LCI Industries (LCII) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Drew Industries Incorporated third-quarter 2006 earnings conference call. My name is Onika and I will be the operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes. At this time, I would now like to turn the call over to Mr. Ryan McGrath with Lambert, Edwards. Please proceed, sir.

Good morning, everyone, and welcome to Drew Industries' third-quarter 2006 conference call. I'm Ryan McGrath of Lambert, Edwards & Associates, Drew's investor relations firm. I have with me today members of Drew's management team including Leigh Abrams, President, CEO, 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 to discuss our quarterly results. 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' operations may be considered forward-looking statements under securities laws. As a result, I must caution you that, as with any prediction or projection, there are a number factors that could cause these results to differ materially. These risk factors are identified in our press releases, in our Forms 10-Q and 10-K filed with the SEC. With that, I would like to turn the call over to Leigh Abrams. Leigh?

Thank you, Ryan, and good morning. Welcome to all of you on this call as well as all of those listening on the Internet. Before I start, I want to apologize for the last call. I understand there was a lot of static, and they have promised us that we won't have it this call. Also, Dave Webster, who is normally on the call with us, is traveling; but I'm sure we will be able to answer your questions.

I really don't know quite how to start. We have become so used to reporting record quarters that I have had to reorient my thinking. However, there is one thing that I know -- that this was a very profitable third quarter, and it was despite a very difficult business cycle.

Despite that, our sales continued to rise, albeit modestly in this third quarter. In fact, third-quarter sales reached a record for a third quarter of $181 million as compared to $171 million for last year's third quarter. This year's third quarter was not impacted by hurricane-related sales, whereas last year's third quarter included about 6 to $8 million in sales of hurricane-related business.

Net income for the third quarter was 46.9 million, which was down 29% from last year's third quarter of $9.8 million, while earnings per share decreased to $0.32 per diluted share compared to $0.45 per diluted share in last year's third quarter. Last year's third quarter included about $0.03 per share applicable to the reversal of a portion of litigation costs related to some litigation that we had settled for less than the anticipated amount. We had recorded a greater amount earlier in the year, and thus reversed it in the third quarter.

Sales for our last 12 months ended September was $772 million; net income was $36.7 million; and earnings per share were $1.68.

For the 2006 third quarter, about 70% of our total sales were from our RV segment. Of that amount, more than 90% came from sales of components for travel trailers and fifth-wheel RVS, with the balance of our RV segment sales generated from sales of specialty trailers and components for motorhomes. The remaining 30% of our 2006 third-quarter sales were from our manufactured housing segment.

For the eight months ended August, industry statistics reflect a gap between wholesale shipments of towable RVs by manufacturers and retail sales by dealers. The RVIA has reported that through August of '06 wholesale shipments by manufacturers of travel trailers and fifth wheels, which are our primary RV market, were up 23% and 7%, respectively, or a combined increase of about 18%.

However, information provided by Statistical Surveys indicated that retail sales of these types of RVs were basically flat for the same period. That was despite a 9% decrease in retail sales in August. Retail sales for September '06 are not yet available; probably will be available I think the 20th of November.

But wholesale shipments of travel trailers and fifth-wheel RVs for September declined 20% and 18% respectively. This compares to about a 12% decline in our RV segment sales. So again we outperformed the market.

The dichotomy between the wholesale sales and retail sales is partially due to dealer restocking of inventories earlier in the year, to replace the inventory that had been purchased by FEMA. But thereafter, retail sales softened -- and possibly a little quicker than we had anticipated. This, combined with high interest rates, caused dealers to quickly reduce their inventory. I think that that is what we are experiencing right now, is some very steep dealer reduction in inventories.

Also, affecting the difference between wholesale and retail sales is the fact that the Canadian retail sales are not included in the retail sales statistics which are provided by Statistical Surveys, while Canadian wholesale shipments are included in the data provided by the RVIA. We just have not been able to quantify this. But we don't think that that is a significant factor.

We believe that two of the factors that caused the retail sales to slow are high gas costs and higher interest rates, both of which continued to rise through most of the year until late in August of 2006. Of course, higher interest rates both discourage consumers from buying RVs and make carrying high inventories by the dealers very expensive.

In addition, we believe that the possible fear of gas shortages due to geopolitical conflicts was an additional negative factor that postponed consumers from buying RVs in greater numbers.

But recently, many of these unfavorable factors have significantly improved. Gas prices are down, interest rates are stable, and the fear of gas shortages has eased. However, the industry is now in the middle of its typical end of the year seasonal and holiday slowdown. Thus, we do not expect to see RV industry improvement until late in the first quarter of 2007.

In addition, last year's very strong business caused by the Gulf Coast hurricanes will make comparisons very difficult for the fourth quarter of 2006 and for the first quarter of 2007. For that matter, 2004 was also affected by hurricane-related business. So I think what we probably experiencing right now is a normal seasonal slowdown that we just no longer are used to, because of the last two years of hurricanes.

We remain optimistic about the long-term growth of the RV industry due to extremely strong demographic trends, with almost 20 million people -- or 11,000 people per day -- turning 50 within the next eight years. This is the primary buying group for RVs, although the 30 to 50 year age bracket is the fastest-growing RV-buying age group. By 2010, industry experts predict that the RV will be owned by some 8.5 million households, which is an increase of about 8%, which outpaces the overall U.S. household growth of about 6%.

Our new product sales have continued to grow in part because of our relationships, our product quality, and our customer service, as well as our extensive R&D departments [and efforts]. We estimate our market potential for these new products introduced in the last two years to be more than $750 million. At the end of September '06, we had captured about $105 million of annualized sales of these products compared to about $60 million at September of '05.

Now, we continue to be optimistic that we will increase our market share of these new products, and we will continue to add new products to the RV market.

Just a quick update, our June '06 acquisition of Happijac continues to perform well. Happijac is a manufacturer of bed-lifts, toy haulers, and other RV products. They obtained a broad patent for bed-lifts in late 2005 and thus should greatly benefit from this fast-growing segment of the RV industries.

For those of you that are unfamiliar with the term toy haulers, they are RVs which include space to transport leisure vehicles such as motorcycles and ATVs. More and more Americans are just taking their toys along with them on these RV trips; and that puts Happijac in a great market. We expect continued growth of the toy-hauler market and thus increased sales of our bed-lift products, as well as synergistic cost savings between Lippert Happijac.

With respect to the manufactured housing industry, the industry's wholesale shipments grew to 147,000 homes in 2005, which was up from 131,000 homes in '04. It appears that the industry will ship about 125,000 homes in 2006, which is lower than our previous estimate of 130,000 homes and previous analyst estimates which were much higher.

The 2005 growth of the manufactured industry was due to about 20,000 single section homes purchased by FEMA, mostly in the fourth quarter of last year. During late -- we really anticipate that during late 2006 and into 2007, when the cleanup of the devastated areas is further along, we believe that the manufactured housing industry will begin selling more homes to replace those that were damaged by the 2005 storms. That is just as it did after the 2004 Florida hurricanes.

In addition, in the coming years, as the baby boomers begin to retire in much greater numbers, the manufactured housing industry should experience additional growth.

In 2004, we began an operation of a specialty trailer factory in Indiana in an attempt to capitalize on the success of the Zieman specialty trailer business on the West Coast. However, because of an overly aggressive business plan, possibly a miscalculation of the Midwest specialty trailer market, we lost a significant amount of money in both 2005 and 2006 at that factory. Accordingly, we have now closed that factory and reported all losses applicable to its closedown. Nevertheless, we will conceive to expand our very profitable Zieman specialty trailer business on the West Coast.

Our new Kinro window factory that we opened in Arizona in 2005 -- we had incurred about $700,000 of start-up costs on that factory during '05 -- is now nicely profitable and we believe we will have the capacity to capture additional market share.

Having discussed the industry problems, our third-quarter results, the question most often asked is -- what can we do about it?

We will basically respond to the very difficult business environment that we're facing today as we have done in the past. We will operate as efficiently as we can, as smart as possibly. In that regard, we've closed several factories. We have reduced our hourly workforce to current production levels. We have reduced fixed overhead wherever prudent, and we will continue to do that as times remain slow.

In addition, we continue to seek additional market share. We're aggressively pushing our new products and we're continuing to pursue acquisitions. In that regard, it is worth noting that our performance-based incentive compensation programs and our stock option plans create a very strong and effective motivation for management to generate the best possible results.

In summary, despite a lackluster third quarter, we are pleased with our progress to date. We are optimistic that the long-term prospects of both the RV and the manufactured housing industries will improve in time.

Finally, as I often say -- as I say as often as possible, our success is really attributable directly to our extraordinary operating management team headed by Dave Webster and Jason Lippert. David and Jason are responsible for the continued market share gains that we have seen. They continually introduce new products. As always, good management is the key, I believe, to a successful business; and I think we have the best management.

Over the last several years, both of our subsidiaries have gained significant market share. We've introduced new products. We have made great acquisitions. And most importantly, we have kept our costs low and quality and customer service high. I will now ask Fred Zinn, our Executive Vice President and CFO, to review our financial results in more detail.

Thank you, Leigh. As Leigh discussed, conditions in both the RV and manufactured housing industries have been difficult these past few months. Certainly this has adversely impacted our operating results, with our net income in the third quarter declining 29% to $6.9 million.

In the press release, we described the factors that impacted these results for the quarter, such as the downturns in the industry, the pressures on the margins from volatile raw materials, and the shutdown of our Indiana-based specialty trailer operation.

Net sales in the third quarter of 2006 were about $21 million below the very strong second quarter. As a result, both our gross margin and our operating margin declined. Part of the decline was due to a 30 basis point increase in material costs as a percent of sales. But the biggest factor in our reduced margins compared to the 2006 second quarter was that fixed production and administrative costs were spread over a smaller sales base. Manufacturing overhead costs and SG&A costs declined by an aggregate of nearly $3 million from the second quarter, but that wasn't adequate to fully offset the impact of the lower sales.

Despite these factors, though, our overall market share increased in both our operating segments. We estimate that our content per travel trailer and fifth-wheel RV increased to about $1,490 per unit for the 12 months ended September. That is up from $1,431 that we reported last quarter. Certainly, that gives further evidence of our ability to grow beyond what our industry's performance is.

Our estimated content per motorhome also increased to about $292 per unit from $280.

In terms of manufactured housing we don't have the statistics yet for production in the manufactured housing industry for September. So we don't have a precise content per average manufactured home. But we estimate that our content per home has increased to about $1,675 a unit from the $1,631 we reported last quarter.

In response to the industry and economic conditions, we implemented significant cost-savings measures, and we outlined those in the press release. But I really should point out that these efforts to reduce costs and increase efficiencies and produce outstanding returns are really nothing new to Drew.

For example, the volatility of our raw material costs continues to be one of our most difficult problems. Over the last several years, operating management has mitigated the extraordinary volatility in raw material costs by working with customers to obtain price increases, although those were generally without mark-up.

In addition, in an effort to keep price increases to customers down, we have made significant investments, including $20 million so far this year, in the most efficient equipment. That resulted in reduced production costs and also helped us expand our capacity to meet our customers' needs.

Further, while we consolidated the operations of three facilities recently in response to industry conditions, over the past several years we have consolidated eight additional facilities. Those typically were not closed because of a lack of volume; but they were consolidated because our analysis showed that we could reduce operating costs and improve profitability by doing so.

In the last two years, we've also intensified our efforts to reduce costs by expanding our purchases of imported components where they are less costly. We have implemented testing programs to ensure that those components meet our high standards and specifications. We are making further efforts in that regard; and we expect further cost savings from importing programs in the coming quarters.

We have also continued to expand our quality control efforts. That is both to help us reduce warranty costs and maintain a high level of customer satisfaction.

Further in the past two years, we swapped $35 million of variable rate debt to fixed interest rates. That has helped us both reduce volatility and lower interest costs. Partly as a result of those interest rate swaps, the average interest on our debt was about 5.9% last quarter.

Overall, management has been and continues to be proactive and highly motivated to maximize profitability. That is both because we take a lot of pride in Drew and also because of the incentives provided by the compensation programs that Leigh talked about. The compensation programs tie a very significant portion of management's current compensation to Drew's profitability, and they tie a significant portion of management's long-term investment in the Company's future to stock price movements through stock options that we issue.

Our employees have recognized substantial gains on the exercise of these stock options. But further, in 2005 and in the first nine months of 2006, Drew realized cash of more than $12 million from option exercises and related tax savings. So overall, these performance-based incentive programs provide an enormous motivation for our employees and cash flow to Drew.

Turning to the balance sheet, our debt levels as we said in the press release declined nearly $20 million between the end of June and the end of September. That was in part due to operating management success at reducing inventory levels by nearly $11 million and also in part due to third-quarter profits. We expect further significant inventory reductions over the balance of the year, which will help our cash flow. But at the same time we have to recognize the need to be prepared to meet customer needs when their demand for our product increases.

Accounts receivable remains in good shape. We have about 20 days sales outstanding at the end of September. But on the other hand, we are cognizant of the fact that account receivable problems can arise quickly during industry downturns. We are closely monitoring a number of our accounts.

Over the last three years, we have invested more than $75 million in capital expenditures, and that includes what we estimate to be 24 to $27 million this year. We expect that capital expenditures will be lower next year, although we have not yet finalized the 2007 plans.

But we have also been able to and also expect in the future to offset some of these expenditures through the sale of facilities that we have consolidated. The first nine months of this year, we collected nearly $5 million in proceeds from the sale of these fixed assets. In one case we provided short-term financing to the buyer of one of these properties. We anticipate collecting that note and an additional $4 million in about a year, and at that time we will record a gain of about $2.8 million on the sale of that facility. We also have a number of other facilities that are being currently marketed and hopefully over the coming quarters will see some cash flow from those.

In terms of depreciation and amortization expense, this year it should be about $15.5 million, maybe slightly higher. Next year we're looking at 17 to -- between 17 and $18 million, although that is not -- those plans are not quite finalized.

Our effective tax rate for 2007 we have estimated to be 38.7% as you will see likely in the fourth quarter. But as is typical, we're in the process of several tax audits in a number of different jurisdictions including Indiana, where we have a significant portion of our operations. In each quarter, we review our tax positions and base our reserves on the available information. Now I will turn it back to Leigh.

Thank you, Fred. Now I would be more than happy to take questions. Onika, if you could set up that, please?

(OPERATOR INSTRUCTIONS) John Diffendal with BB&T Capital Markets.

A couple different things. You mentioned material costs certainly have been fluctuating. Talk about what they are kind of doing right now, and sort of looking forward. I would think that with the weaker markets in housing and RVs that some of that is starting to come back down. Talk about what you're seeing (multiple speakers).

We would have tended to agree with you, and we do see some easing; and then just about when we get all excited about some easing in raw material costs they turn around and they hit us again with increases. So I think maybe Jason can give you a little bit more detail on that. But they certainly have been very, very volatile. There has just been no pattern one way or the other. Jason, do you want to add anything?

Yes, I mean, you are mostly right. I mean, the material costs have been very volatile over the last three years. We have gone through our periods of smoothing out; and then they will go up again. We haven't seen very much downturn in the last few years. But things have stabilized after September in several of the steel markets that we're purchasing in. I can't speak for Kinro.

But that is kind of where we are at. We are in a period where we have had a couple months of stability, and we're just kind of waiting and seeing, hoping that things continue to stay where they are at or trend downward.

We do buy some specialized junior beam product, that isn't typical of what the rest of the steel industry is doing. So that kind of muddies things up a little bit.

But those costs have stayed very high.

Yes, actually, they have increased in recent weeks. Same thing with some of these -- surprisingly -- with some of the petroleum-based products that we buy. We have seen some increases as recently as this month in those, kind of lagging what the market did. So hopefully we will see them come down later.

But right now, I would say the returns are mixed. Probably half of raw materials have come done, but only slightly; and half of them have gone up in recent weeks.

You mentioned in the release that you also have seen some lower-than-expected margins in the new products. Can you expand on that a little bit in terms of what may be going on there?

I will again answer it first, and then I will ask Jason to fill it in. But whenever you introduce a new product, you are basically inefficient in the new product. You don't buy as well, you don't manufacture as well.

We certainly experienced that when we introduced our slide-out systems a number of years ago. It was a very low-margin product in the first year or two. Today it is a very good margin product.

So it is a learning curve and we're experiencing that. We have experienced some pretty good growth, over $100 million of sales of new products. The margins on those products are just not equal to our normal margins, but we're hoping that next year at this time they will be. I don't know if you want to add anything to that, Jason?

No, I think that is pretty -- states it pretty well.

You mentioned with the incentive compensation that when we look toward the fourth quarter, and given the sort of I guess a little bit of an inflection point here in the third quarter, would we see any like reversals of earlier accruals or anything like that, that we ought to be thinking about?

Our accruals are based upon operating profit. So it is not that we will reduce previously established accruals; but certainly, our future accruals for the fourth quarter will be lower if our profits are lower.

Okay. Also interest expense I guess net was about $1.4 million. You mentioned that some of those debt levels actually coming down from the third quarter. What should we be thinking about on the interest expense?

I'm hoping that we will see a decline in interest expense in the fourth quarter, because rates moved up a little bit. I think [didn't] impact us significantly, but certainly cash flow should continue to (indiscernible) reduce the debt interest rate.

Fourth quarter is usually a good cash flow. Your sales are usually slower, so your inventory and receivables come down. But then you use that cash again in the first quarter and the second quarter.

Lastly, you mentioned workforce reductions. Anything you can do to quantify that? Or if that have any sort of positive --?

I can tell you that since the end of the fourth quarter, since the end of the third quarter, so in the last month, we have reduced our production workforce by between 5 and 7%. So we are continuing to make strides that way.

Since the end of Q3?

Yes, since the end of the quarter.

Thank you.

That is typical for this time of the season. You know, I think we all got spoiled over the '04 and '05, when both years had significant amount of hurricane-related business. But this is the slow season. This is seasonally slow both because of the holidays and because of the weather conditions. The last two years sport us spoiled us.

So this year may be slightly slower than normal, but this is what the industry normally experiences. You can go back and you will see the first half of a year is always much stronger than the second half.

Let me just get one last one and then I will let you go. But as you pointed out on the RV side with towables, the shipping numbers really -- they hit the brakes pretty hard I guess, especially in September, relative to earlier in the quarter.

Given what you guys are maybe seeing out in the marketplace, how long do you think that it will take to sort of clear out inventories? I know there has certainly been some indications of discounting on the travel trailer and fifth-wheel side. How long do think that will take to (multiple speakers)?

I think that is, again, a much better question to ask the manufacturers. They certainly deal daily with the dealers. They probably have a lot more information on that. But maybe Jason, you can fill us in a little bit?

Just anything you think about it.

Yes, I mean, it is hard to answer, I guess. I don't have the crystal ball on what the traffic at the OE level is doing. The one thing I can say is that our sales are tied directly to our customers. We don't have to go out and scrap for every little sale like the OEs do.

So I think we are in a better position from that standpoint, because they are going to go out and get aggressive and try to get as much sales as they can in a tough market. We're going to sell them every chassis or every slide-out that they buy from us.

We did hear discussions at the Pomona show that was recently held in California, it was very, very strong and very well received. I think that at least caused some short-term optimism. But my guess is dealers are clearing out their inventory just on the basis of the order flow that everybody is seeing.

And that we really do expect late in the first quarter of next year that the pent-up demand -- that was probably caused by people just deciding not to buy in the current environment of high gas prices and high interest rates and the conflict that was in the Middle East. Those things have also subsided now. But it is probably too late for people to buy this year, so they will probably wait to buy first quarter of next year and use it for traveling during the spring and summer season. So we would not be surprised to see a fairly robust recovery in the late first quarter.

I want to emphasize again that the orders are not terrible right now. I mean they have slowed down a little bit. But like Leigh was just mentioning we are not seeing a whole lot different picture than what we would have a couple of years ago, before FEMA really started ordering a lot of trailers in the last couple years.

Good point. Thanks.

Kathryn Thompson with Avondale Partners.

Could you quantify your FEMA impact going into the fourth quarter?

I think the fourth quarter last year we had maybe 28 to $30 million of sales, maybe.

I think it was a little less than that. (multiple speakers) around 25.

25 to $30 million with a lot of it coming in October-November and slowing down in December.

The margins on those products were comparable?

They were decent margins, yes.

They started out in September and even early October, they were probably a little lower because we were not quite as efficient; and they improved towards the end of this quarter.

On FEMA, our margins were not as -- our margins are not as good as -- comparable to the normal units that we'd sell.

One of the reasons were the FEMA units have a lot less of our content than they would in a normal unit. So $30 million worth of business was not traditional business for us. It would have -- $30 million of traditional business would have given us much better margins.

Okay. Of that mix, I would assume a greater portion of it was on the towable side as opposed to your manufactured housing.

Yes.

Are there any costs related to your three closed facilities? Any additional closures going into (multiple speakers)?

Any costs that were, we have taken, even in the specialty trailer operation. We have taken all costs. We have some inventory left which we have marked down; and we expect to sell it at the markdown level that we have. [In fact], more than half of our finished goods inventory was sold in October at the estimated value that we thought we would get. So we think we are pretty much done on all of those costs.

You can always have a little bit, but I don't think it will be anything significant.

So less than a penny or two?

Oh, no. It should --

Yes, it should be less than that.

Less than that, yes.

Okay, perfect. Not to beat a dead horse with the whole inventory; but on the towable side, the one thing I am hearing a little bit differently in the market is not just that dealer inventories are high, but that finished goods inventories at manufacturers' lots are also high.

Could you shed any light on what you are hearing or if anything at all about finished goods inventories being high, and how that may or may not affect your business?

Well, you know, again, when dealers shut down -- and they shut down pretty quickly -- the manufacturers probably, at least for a day or a week or two weeks, continue to produce at levels that they anticipated. So you probably have a relatively small supply of excess inventory at the manufacturers because of the dramatic slowdown by dealers. I don't know if you can add to that, Jason?

I mean we experienced the same thing. Our inventories frankly would have come down more at the end of September if business had continued. But it kind of just shut off there for about 20 days in late September. I think the manufacturers probably experienced the same thing that we did.

I am not hearing a whole lot about high inventory levels at dealers. I'm hearing more low inventories than high inventories. Though at the OE level, the manufacturers' level, I don't think they are carrying any higher inventories than normal, at least from what we see.

A lot of the multiple units that we sell to our customers at the manufacturing level are already sold. We would know if it was different, I think.

So you would have a pretty good read on what their inventories are looking like?

Yes, because Lippert's product is all one-to-one. We sell one chassis for every trailer that is built. So it is a lot easier for us to gauge what the manufacturer is doing.

Okay,

When they build stock units, we know it. There is just not a lot of that going on. Or open units or whatever you want to call them.

Then finally, last question is, any read on the RV and manufactured housing industry sequentially from September to October?

I think they have continued slow. Again, you're going into slow, a seasonally slow period, although October is usually a good month. But this year, our sales are definitely down in October from last year. But again, when you try to pro forma out the FEMA sales, they are down just slightly.

(multiple speakers) the two factors. You have FEMA business that you have to pro forma out of last year; and then you have to look at the current year. The current year is slower than last year. But even that is a very difficult comparison. Because when FEMA started there were a lot of sales that you maybe cannot directly relate to FEMA. Such as sales by contractors who were going down into the area to buy, to repair, and to clean up. They bought RVs. There was a lot of RV purchases last year that you can't directly attribute to FEMA but were definitely -- probably caused by FEMA. So sales comparisons are just almost impossible to make.

Yes, but from what your estimation earlier excluding that impact last year, sales would still be down just slightly?

Yes.

Okay, great. Thank you very much.

Scott Stember with Sidoti & Company.

You mentioned in the press release and in your comments about closing (inaudible) factories. Can you maybe talk a bit more about that, one?

Number two, is there a possibility of any further closures? Where you stand right now, what would you say your capacity utilization is on the RV side of the business?

I'm going to let Jason -- I'm going to let you answer all three of those. The first question is the three factories that you closed; you want to just characterize?

Yes, I think we were in a mode to continue to close factories as we have over the last couple of years that we have been seeing a lot higher levels of efficiency in all of our plants and products. We have been closing facilities for the last three years, just continuing to consolidate operations and become more profitable. So we were kind of on track to do that, regardless. The slowdown in the industry here recently didn't really push us hard to do it one way or the other, so.

Maybe a little sooner, but --.

We maybe moved it up a month or two. Then secondly, are you anticipating closing any additional factories?

Not other than the ones you discussed earlier in the conference call. I think Fred mentioned the one that we were going to close that had the gain.

Right. Scott?

The last question, sorry to bombard you there, the last question was about the capacity utilization on the RV side, where you stand?

Maybe I can answer that a little bit, and Jason could be more specific. But I think overall, before the slowdown, and before closing of those couple of factories, we were probably on the order of 70%. You know 65 to 80%.

Again, that is 70% on one shift.

One shift, that is exactly right.

You've got to remember, last year when FEMA ramped up, we went to two shifts, we worked seven days a week, so capacity is a wishy-washy number. You can do what you have to do. We have a lot of factories. If we're busy in one factory, we can always produce at a different factory if need be, use transportation. But as far as efficiencies, we're probably down at the 70% level and would like to be up at the 85% level.

I think it is important to note that at Lippert we don't run any second shifts right now. So we have got a lot of available capacity if we needed to fire it up and get it running.

And if business does pick up -- I think what, Scott, as you are you're getting at -- you will get probably a pretty good surge in margins; just like we experienced a downward surge when we lost the cream of the crop (indiscernible) the last 10% of production.

That 70% figure was right now on a single shift basis?

Right. Yes.

We are coming up to the Louisville show in a couple of weeks or three weeks or so. Obviously you guys have had a whole slew of new products over the last couple of years. Is there anything new that you can talk about maybe?

We will surprise you at the show.

All right, that's all I have now. Thanks.

[Desoi Tinmen] with Heritage Capital Management.

I had a couple questions. In regards to the specialty trailer facility in Indiana, I think we said on the last conference call that you would possibly use that for other components.

Yes; and we are.

We are?

So we didn't shut down the factory, that may be just a [misstatement].

We shut down the product line. The factory will be doing painting for some of our other products that we're presently outsourcing.

And some other work as well in the slide-out area and other things. So it will be utilized (multiple speakers).

We have already moved our slide-out operation in that facility and are painting our own product now, so.

All right. Then we talked about the improved working capital to take down the inventories and take down the receivables. Do we have any goal for the end of the year maybe in terms of dollar amounts or DSOs, inventory turns?

We do but we don't give guidance in that sense. The only thing we can tell you, it will -- debt will be lower and inventory will be lower by year end.

All right.

In receivables, really it is not so much that we were so good and improved it this quarter. It's that our sales were down relative to last quarter, so our receivables came down. We were at about 20 days, give or take, sales and receivables at the end of last quarter; and the same, give or take, this quarter.

All right. Historically, we keep talking about when we go and talk to the customers, are able to get price increases, but most of the time are passing on the increased cost just to them. We're not getting any additional benefit. Is there going to be a point where we're going to be able to go to our customers and maybe get some incremental margin with these price increases?

We try to do that two ways. We continually try to improve our efficiency, which would help [and give] us some margin back. When you -- every once in a while you have to reprice a product. At that point, you try to work with the customer and try to get some margin back. But again, it is a give and take with your customer. I don't know if you want to add to that, Jason?

No, we just try to do the best we can. I think the point you made earlier about, especially with a lot of the new products, as we continue to get more of the new products and get some time under our belts, we're gaining significant, you know --.

Experience.

You know, we're just gaining a lot better materials efficiency and labor efficiency and things like that as we get building product and get more experience doing it.

I think the other way we improve our margins is by filling up the factories. So as Scott Stember asked before about the capacity utilization, if we are at 70% and we can move got closer to the 85% we will spread our fixed costs over a larger sales base and improve our margins.

All right, thanks a lot, guys.

Brett Henderson with Bonanza Capital.

Good job in what seems like a pretty difficult environment right now. Fred, I missed the manufactured housing content per unit that you guys were estimating.

I think it was $1,630. Let me just check. $1,675. Right. Last quarter it was $1,630 and it increased to $1,675 -- about. Again, we don't have the September production statistics from the industry, so it is an estimate.

I got you. Okay. Then any color on how revenue compares just for our models? It is kind of hard to model out the next two quarters. How is revenue for October compared to last year?

As we said they were down. We didn't give a percentage, but they were down. We had to pull our FEMA business, we probably had $10 million of FEMA business last October, and on top of that we were down.

So $10 million of FEMA; ex that out; and then down a little bit.

Right.

Okay, thanks. Good job, guys.

(OPERATOR INSTRUCTIONS) Jamie Wilen with Wilen Management.

I would just like to reiterate; nice job of creating operating flexibility to handle a soft patch in the industry. Is this creating any more acquisition opportunities for you? (inaudible) don't quite have the same financial strength that you do, and --.

The acquisition market has been active and we have looked. In fact, we seriously looked at an acquisition in the third quarter which we did not make. In fact, we took some write-off in the third quarter on it. So the market is there. It is just a question whether or not we will pull the trigger or not. We think a down market like this gives you some pretty good opportunities, and that is what we are looking at right now.

As you evaluate a multiple of EBITDA, how do you handle -- obviously 2005 is great, '06 not as good, and (multiple speakers) ?

That is the negotiating problem that you face. A buyer still looks at his company for what was last year, based upon last year's numbers. And you're looking at current numbers; and you have to try to work out some happy medium.

Are there a lot of other people that you're competing with us in this endeavor?

Very few. There's very few other buyers for our type of companies, the smaller family owned company. (inaudible) they want to be very aggressive, they will probably get the company rather than ourselves. But we tend to buy under our formula of acquisition; and we have been very prudent in that over the years. We will probably stick with that.

Beautiful. Last question as far as Happijac. You mention that margins may well improve as you move forward. Are these cost savings -- are they very easy margin improvements that are very tangible? How much of a margin improvement will we see over the next 12 months in Happijac?

We don't talk specifics, but there have been things that Lippert and Happijac are working together on, in the way of shipping, in the way of production, and have already made some nice margin improvements and will continue to do so. I don't know if you want to add to that, Jason?

No.

Just to put it into perspective, though, it was a business that did $15 million, hopefully it will grow. So a margin improvement isn't going to show up significantly in Drew's numbers, but it will just make it a much more attractive acquisition.

Very good. Thanks, fellas. Nice job.

Arnold Brief with Goldsmith and Harris.

In general terms, could you discuss the importance, as you see it, of new products the next two or three years versus the last two or three years?

You know, new products as well as acquisitions as well as market share all go hand-in-hand. We do have fairly high market shares now in many of our products; and yet in many products we have 15 and 20 and 25% market share. So we have room to grow.

But we will continually look for new products whether they come from our own development or whether they come through acquisitions. That is part of our business plan. That is something that Jason and David Webster look at every day, as to what they can do to increase their importance to the customer. I don't know, Jason, if you have any specifics you what to add to that.

No, I think we have introduced -- on the Lippert side anyway, we've introduced several new products over the last few years. When I am talking about introducing new products, I am not talking about just ideas. I am talking about stuff that we have thought through, it's been accepted well, and we have generated some significant sales on.

We have got several of those that are going to come out in the next several months. We are introducing a lot of those at Louisville. So on the Lippert side we're real optimistic about new products.

It's the same on the Kinro side. They have some projects they have been working on for a while. We are hoping that they will eventually come through and that will add significant volume as well. So both companies focus on new products on a regular basis.

Thank you.

At this time there are no questions in queue. I would now like to turn the call back over to Mr. Leigh Abrams for closing remarks.

Again, I thank you for listening in. We were somewhat disappointed not being able to report another record quarter, but we're really quite pleased that we did as well as we did; and we're very optimistic about the future particularly into '07.

So again we will speak with you at year-end. Have a good holiday season and a good new year. Thanks very much.

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