LCI Industries (LCII) 2007 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to the first quarter 2007 Drew Industries, Inc. earnings conference call. My name is Rob and I will be your coordinator for today. (operator instructions). We will conduct a question and answer session toward the end of this conference (operator instructions).

At this time I would now like to turn the call over to Mr. Ryan McGrath with Drew's Investor Relations.

Thank you. Good morning everyone. Welcome to Drew Industries 2007 first quarter conference call. I'm Ryan McGrath with Lambert, Edwards and Associates, Drew's Investor Relations firm, and I have with me today member's of Drew's management team including Leigh Abrams, President, CEO, and Director of Drew; David Webster, President and CEO of Kinro and a Director of Drew; Jason Lippert, Chairman, President and CEO of Lippert Components; and Fred Zinn, Executive Vice President and CFO of Drew.

We want to take a few moments to discuss our quarterly results. But before we do so, it is my responsibility to inform you that certain statements made in today's conference call regarding Drew Industries and its operations may be considered forward looking statements under the securities laws. As a result I must caution you that actual results and events could differ materially from those described in the forward looking statements. These risk factors are identified in our press releases and in our forms 10-Q and 10-K 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 those listening on the internet. We're certainly very pleased with our first quarter results even though our net income is 6% lower than last year's first quarter. We should point out that the decline in our first quarter profits is solely because of lower sales, which were down 17%. Approximately 10% of the 17% of the current year's decline was due to the absence this year of hurricane related sales that occurred in the 2006 first quarter, while the balance of the sales decline is attributable to the 2007 industry sales declines in both the RV and manufactured housing industries.

For the 2007 first quarter, wholesale shipments of travel trailers and fifth wheel RVs, which are Drew's primary products, were down 18% while for January and February 2007, the last months for which statistics are available, manufactured housing production was down 38%. Our sales decline of course would have been much greater if it were not for the acquisitions that we made this year and last, as well as sales and products that we introduced within the last two years from our continued -- as well as our continued market share gains.

When I look at the quarter I really see two distinctive elements. First is the sales decline, and second are the actions taken by our management team to offset the sales decline and the related drop in profits. Profits actually would have been down substantially more if it were not for aggressive actions taken by David Webster and Jason Lippert, the CEOs of our two operating subsidiaries. Significant cost cutting measures were instituted including the closing of factories and the shutdown in September of 2006 of the unprofitable specialty trailer operation in the Midwest. However I should point out that our Zieman specialty trailer operation on the West Coast remains very profitable.

In addition, we improved margins on our new products. We also took a variety of other steps that helped to offset the effect of the 2007 first quarter sales decline. We continue to face profit pressure as raw materials continue their upward trend after a brief reprieve in the fourth quarter of 2006. Steel, aluminum, and other raw materials have increased each month during 2007 and as a result we are currently attempting to get additional price increases from our customers, albeit without margin to help offset these increases.

Most important, though, we continue to examine every factor and every cost to see what additional costs we can reduce. We are confident that these cost cutting measures will help our operating results while industry sales are soft, and will significantly benefit us once the industry improves.

With respect to the RV industry, beginning in the summer of 2006 dealers apparently realized that the level of retail sales that they had been expecting, and for which they had accumulated inventory, were not going to materialize. Accordingly, beginning in August 2006 they began to reduce inventories by buying fewer RVs from manufacturers. This immediately affected our sales which were down significantly in the latter part of 2006.

During this timeframe and during January 2007 RV retail sales, although down from 2006, exceeded wholesale shipments to dealers and thus RV dealer inventories have since declined but are probably still a little bit too high. If retails are strong during this year's prime selling season that is just now beginning, we would expect the RV industry to being its recovery.

We are also more optimistic about several factors that negatively affected the RV industry during 2006. Gas prices, although extremely volatile, are for the moment slightly lower than the record levels of last year. Interest rates are stable and the fear of gas shortages has eased. However the consumer confidence index, which is a barometer of future RV sales, has recently been down.

Nevertheless we continue to be optimistic because the likelihood of long term growth of the RV industry is extremely positive due to strong demographic trends with almost 20 million people, or 11,000 people per day, turning the age of 50 within the next eight years. This of course is the prime buying group for RVs, although in the last several years the 25 to 45 year age bracket has become the fastest growing RV buying group and this could lead to even further growth. By 2010 industry experts predict that RVs will be owned by 8.5 million households, which is an increase of 8% which outpaces the overall U.S. household growth of 6%.

The best that I can say about the manufactured housing industry is that I just don't know. There are several indications that the industry has finally reached bottom, but that has been said so many times in the past that we actually remain skeptical. One of our publicly traded customers recently announced that they have seen an increase in their backlogs for manufactured homes, although we cannot say that we've seen it yet.

Although somewhat positive -- another positive indicator for the manufactured housing industry are the problems in the sub-prime mortgage market, which may make it more difficult for certain buyers to purchase a site built home, and thus hopefully they will turn to a manufactured home. This is consistent with reports from several of the larger industry lenders that are reporting a significant increase in manufactured housing mortgage applications. We still have to see these applications actually result in sales of manufactures homes.

However the most compelling positive factor for the manufactured housing industry is that today's manufactured home is a quality home and is almost certainly the best buy in the housing industry. Unfortunately, relatively few people know about this. As we've often said in the past, the public is just not aware of the strides that our industry has made in the last 10 or 15 years in improving the quality, the appearance, and the comfort of the house.

At a recent manufactured housing industry meeting one of the main topic discussed was the importance of commencing an effective generic advertising campaign that should both expand the industry's current market base and also help to convince zoning officials to allow manufactured homes to be sited in their communities. Increasing the customer base of manufactured homes through an informative advertising campaign should also help with the financing problems that the industry has been experiencing.

In addition, as the baby boomers reach retirement age in greater numbers in the next several years, we expect the manufactured housing industry to begin to recover from today's very depressed levels. Even today many retirees sell their primary residence and use part of the proceeds to purchase a manufactured home in a warmer climate, and then use the balance of the proceeds for retirement purposes. However with the slow down in the market for site built homes, it has become more difficult for home owners to sell their site built homes and buy a manufactured home. We think this is just a timing issue.

Last quarter I speculated that our experienced management team would take aggressive action to help mitigate the effects of the slower industry sales. And as our results indicate, I'm certainly gratified that to date we have been extremely effective in the actions taken to help us remain solidly profitable and to be in a position to resume our growth once the RV and manufactured housing industries recover from their current slump. And we're really fairly confident that that will happen.

Finally, as I say as often as possible, Drew's success is attributable directly to our extraordinary operating management team, headed by David Webster and Jason Lippert. David and Jason are responsible for the continued market share gains and new product successes at both Kinro and Lippert. As always, a good management is a key to successful business and I truly believe that we have the best.

Over the last several years both of our subsidiaries have gained market share, introduced new products, made great acquisition, and most importantly have simultaneously kept 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. Despite the 17% decline in our sales, net income decreased only 6%, or $600,000 as shown in the press release. And as Leigh said, that was in great part due to cost controls and operating and efficiency improvements that were implemented.

Recent acquisitions were another key factor aiding results this quarter. We believe that the bed lifts that are made by Happijac, and the suspension products made by Trailar and Equa-Flex, both of which we acquired recently, have significant advantages over competitive products that are available in the marketplace. And as a result they continue to capture increasing market share. This quarter they added about $0.02 per share to our EPS. While this a relatively small amount these are just two in a string of many successful small acquisitions that we've made over the years and each has added incrementally to our bottom line.

Another item I'd like to highlight is the closure of the Indiana specialty trailer operation. Comparative results this quarter benefited from the illumination of last year's $800,000 pre-tax loss of this facility. It's also worth noting that the pre-tax loss of this operation was $1 million in the 2006 second quarter and $1.2 million in the third quarter of 2006. And those losses won't recur this year. Further, as we said in the past, the specialty trailer operation commanded a significant amount of management attention, which is now being put to much more productive use.

Also benefiting our gross margin this quarter was a decrease of about $1 million in our worker's compensation costs. We're largely self insured for worker's comp, so this expense and the related accrual fluctuate with the claims experience. But we put a lot of effort into our safety programs and we're pleased with the improvement in this area in the first quarter.

One measure of our success in expanding our market share has been our content per industry wide RV and manufactured home produced. In the RV segment our estimated content per RV increased to $1244 in the past 12 months from the $1212 reported last quarter. In the manufactured housing segment the industry production statistics from March 2007 have not yet been released, but we estimate that our content per home has increased to about $1850 over the last 12 months from the $1784 reported last quarter.

Last quarter we mentioned that we had identified a number of facilities which would be consolidated into other existing facilities in order to streamline our operations. We've analyzed the cost associated with these closures and we recorded a modest amount of severance as well as a net pre-tax charge of about $600,000 to write down the book value of those facilities to their estimated fair value.

Although real estate markets where these facilities are located is uncertain and these facility sales could take some time, we expect to generate approximately $15 million on the sale of these facilities. And certainly that will go a long way to offsetting our capital expenditures. As we said in the press release, we expect capital expenditures to be about $15 million this year, which is down from $22 million last year and more than that the year before.

In addition, in 2007 -- September of 2007, nearly $4 million becomes due on a note that we received on the sale of a facility last summer, which we leased back for about a year. For accounting purposes we deferred a gain of nearly $3 million on that sale and will record that gain when the lease ends and we collect the note.

These asset dispositions, coupled with reduced capital expenditures, should lead to significant reductions in interest expense in the coming quarters. Baring sizable acquisitions, we expect to see the continued decreases in our interest expense. This quarter interest was down $200,000 from last year's first quarter, and that's despite $37 million that we invested in acquisitions since the early part of 2006.

We've also focused on controlling interest expense by reducing inventory levels by more than $18 million over the past year. Further, the decline in working capital, combined with the reduction in capital expenditures and facility sales, should help improve our return on assets in 2007.

The other benefit of improved asset utilization and strong cash flow has been substantial reductions in our debt levels. On March 31, our total debt was about $52 million and that included $11 million outstanding under our $70 million credit line which we swapped from a variable rate to a fixed rate of about 4.4%. In connection with this low interest rate swap, we maintained the $11 million loan balance although we had more than $11 million in invested cash at the end of March.

We also had $26 million of senior promissory notes outstanding at an average effective rate of about 6%. These senior notes are part of a shelf-loan facility with Prudential under which we can, with the approval of the lender, borrow an additional $25 million. Finally, we had about $15 million in real estate and equipment loans which were at an average rate of about 5.8%. So in total our debt, net of the invested cash, was about $41 million at the end of March 2007.

Now I'll take just one minute to cover some of the other areas that will impact results over the balance of 2007. Depreciation and amortization expense aggregated $15.7 million in 2006 and in 2007 it should aggregate between $18 and $18.5 million, more than offsetting our planned capital expenditures.

Our effective tax rate for the first quarter of 2007 was 38.7%. In 2007 the federal tax credit on domestic manufacturing activities doubled to 2% of manufacturing related pre-tax income. However based on the allocation of our income among the various states and the state tax rates in those states, I expect higher state taxes to offset much of the federal savings, leaving our anticipated effective rate for 2007 at the 38.7%, which is just below the 38.8% that we recorded in the full year of 2006.

As we've mentioned in prior calls and in all of our filings with the SEC, we are in the process of tax audits in several jurisdictions and each quarter we review our tax positions based on available information and we update our tax reserves accordingly.

Now I'll turn it back to Leigh.

Thank you Fred. Rob, if you could open the phone up now for questions, we'd be happy to answer or try to answer them.

Certainly. (operator instructions) Your first question is from the line of John Diffendal of BB&T.

Good morning guys.

Hi John, how are you?

Doing fine. I guess clearly you had a tremendous improvement in your RV margin and going back over several years. I guess you indicated in the fourth quarter that you looked to cut costs about $4 million. Was that number higher in the quarter than you'd expected? I just want to get a better stance on whether you think you can keep a 12% plus margin on a sustainable basis going forward.

Let me first start out by saying we tackled costs everywhere, so there was one major area. We tried to look at costs everywhere possible and reduce them wherever possible. As far as margins going forward, as we indicated we do have some price pressure from raw materials which we're attempting to pass along and a lot is going to depend on how successful we are in getting those price increases. I'll let Fred maybe add a little bit more detail to that.

Sure. In terms of the cost cutting it's a little hard to distinguish between the cost cutting on one hand and operating efficiencies on the other, but I would say generally we're tracking what we described in our last conference call. We've identified some additional cost saving measures and hopefully we'll see it accelerate a little bit throughout the year.

You mentioned importing. How important was that in the results?

Modestly import. I think you recall from our last call we said we were disappointed with the margins on some of our newer product lines. And in some of those product lines we do a fair bit of importing. We're not talking about a huge amount of sales, but we did pick up some lower prices on some of those imported products that probably saved us several hundred thousand dollars this quarter.

Great. Thank you. I'll let others ask about some things.

Your next question is from the line of Kathryn Thompson of Avondale Partners.

Great, thanks. Just to clarify, by all records going back this is the best quarterly RV operating margin we have going back to fiscal '01 on a quarterly basis. Is this the best margin in the company -- since the company's been in the segment?

I don't think so. I think if you went back a little further, maybe a lot further, you'd find some higher margins. You have to remember, this quarter -- for the past two or two and a half years you've seen our margins depressed a little bit by the specialty trailer operation which currently is no longer impacting the RV segment. And you've heard us talk about the lower margins on some of the newer product lines which improved this quarter. So you put it all together and it could make a difference.

It's also during the growing period of the RV industry we were opening factories and incurring startup costs, which we didn't have this quarter. So a lot of the positive negatives that were out there for the last couple of years have disappeared and they've all kind of hit this quarter.

Yes, it seems like this is the first quarter where you've had -- in probably six or seven years -- where you've had it -- the first period, say, for the past. Since August you've had a chance to really focus on operations a little bit more closely because you've been in such an explosive growth. But tacking a little bit more on John's earlier question, would this improve margins in Q1? Are we seeing more a fundamental change in the margin segment makeup? And this is really more so, so we can get a sense on how we should think about modeling going forward.

I wouldn't say it's a fundamental change. I think you look back a few years -- and I haven't broken it down by segment and obviously I don't recall it. But go back to 2004's first quarter before we started with the hurricane issues and the spiral in the raw material prices and I think our margins -- our gross margin in the first quarter of 2004 was a little higher than where it is now. Our operating margin was slightly higher and I don't think there's anything special in that quarter. So I think we're just now starting to get back to where we were two, three, four years ago. But as Leigh said, we are now facing another round of spiraling raw material costs. So we'll have to see how we fare in that process.

Okay. What are you hearing in terms of overall towable retail sales trends in the field?

I'll ask Jason and David. Maybe Jason, could you start on that?

Retail trends, I don't know. I mean I'm not hearing anything that's out of the ordinary. I mean I'd classify it as average right now. We're not hearing anything that sounds ultra-bad and not hearing anything that sounds better than normal or better than what's expected this time of year. So I'd just kind of classify it as in the middle of the road right now.

David, do you have anything to add to that?

No, not really. I mean, I'm not hearing anything as far as the retail trends. There's still some inventory out there, but we're running right along. Nothing great and nothing real poor.

So it would be fair to characterize that sales appear to be flat year over year?

It's hard to say. I think the selling season is just starting and we really need a few more weeks to see what's going to be.

In terms of overall numbers, Kathryn, a lot of what we get we're a few steps away from the retail sale. So a lot of what we hear is what you write and what John writes and all the other analysts write. So we couldn't more than hear what you're saying.

Okay. And finally was -- are you willing to give out the past utilization numbers, and if not could you at least give us a sense of whether production rates have improved in year over year?

I'll take a stab at that and then maybe ask David and Jason to chime in. Manufactured housing capacity is certainly low, capacity utilization is certainly low, probably less than 50%. In RVs it's also not extremely high but we've closed factories and I think that's one of the reasons for our improvement is we've combined sales from various factories and put them into existing factories and that helped improve our utilization and improve our margins a little bit. And we'll continue to do that as the year goes on.

I don't know, Jason, do you want to add anything to that?

Yes, I think that we are utilizing capacities probably as good as we ever have just from the standpoint that we have closed facilities and consolidated some regions into one or fewer facilities than what we had once operated in. And some of the acquisitions that we made over the last few years, we haven't acquired a whole lot of brick-and-mortar there. So some of the times we're taking some of the acquisitions and filling available capacity that we have in our RV and mobile home factories.

David, do you have anything?

No, not really. We haven't had to close any factories or anything and utilize what we've had and, like normal [inaudible].

Great. Thank you very much.

Okay.

Your next question is from the line of Scott Stember of Sidoti & Company.

Hi Scott. How are you?

Good, thank you. Back up to the point of the capacity utilization, if we do see a pretty significant rebound retail demand and production rates need to come up for the back half of the year heading into next year, with everything that you've done, particularly on the RV side, where do you stand as far as moves that you might have to make towards increasing capacity? Or if that at all?

I'll take a stab at that. There's two types of growth. You could have explosive growth like you had when you had hurricanes, or you can have just normal growth. Explosive growth when the hurricanes came along, both Kinro and Lippert were able to go to two and even three shifts; and went from five days to six and seven days and they handled it with minimal interruption. Slow growth we can handle very easily with the existing capacity we have. We still have some unsold factories. If we had to, we could always reopen one. And I just don't see capacity as a problem. Second shifts are definitely doable. We've found we can live with the second shift. Definitely doable and just not a problem; so I don't consider capacity to be a problem.

David or Jason, do you agree or disagree?

I agree. We -- at Lippert we don't really run any second shift so -- and our second shift is available to us at any given point in time. And, granted, there's a little bit of startup there hiring a new workforce and training some managers and things like that, but it's really not a big hurdle for us to start up second shift at any one or multiple facilities that we operate.

And as far as the April sales numbers that you guys talked about being down 5%, with what we're seeing in the manufactured housing side, the free fall, is it safe to assume that the RV sales [inaudible] last year, correct?

We need to wait and see. We still haven't even gotten our final sales for April. That 5% is just an estimate we have a couple days' reporting to look at it. It's probably 4% to 8%. But it probably has been a little stronger on the RV side than the manufactured housing side. And don't forget we have acquisitions in there as well so our comps to last year aren't just industry related.

And April had another day this year which could account for as much as 5% with that, so we could be down 10% on a day to day basis.

Good enough. And as far as new products, specialty trailer axles and axles for trailers, are those still the two big items out there which are doing well?

Jason, you want to take that, specialty trailer axles?

Yes, and to kind of get to your last question, Scott, with respect to RV being up, you've got to remember too that like Fred said there's acquisitions that are always getting added into that pot. And we're invested a lot of the time not only in cargo trailer axles, but a lot of cargo trailer chassis and chassis components there too, which is constantly adding to that RV basket. So the specialty trailer parts and specialty trailer axles are a continuously growing segment of our business and it's going well and we feel positive about continuing to take more market share there.

Okay. Last question and I'll leave. Big picture -- FEMA, just expand upon what you mentioned in the press release, what you've seen?

I'm sorry, could you explain?

FEMA, and them putting units back into the market?

Well so far it's been very small, a couple hundred units at a time. They used -- they're only used units; they're not new units. The used market is very strong in the RV industry. If anything, some of the field surveys are saying they're having trouble getting used product. But overall it's certainly something we would prefer not to see. There's a lot of dealers that are unhappy, a lot of manufacturers that are unhappy about it, but I don't think it's going to have a significant effect on the industry.

All right, that's all I have. Thank you very much.

Okay.

Your next question is from the line of Cheryl Cortez of SIG.

Hello.

Hi Cheryl.

Most of my questions were answered at this point but I was just wondering if you're still considering any acquisitions in the future. I know that this time is really tough, but --

We're always looking at acquisitions. They take a long time and you never know if you have an acquisition until you write the check. So we are constantly looking, constantly talking to people, and of course if one occurs we'll announce it.

Thank you.

Your next question is from the line of Ed Aaron of RBC.

Thanks. Good morning guys.

Hi Ed. How are you?

I'm great. Wanted to just ask a little bit about your ability to pass on raw material costs at a time when your margins are showing solid improvement and presumably some of your customers aren't. Can you just comment on that first, then I may have a follow up question to that.

Well it's hard at any time to pass along a price increase, whether you have good margins or you don't have good margins. But as we said, the first quarter was the result of a lot of effort by our management team to reduce costs. But when raw material prices go up you just have to pass them along, particularly at the rate they were going up and management team will keep trying to do that.

David, I don't know if you want to comment on that at all?

No, not really. When you have raw material price increases you continually have to go to the customer, but it's a battle. When you show the numbers that we're showing and the things that we do it's -- to be competitive in the market you still have to be able to produce it and get it to the customer with a bottom line that you all look for. So it's a struggle.

And you know as I always say, we don't pay dividends. We take our profits, we put it back into the business to try to improve the efficiencies of our plants to do everything we can to make a better product at a reasonable cost, so it's something that's ongoing and it's an ongoing discussion with customers and we really try to work as a partnership so that we stay healthy and we can continue to give the customer good service and good quality products.

Can you comment on any feedback that you've received thus far?

Jason, do you want to handle that?

I haven't received any feedback but we try to keep our business separate with our customers. And with respect to margins too, I think one of the things that's important to consider that we haven't talked about is we invest a considerable amount of money into R&D and a lot of the products we're developing in our research and development branch of our company, at least on the Lippert side, we're looking at developing products that are unique, that are patentable, that can bring higher margins to help offset some of the tight margin stuff that has been more historical type products with our company. So I think from that standpoint we've, over the last few years, developed a ton of real solid new product that compliment our RV chassis and slide-out products and have added good margin from that standpoint as well.

Okay, thank you.

Okay Ed.

Your next question is from the line of Jamie Wyland of Wyland Management.

Hi fellows, great quarter.

Hi Jamie. How you doing?

Very good. Frank, could you repeat the number on the Indiana facilities, how much that cost [inaudible] second quarter?

Yes. Second quarter was $1 million and third quarter was $1.2 million.

And then it was done by then?

Yes. It might have been, I don't know, $100,000 or $200,000 in the fourth quarter, but essentially nothing.

Okay. In talking about the spiraling raw material costs, could you quantify what you mean by "spiraling"?

Well I'll give you just an overview. In terms of steel, which is the one that's in the papers the most, the price is -- the cost of steel today is three times, or a little bit more I think, than what it was three and a half years ago. And certainly that is not an ordinary-type inflation.

But how much have these raw materials increased in the last three months?

Maybe, Jason, you could --

Yes. On Lippert's side, approximately 10%. And I think on top of that we've had prices -- I know aluminum particularly is going up as well. So it's just steel. It's across the board.

And do we have any programs for material substitutions or being able to make the product at a lighter weight to have less material going into the same quality product?

I think that's something we're engineering more. We're always looking at trying to put less material into the product but you have to maintain [inaudible] obviously.

Kinro's introduced a new front and rear for RVs that they can make out of a composite material that is lighter than the current material that is used. And as we indicated last quarter, they got their first order on that and I know David is continuing to work on that. And I think Jason has introduced new composite material for chassis and walls and stuff like that. So we're looking at that kind of stuff, but that's not an easy job to do.

On the Happijac side, it seems like an incredible product and it seems like you have it down in market share. Do you and is it -- as I've been to the shows -- is it just in the low to mid end, or is it throughout the entire spectrum from low to high end vehicles?

Jason, you want to take that?

Most of the -- the product's being used on both the motor home side of the business and the towable side of the RV business. And as of the sport trailer product, which is predominantly what the product is used in is just the sport and the ramp toy trailers, the towable and motor home guys, that they're building. But that's been one segment of the market that's continued to increase a lot over the last 12 to 24 months relative to some of the conventional trailers that have actually shown a slight to modest decline in volume. So as that segment of the industry continues to develop and grow as it has, it bodes really well for the Happijac bed-lift product.

What kind of market share do we have and are we patentable on our product line there?

That product is patented. It's one of the reasons we acquired them; they had a very, very nice patent they had just gotten a few months before we acquired them.

Yes, we should have a very high market share in that product line. There are other competing products, but they're just not anywhere near as good as this one.

Okay. And the growth of that market, could you guess at it?

It's tough. They don't give individual statistics for toy haulers, but from our sales and from everything we hear and read about, it's probably the fastest growing segment in the RV industry.

I can't recall exactly the numbers, but I think if you look on the RVIA website they do talk a little bit about the shipments of -- quantify the shipments of toy haulers, including even the strong points Jason said.

Any other new products that you have on the horizon over the next 12 months?

We don't want to give any secrets away. As we introduce them --

We did make that acquisition in January of Trailer and Equa-Flex and they had a wonderful, also patented, suspension product which Jason's customers have really latched onto and started buying in good numbers.

But you know, Jamie, as we indicated, we're always looking at new products and we do expect to have some new products to introduce.

We spend a lot of money in R&D and the only reason we do is because we're trying to bring new products to market every quarter and trying to add value to our existing product lines.

Great. Well quality of management is certainly more evident in a downturn than it is in a boom. You guys have done a great job here.

Thank you Jamie.

Your next question is from the line of Jeff [Garnavalie] of Tribeca Global Management.

Hi. Again, terrific, terrific job on the cost side. I just wanted to go through just very quickly the math in terms of what you think about this going forward. But if I look at the net sales in the RV segment they were down about $20 million or so, which I guess you know would mean your contribution dollars were down probably [inaudible] $5 million, something like that. And yet your operating profits were up almost $2.5 million, so am I correct in calculating or assuming that you were able to actually remove somewhere in the order of $5 to $6 million of costs?

No, I think your overestimating what our contribution margin is. It's probably a little bit less than that. There are also other factors like the hurricane business we had last year was probably a little lower margin. The new products that we added were mostly in the RV industry, so as those improve even up to more normal levels, we see a boost in the RV segment. The RV segment also includes the specialty trailers. So if you put it all together I think you're overestimating significantly the impact of the cost [inaudible].

And, again, a lot of the negatives were not there. We did not have startup costs because of growth. We didn't have the specialty trailer loss in the quarter.

And the worker's compensation was largely -- the pickup there was largely in the RV segment as well. That's something that varies. I think generally we've done a good job in our safety programs and hopefully worker's comp will stay low, but it does fluctuate.

And depreciation for the quarter was up over last year, was about $1 million or so, right?

I'm sorry. I couldn't hear your question.

Depreciation year over year was up about $1 million or so?

Yes, and most of that -- not all of it, but most of it -- is because of acquisitions. It's depreciation and amortization and I think with the acquisitions we made, especially the patented products, a lot of those acquisition costs are amortizable.

Okay. So are you willing to actually give a number in terms of how much -- or a range -- how much you were able to take out this quarter?

I'm not going to give you a number but I can say we're tracking pretty well with what we projected when we spoke last in February. We estimated we'd take out about $4 million in cost savings at that time and we have identified some new opportunities. So it's in that same range. It's not triple that.

And again, in addition to cost savings, there's been efficiencies instituted as well, both in streamlining products and things of that nature.

And the $4 million, that's an annualized number?

Yes, that's an annualized number. But that doesn't include the efficiency improvements. When we close factories, at least over time, we'll gain some more efficiencies.

Okay. Thank you.

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

Yes, just a follow-up. I want to make sure we don't get caught up in a trap here; you're trying to do some modeling on the RV side. You go back to '03, I mean, typically there's a seasonal improvement between Q1 and Q2 in margins, and I just -- when I look at almost peak margins in what's normally a weaker seasonal quarter -- and I understand what you're saying about the acquisitions, and the new products have better margins; when you look at Q2 last year and back out the specialty trailer, you had a margin, I guess of about 10.6%, according to my records there.

I guess what I'm looking for is a little help from you guys in terms of whether we should be thinking this is something that a 12% plus in the margin, given the other things on price increases and raw materials -- should we be looking at something that's more similar to a 10, mid-10 kind of margin in the second quarter, rather than trying to throw something that you had in the first quarter?

Well, a lot's going to depend on how successful we are in getting price increases. The higher prices of raw materials that we purchased in this first quarter will start hitting in the second quarter, so we'll have to see if we're successful in passing along those price increases.

That doesn't imply we could be less on the margin. The danger we have is looking at a 12% plus margin in Q1 and assuming that goes forward.

That is a bit of a danger. We do have some opportunities for additional cost savings. But we're, as we said, facing higher raw material costs. We had workers' comp that we had a very good quarter in and we don't know if it will continue.

But you also have seasonality, which goes as a plus if some of these negatives that we're talking about, because you don't get a price increase until you ask for it. So, it's very hard to parse all of the moving parts, to predict, and as you know, we don't give out predictions.

I hear you, but I'm on the edge here.

I know, but you that raw materials represents almost -- or, a little bit more than 50% of our sales dollars. So, every movement in raw materials overshadows a lot of other things. It does really depend on how far raw materials continue to go up, and how quickly we can price increases.

Okay. Thank you.

Your next question is from the line of Arnold Brief of Goldsmith and Harris.

Can you give us some idea, in terms of some of the new markets, what progress you made? I'm thinking of the new modular motor homes.

We continue to make progress. It's been slowed because of the slowdown of the industry, but we continue to introduce new products. Kinro brought back bath products that they sold only to manufactured housing industry. They've brought that in now, and they introduced it last year or two into the RV industry, and have made some very nice progress on that. The slide-out systems that we sold only as towables the last few years, we've picked up probably more than 25% market share in the motor home industry, and we're continuing to push on that. Axles, which we had no market share at all in the last 18 months to 2 years, we've picked up significant market share, both in the RV industry and now are picking up market share in the specialty trailer business, and those margins, particularly in some of these new products, were quite low when we first introduced them, and our goal in '07 is to improve those margins, both because of increased volume and because of increased efficiency. So, we try to tackle the problem from both sides.

Are the contributions from modular motor homes becoming significant at this point?

They're still small. We haven't introduced in the past six months new products for motor homes, but we've made significant strides in modular. It's very hard for us to tell. Some of our customers build both modular and manufactured homes, and some of our products can go into either one, like the windows. So, it's hard for us to tell, exactly; but I still say there's still both reasonably modest.

You got to remember -- motor homes, even though it has a big dollar content for retail sales, has a relatively limited number of units. It only accounts for about 14% to 15% of the total units in the RV industry; probably less than 60,000 units right now for motor homes. So no matter what you do, your sales are just not going to be anywhere comparable to what we do in towables. The biggest area of the motor homes can be your powertrain and your chassis, which could be $50,000 to $75,000, compared to our traditional truss chassis, they're probably -- average is $1500. So we're just not going to get the volume in motor homes that we get there, but it's certainly a nice addition to our overall sales volume.

Thank you.

(operator instructions) And your next question is from the line of John Baker of Ferris, Baker Watts.

Hey, John.

Hi, good morning. My question has actually already been answered.

All right, John. Thank you.

All right. Thank you.

And there are no further questions in queue at this time.

Well, again, I thank everybody for listening in, and we hope that our July quarter will also be as nice as this quarter. We look forward to speaking with you again. Take care.

Ladies and gentlemen, this concludes the presentation. Thank you for your participation. You may not disconnect, and have a good day.