales both outpaced the industry growth rates during 2005. And we expect that to continue in 2006, primarily because we are continuing to gain market share. Our new product sales are increasing, and our 2005 acquisition of Venture Welding was only in for eight months of the year, and it will be in for a full year this year.

Looking at the RV market as a whole, we really believe that the long-term RV industry trends appear to be very strong as the demographics of the industry are favorable. Consumer confidence, which has bounced around, seems to be rebounding. Fuel prices, which also have been up and down, seem to starting to stabilize. We really believe that the general public really seems to prefer the [RFV] lifestyle and domestic travel over foreign travel.

With respect to manufactured housing, before the storms we had expected the industry to achieve a slight increase in [post] sales over the 131,000 homes produced by the industry in 2004, but partially as a result of the hurricanes, the manufactured housing industry shipped 147,000 in 2005, which included about 20,000 homes sold to FEMA.

Further, we continue to hear that many of the industry sources, from many industries, repossessions of manufactured homes in 2005 were less than the approximately 80,000 to 85,000 homes that were repossessed in 2004.

In addition, and I would guess most importantly, manufactured housing financing seems to be more readily available. As a result of all of these factors, there are some analysts that are projecting shipments of about 160,000 for 2006, but we have used lower numbers for our internal estimates.

Looking ahead to the first quarter of 2006, we're really very pleased with the way the year has started out. Our January 2006 sales were about 35% ahead of last January, and sales have continued very strong into February, at least for the first 14 days of February.

Then, finally, as I say at the end of every one of these calls, and as often as I can, I really believe that our success is attributable directly to our extraordinary operating management team headed by David Webster and Jason Lippert. Both David and Jason are responsible for the continued market share gains that we regularly get. They continually introduce new products, and as always, good management is just a key to the successful business. And I believe that really these two gentlemen are the best. Over the last several years, both of our subsidiaries continue to gain market share, continue to introduce new products, continue to make great acquisitions, and most importantly, they've been able to do all of this while keeping costs low and at the same time keeping quality and customer service high.

And at this point, I'll now ask Fred Zinn, our Executive Vice President and CFO, to review our financial results in more detail.

Thank you, Leigh.

As Leigh already said, our 2005 sales grew by $138 million, or about 26%, and that includes organic growth of about $40 million to $45 million, which was 8% of 2004 sales.

Due to our continuing growth, for the second year in a row, we've invested heavily in capital improvements and capital expansion. We also made significant investments in quality control people and procedures, and incurred start-up costs of about $2.7 million during 2005, which compares to about $300,000 in 2004.

I should point out that the start-up losses are net of about $600,000 reduction in incentive bonus to management. And the point there is that management competition is hit with a portion of these losses, and that provides further motivation for management to improve these operations in all of our operations.

Despite all these investments, costs, and start-up losses, both our operating margin and our net profit margin improved from last year. Looking forward, we expect to continue to make significant investments in 2006, with capital expenditures of about $22 million to $25 million. These investments in new plants and equipment, as well as our investments in quality control programs, and productivity improvements, are all expected to pay substantial returns over the longer term.

As we reported in the press release in the financial tables, our return on assets for the [trailing] 12 months increased to 12%, and our return on equity reached 23.5%. It's our goal to continue to improve these returns, as well as improve our operating margins.

Our biggest challenge on the cost side continues to be highly volatile prices for raw materials. Some of our raw materials have a very high energy content, and some have experienced large swings in demand worldwide. Continuing volatility in our raw material costs late in 2005 and early 2006 makes it difficult to ensure that sales prices will keep up with costs. Although through last year-end, 2005, we obtained adequate sales price increases so that our bottom line wasn't significantly impacted.

However, our percentage margins have been adversely impacted, because sales are up more than $70 million due to the selling price increases on which there was little, if any, operating profit.

Our response to the uncertainty in the costs of our raw materials has been two-fold. First, as I've said, we've invested heavily in productivity improvements. Secondly, we significantly increased our purchases of both domestic and imported raw materials whenever we can get the best prices.

Increasing imports of raw materials has helped control costs, but importing requires that we maintain higher inventory levels because of the greater lead times in delivery.

Partially as a result of increased importing, and partly due to increased sales, inventories increased 39% from last December. But, that's about the same as the increase in our fourth quarter sales.

Some of the other issues we mentioned in prior calls continue to be challenges. But, they're now better controlled, and that includes bad debt expense, workers compensation costs, and warranty expense.

Our accounts receivable aging has improved markedly from when we spoke in the middle of the year. Our past due balances have declined significantly, and day sales outstanding are down to 21 days.

Workers compensation costs, while they fluctuated during the year as a result of limited number of large claims, but excluding the litigation settlement that Leigh mentioned, workers compensation costs for the full year have declined.

Partly as a result of the increased quality control efforts I mentioned, our warranty costs as a percentage of sales remained fairly consistent with last year at about [0.6%] of sales, and that's despite changes in our product mix.

Looking at our two product segments, we're pleased to report that both segments reported higher sales and profits. The RV segment grew substantially again from new products, new markets, and FEMA and hurricane-related demand.

And despite continuing increases of raw materials, $2 million of start-up losses in the segment, and the strains of the initial ramp up in production due to the hurricane related orders, the operating margin of this segment improved slightly to 9.3% of sales in 2005 from 9.2% last year.

Fourth quarter margins of this segment improved to 8.6% from 6.2% last year. If you recall, last year's fourth quarter margins were impacted by increases in steel costs that we hadn't yet passed onto customers. It was also impacted by plant closure costs.

Improved results in the RV segment, particularly in the fourth quarter were also largely the result of spreading fixed costs over a larger sales base, which offset the volatility in our raw material costs, increased spending on our quality control programs, and start-up losses.

We estimate that our content per recreational vehicle shipped by the industry was about $980 in 2005. That's down slightly from what we reported in the third quarter as the lower content in those Emergency Living Units purchased by FEMA offset other growth. With the expected decline in FEMA purchases in 2006, and growth in our new product lines, we expect content per vehicle to increase again in 2006.

Manufactured housing segment also expanded. Sales were up 21% and operating profit up 29%. And that's, again, in part because hurricane-related orders increased our sales and enabled us to spread fixed costs over a larger sales base.

During the third quarter of 2005, if you recall, we incurred significant costs in gearing up for the hurricane-related orders, including overtime and some lower production efficiencies as we trained new employees. But, those costs have declined throughout the fourth quarter, and we have become more efficient.

We estimate that in 2005, our content per manufactured home sold by the industry was a little bit more than $1,500. That's about $50 per unit less than we reported last quarter. And that's for the same reason - our typical content in the hurricane-related units, as we mentioned, is about half of what our typical content in other manufactured homes.

Looking at the balance sheet, capital expenditures this year were $26 million. That's about $6 million than we anticipated and reported to you at the end of the third quarter. Most of that increase was due to the acceleration of the purchase of a 425,000 square foot facility in Goshen, Indiana, which we had expected to close that purchase in early 2006, but instead closed in late 2005. That facility replaces other facilities in that area, and also allows additional room to accommodate our growth.

In 2005, we also sold three facilities at a small gain per sales prices aggregating $2 million. And we currently have seven facilities for sale that have a book value of more than $5 million. And the aggregate, we expect these properties will be sold at a gain, although, of course, the uncertainties of the real estate market make it impossible to predict with any kind of certainty.

Our total debt increased by about $2 million from last year, and as cash flows from our operating activities of about $32 million and cash from stock option exercises of more than $10 million were offset by the acquisition of Venture Welding for $18 million, and $26 million capital expenditures.

Depreciation and amortization, which last year 2005 was $11.9 million, is expected to grow to [$13.3 million] [background disturbance] in 2006. Goodwill and other intangibles on the balance sheet increased due to the acquisition of Venture Welding in May, and other non-current assets also increased, and that's largely due to the reclassification of facilities held for sale.

I would also like to point out again that Drew began expensing stock options back in 2002. And it's been our practice to grant employee stock options every two years. Prior to this year's grant of 626,000 shares, the last significant grant was in November 2003.

In terms of expense, for the full year of 2005, our option expense was $1.1 million. Stock option expense for 2006 is expected to increase by about $1.2 million because of those new grants.

Now I'll turn it back to Leigh.

Thank you Fred. Colby, if you could now open it up for questions, we'd appreciate it.

Yes sir.

[OPERATOR INSTRUCTIONS]

Your first question comes from the line of Scott Stember with Sidoti and Company. Please proceed.

Good morning.

Good morning, Scott. How are you doing?

Could you guys maybe talk about some of the new products. Obviously, we know which are some of the hot ones, but heading into the first quarter, can you just tell us which ones are really starting to take off, and which ones are maybe not meeting your expectations?

I'll ask Jason and David to answer. Jason, you want to start with that?

In terms of hot products, it'd be our RV and Cargo trailer axles along with our motor home slide out and leveling systems. Those are generating the most revenues out of all our new products.

And David you want to add what you're working on?

We're looking at the motor home window product with some products that will be new to the line, and I believe we've also introduced bath products for the RV industry and working on a bunch of other products as well. Really I'm not [included] in the numbers we've issued but will be in the '06 numbers.

Equipment trailers, dump trailers for FEMA-related stuff and standard type dealer product were pretty substantial last year and jumping into this year as well too.

And as far as the strength you talked about through the first 14 days of February, are we talking the same mix in strength of RV versus manufactured home?

The reason we didn't give a number for February, you really can't give a number during the month. Particular days could be stronger this year than last year. You really don't know until the month, but the month has really started out very strong. We won't give any specific percentages, but we're very satisfied with February so far. Really can't tell until the end of the month.

Okay. And as far as heading into the first quarter, you guys talked about erratic raw material costs. Can you talk about how much do you think you guys will quantify how much you could offset that through some of these production efficiencies and imports that you talked about?

Fred will give you a shot at that.

It's very hard to tell, of course, because I don't know what tomorrow holds. Raw material prices from steel to aluminum, glass, ABS, vinyl, they're all up and down with fairly significant swings.

But what we see now, we should be able to offset the price increases and the cost increases with, as you said, both productivity improvements and some better purchasing overseas. I'm not sure it's going to be quite even throughout the year, but I think, looking at it at this point for the year as a whole, we should be okay.

First quarter, there's quite a bit of raw material price increases that we've seen even in the last 45 days. So, as that flows through P&L late in the first quarter and early second quarters could hit a bit.

Price increases really have been consistent and ongoing, and it's really tough for David and Jason to handle those because they must maintain margins if they're going to put $26 million into CapEx again this year. But that's an operating problem.

So, it sounds like we have a little bit of a timing issue, just so you -

You really just can't predict -

Can't really tell you. There are sales price increases going in at the same time. So, it is very hard to see how the timing of how the higher cost for materials flowing through our P&L will match up with our selling price increases. I don't see anything major though.

And as far as what you talked about how you closed on a facility early this year, which is one of the reasons for the increase of the $6 million variance in capital expenditures, and I think you mentioned over $20 million in CapEx for '06 as well. What have you added any additional plans beyond what you might have expected before?

There's a lot of new equipment going in. We have a lot of new products. And we are adding some facilities and lots of new machinery to try to improve efficiencies. And when you're growing as fast as we're growing, you just have to keep pace with the growth and make sure you have capacity to meet the needs. That's what we're providing for this year.

And just a last question. We've heard some news about some FEMA bottlenecks with delivering product down to some of the storm-ravaged areas. Can you guys quantify that and how you expect may be timing of orders, if there are any orders left to be done for FEMA in the first half of the year?

FEMA obviously has directly handling it and they can't tell you what's going on, so we certainly can't answer that. There are some additional FEMA orders to be delivered and some new ones coming out. I think the bulk of the FEMA business was done in '05. There will be some this year. I can't quantify what FEMA's doing with the units or what they're not doing with them.

There are still some good number of units going to FEMA through or end of month of April, but past that it's going to be real spotty.

That's all I have. Thanks a lot guys.

Thanks Scott.

Your next question comes from the line of John Diffendal with BB&T. Please proceed.

Hey John.

Yes. Good morning and fine quarter. Just a couple of things. One, in the release you mentioned that you expect a substantial reduction in the start-up losses in the first quarter. And you mention that you were running it $1.1 million in the fourth quarter. Can you substantiate, can you give us a little more substantial number on how much reduction you're expecting there?

We don't really speculate on the future. We just know that the two factories and a number of the products have all seen dramatic turn-arounds in the last 30 to 40 days, and therefore are expecting much better first quarter. We had really expected a much better fourth quarter than what we actually did in those two factories, but whatever could go wrong went wrong - -

In Q4.

- - in Q4, but we think that those have turned around in '05. But I won't give you any specific numbers.

But you do, this Q1, that's another sort of offsetting factor, isn't it? For the raw material price increases?

Not compared to last year's Q1. Compared to the Q4, yes. I would say that's true.

Sequentially, yes.

We will likely have some more startup costs, but it should be at a lower rate, a lot better than the - -

I guess the tax rate was a little bit lower than you had been running early in the year. What was going on there? And can you talk about what tax rate you're expecting for '06.

At the end of the year, if you adjusted tax rate, as we did, a few 10ths of a percent, what appears in the fourth quarter you're making a whole adjustment for the year in the fourth quarter. So, that's what drove it down. I think for the year, we were just under the 37.9%. It's down from last year, generally because of the new Jobs Creation Act that implemented a 1% reduction in Federal tax rates on manufacturing earnings. And I would say we're probably be just north of 38 next year. That would be my best guess, 38.25% to 38.3% or some.

25 to 38.3%. Anything to note, Fred, about interest expense? Do you expect to run it the fourth quarter rate for next year, or what can you tell us about that?

I do see it coming down. Certainly we had in the last part of the year, very high inventory levels. Some of that was buying ahead to beat raw material price increases. We should have good cash flow this year, so I do see our interest coming down. I don't know about the first quarter, but just throughout the year.

Thank you so much.

Your next question comes from the line of Shaun Nicholson with Kennedy Capital. Please proceed.

Hey guys. How are you doing?

Hi Shaun.

Most questions have been answered. I just have a general, get your opinion on, the rebuilds down in New Orleans and that area with manufactured housing. And what you're hearing on what people really think of that product going down there is permanent living spaces. I know it hasn't really started yet, but towards the end of this year.

I'll give you a quick answer here, and then I'll ask David and Jason to chime in as well. From what we have heard from people who've been down there, that the damage is much more severe than what you see on television.

And just to clean up the area will take a considerable amount of time. It's already been four or five months, and there's still tremendous amounts to cleanup. We're expecting building to begin, to rebuild begin, middle or towards the end of the year. In certain areas where there were manufactured housing, we believe it will be replaced with manufactured housing. In other areas, we just don't know.

But we do know that the rebuilding in Florida, and of course you remember there was hurricane Wilma that hit Florida this year was very severe. So, there will be rebuilding in Florida and parts of Louisiana, Mississippi. We think it will be significant, but probably later in the year.

David, I don't know if you want to add to that?

I really don't have anything to add to it. They've just got a lot of cleaning up to do down there.

Jason, do you have anything?

No.

Like I said, I appreciate the thoughts.

Okay.

Thanks guys.

Your next question comes from the line of Ed Aaron with RBC Capital Markets. Please proceed.

Thanks. Good morning.

How are you doing?

Good. Thanks. A couple of questions for you. First, I was wondering if it would be possible to get the towable sales in the quarter, if you exclude the ELU products?

You mean for the industry?

No. For Drew. The growth in the towables and then netting out the stuff that went directly to the ELU.

For the year, as a whole, and I don't have the number in front of me for the quarter, but I think for the year as a whole, our sales were up probably 12% to 15%.

That's excluding price increases?

Right.

Excluding the acquisition and excluding FEMA?

That's correct.

Good. And then I wanted to ask about your comments with respect to the inventory restocking of travel trailers at the dealer level. I think you also said in your release that there were about 20,000 units that were purchased by FEMA just straight off the dealer lots. Obviously that creates the need for some replenishment, but if you look at the industry shipments of travel trailers over the last four months of 2005, they were up by 23,000 units on a year-over-year basis. So, just that math would suggest that maybe that product has already been fully replenished at the dealer level. I'm just trying to reconcile that.

If the real number was 20,000, and it's a hard number to pin down. It's industry's best guess. But if it was 20,000 and you're saying 23,000 units were shipped, that would mean that it was only 3,000 for resales. So, maybe they shipped 15,000 and 8,000 resales.

But, whatever number you're trying to come up with is going to be a guess. We just know there is some additional FEMA units out there. There's some additional restocking, and depending on where you are in the country, there's some dealers that have full lots and some that are still looking to replenish a little bit. It's very difficult to guess. Jason, do you have any -

No. That's a hard question to answer. I think we'll know a lot more middle, end of the year.

David, are you hearing anything different?

No.

When you talk about the more recent growth rates that you're seeing, and it sounds like you haven't started to see a tick down yet. Do you have a best guess that when you come into the more normal growth rate?

Really, you just can't predict the future. I just know that January was strong versus 14 days of February have been strong. That's about as far as I can predict. We can only respond to what our customers do, and they can only respond to what the dealers and retail customers do. And that's a day-by-day situation. Understand, the long term is what you have to look at. We try not to look at a day, or a month, or a quarter. The longer term, the demographics of the RV industry are terrific. There's going to be 20 million more people turning 50 and over in the next 10 years. That's your prime buying group.

In addition to that, the advertising campaign in the industry has really attracted buyers from 30 and over. In fact, that's the fastest growing group of the RV buyers, are the 30 and over. Those are the buyers that are more likely to buy travel trailers than motor homes. And I believe that's one of the reasons the travel trailers have grown so fast. If you look long term at this industry, you have to be optimistic. Again, I can't project months or quarters, or even two quarters. Just look long term.

Thanks.

Your next question comes from the line of [Gary Vogul] with Gary Vogul. Please proceed.

Hi. This is Gary Vogul. Good morning gentlemen.

How are you doing?

I'm okay. I'm surviving. First of all, I want to congratulate you. You have accomplished a remarkable record over the last few years. Just totally remarkable under the circumstances.

Second thing is, can you, Leigh, tell me what, looking at where you are today, looking at your competition, looking at both industries, how would you characterize your current acquisition strategy?

It's the same as it's been for the last 10 years. We try to buy companies that will expand either our existing product base, or give us a new product base. We try to buy for less than six times cash flow. We try to buy acquisitions that are immediately accretive, and we are very patient and we do a lot of due diligence on acquisitions. So, that hasn't changed and it won't change.

As far as acquisitions, you basically have used cash during this period.

That's correct.

And the Wall Street has given you proper respect by increasing your share price quite dramatically. And I'm sure your shareholders are very happy. The fact that you're stock is selling for significant multiple of book value at earnings compared to a few years ago, would you consider using shares in an acquisition?

The last time we used shares in an acquisition, is when we bought the Lippert company in '97. That made a lot of sense. It was 50% cash and 50% stock. Management was going to stay on with the company. It was a significant acquisition for us, and what better way it is and incentive by new acquisition is to have management own a lot of stock. Of course, the Lipperts stayed on with us. They're still with us, and they've done an absolute great job. If there was an acquisition opportunity that came about that offered us the same opportunities in the future, we would consider stock, but we much prefer to use cash.

Now given your size and your leverage on your balance sheet and your stock price, obviously you have tremendous capability to buy a much bigger company today than you did a few years ago through acquisitions.

Yes we do.

What would be a large deal given your current capacity?

We just won't speculate on that. I can only tell you that our debt to EBIDA right now is about 1:1. Banks will lend more than 3:1. So, we could probably triple our debt if we wanted to. We're adverse to heavy debt. So, we would probably never consider more than doubling debt. So, that may give you some idea as to where we could go.

So, basically you could make a much bigger do a much bigger deal today and feel comfortable, compared to a few years ago?

That's correct. Without raising additional, or without selling stock.

The only thing I'd add to that is, as you know, once you get into the larger deals, the purchase price multiples go up, way up. And we don't intend to put in that trap of paying eight or nine times cash flow. So, most of the larger deals will be outside our scope.

Thank you very much. Keep up the good work.

Thanks Gary.

Your next question comes from the line of [Deforest Henman] with Paradigm Capital Management. Please proceed.

Hey guys. Just a couple of questions on some of the new products. Can you give us some color on the Thermoform exterior parts, and how that product is doing? I think on the last couple of analyst presentations we still had zero share in that market.

We're still working on it. We believe that's going to be a big product for the future. It's something that takes a lot of planning for a buyer before they switch, and they say we're very patient and we think that'll be a big product.

David, do you want to add to that?

No. The only thing that I have said about that is a very good product, and we're working with several customers right now on the thermoforming end of it, both in the small thermoforming and the large thermoforming.

And that'll be kind of a recurring revenue base? How long --?

-- a product that we probably could start later this year. Once it gets started it should be a nice product.

And that would be, the designs would probably be for a production year, or would they be over multiple years?

You mean the designs for the customers?

Yes.

It could be for multiple years or it could be a short-term design.

Just don't know.

Switching to axles for especially trailers, that's pretty good size market and we've got a little bit of a share in that. Who are we competing against in that market? Are we competing against in-house production?

Jason?

When you say in-house production, are you talking about the people that are actually building the trailers?

Yes.

No. There are other axel manufacturers.

All right.

We won't give you their names.

There's a handful of them, not just one or two.

Thanks a lot guys.

Your next question is a follow-up from the line of Shaun Nicholson. Please proceed.

I just had another question. I've been hearing things of what's going to happen to these trailers and when people are done using them. I know they're not ones that obviously are built for long-term buyers. Do they auction them? Do they recycle them?

Start to look, and even ask Doug to answer on this one. You could start to look at Florida, the hurricanes that occurred in '04, and there's still lots of people living in those trailers and homes that were sent as Emergency Living Units there. We believe it will be even longer that will occur in the existing storms. It's been experienced that many of these trailers just get dumped because they're trashed during that period of time. These people don't have a lot of interest taking care of them. They were real bare-bone trailers in the first place. They didn't have a lot of the amenities that are required of a normal travel trailer. Probably not much of a real market for them.

Doug, you give anything to add to that?

No. That's exactly it. The market's very, very tiny.

Thank you.

At this time, there are no further questions in queue.

Again, we thank you all for listening in, and we thank you all for being investors in Drew.

We look forward to talking to you next quarter. Have a good '06 and we'll speak to you at the end of March. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.