LCI Industries (LCII) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2007 Drew Industries, Inc. earnings conference call. My name is Michelle, and I'll be your audio coordinator for today.

At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of today's conference. If at any time during the call you require assistance, please press star followed by zero and an operator will be happy to assist you.

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Ryan McGrath of Lambert, Edwards. Please proceed, sir.

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

I want to take a few minutes to discuss our quarterly results, but before we do so it's 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 the actual results and events could differ materially than those described in the forward-looking statements.

There are a number of factors, many of which are beyond the company's control, which could cause actual results and events to differ materially from those described in the forward-looking statements. These factors are identified in our press releases and 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 of those listening on the Internet. Today, before I begin my formal remarks, I'd really like just to take a moment to thank David Webster, our CEO of Kinro, and Jason Lippert, the CEO of Lippert. These are our two operating subsidiaries.

I've got to tell you, they've truly done a remarkable job in a down market, and for years I've ended each of our quarterly conference calls by stating how important good management is and then further stating that I thought we had the best. And I think in view of our second quarter results I'm now really certain that we do indeed have the best management team.

So David and Jason, thanks again for a terrific job done.

We are extremely pleased with our second quarter earnings, even though sales for the quarter were down 9% from last year's second quarter. Despite the second quarter sales decline, our net income increased 23% to $12.6 million or $0.57 per diluted share.

Net income for the six months ended June '07, increased 8% to $1.01 per diluted share, compared to $0.93 per diluted share for the same period last year. And this six months results was accomplished in the face of a 13% sales decline.

Our sales decline would have been even greater if it were not for sales from the newly introduced products that we've had over the last 18 months to two years; also from our continued market share gains from our existing product lines, as well as sales from five small acquisitions that we made within the last 18 months.

Our second quarter net income improvements stem from a variety of actions that we took, including our cost-cutting programs, which we are continually expanding. Over the last 12 months, we've closed 10 factories and are in the process of closing five additional factories.

Our salaried workforce has been reduced by more than 90 employees, and overhead is being reduced wherever possible through numerous small cuts which result in significant cost savings. However, despite these cuts, we're really confident that our capacity is sufficient to handle a significant improvement in both the RV and manufactured housing industries, when those industries really begin to recover.

In addition, the closing in September 2006 of our unprofitable Midwest specialty trailer operation was very beneficial. We lost about $1 million in operation in last year's second quarter, which of course we did not incur this year. On the other hand, our Zieman Specialty Trailer operation, which primarily serves the smaller, lower-cost boat business on the West Coast remains very profitable and should be even more so as a result of our July 2007 acquisition of Extreme Engineering, a West Coast manufacturer of custom trailers for high-end boats.

Moreover, margins on our Axle product sales have improved, both from the 2007 first quarter and from last year's second quarter.

With respect to the RV industry, the bulk of our sales are still coming from the towable segment of the industry. We were pleasantly surprised with the May 2007 retail sales report for travel trailers and fifth wheels, which showed a combined increase of 6%, including a 9% increase in the retail sales of travel trailers, which is by far the largest RV category.

Year-to-date through May 2007, travel trailer retail sales are up more than 5%, while fifth wheel retail sales are down nearly 6% or a combined increase of about 2%. On the other hand, wholesale shipments of travel trailers and fifth wheels are down about 16% through June of '07. In fact, for the nine months ended in May '07 -- that's the last month that information is available -- retail sales of travel trailers and fifth wheel RVs have exceeded wholesale shipments indicating that dealer inventories of travel trailers and fifth wheel RVs are shrinking and thus preparing for the way for recovery when consumers begin to buy RVs in greater numbers.

Even though retail sales of total RVs are up, we believe they would have been up even more if it were not for the problems in the site-built real estate and mortgage markets. With site-built home prices stagnating or declining, there is less mortgage refinancing. Also, as the initial low teaser mortgage rates expire for site-built mortgages, monthly mortgage payments are rising, as are mortgage foreclosures.

As a result, there appears to be less discretionary cash available to consumers to purchase leisure products, including RVs. In addition, and to a lesser extent, the consumer confidence has been erratic, which may be partially due to high gas prices, and thus may affect the consumer's decision to buy an RV.

However, I should point out that consumer confidence statistics for July which were released just yesterday show the index at its highest level since 9/11/01. That's usually good news for the RV industry, as the RV industry follows the consumer confidence index.

I'd also like to point out that 2007 will likely be the fourth best year for RV sales in the last 25 years, and out of those four years two were affected by hurricanes, which in our opinion helped to infuse the industry and probably has been the main cause for the excess dealer inventories, which have been reduced over the last two years.

When you consider that sales of RVs are still strong in spite of high gas prices, higher interest rates, and the problems in the real estate market, the attraction of RVs becomes even clearer. For the past several years, the manufactured housing industry has also been affected by the real estate market, but for a different reason. Many traditional buyers of manufactured homes were able to buy site-built homes rather than manufactured homes because mortgage financing -- including sub-prime mortgages -- were available to the site-built buyer at exceptionally favorable terms.

For example, there was little or no down payment was required and interest rates were extremely low. This scenario has obviously changed and we hope that these formerly traditional manufactured housing buyers will once again return to our industry for housing.

This optimism about the manufactured housing industry is borne out to some extent by increasing backlogs at several manufactured housing builders, along with a higher level of mortgage loan applications, as reported by manufactured housing industry lenders. However, we have yet to see these events translate to improved manufactured housing sales, but are hoping that we are near the industry bottom and that the manufactured housing sales will soon begin to improve from the recent very low sales levels.

We still strongly believe that today's manufactured home cannot be matched for quality and affordability by any other type of housing available in the United States. We hope that the manufactured housing industry follows through on its plan to commence 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 cited in their communities.

In addition, as the baby boomers reach retirement age in greater numbers in the next several years, we expect that these potential buyers will help drive the manufactured housing industry's recovery. Even today, many retirees sell their primary residence and use part of the proceeds to purchase the manufactured home in a warmer climate, and then use the balance of the proceeds for retirement purposes.

However, with the slowdown in the market for site-built homes, it has become more difficult for retirees to sell their site-built home and buy a manufactured home, and we believe that this is helping to delay the recovery.

As for the balance of 2007, we will continue to examine every factory and every cost to see what additional savings can be achieved. 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 RV and manufactured housing industries improve.

And finally, as I say as often as possible and in fact started out my remarks today, 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, the new product introductions, and successful acquisitions at both Kinro and Lippert.

It is no secret that good management is the key to a successful business, but the real test of the management team is in a difficult market. We have just such a market today, and despite that both of our subsidiaries have gained market share, they've introduced new products, have made great acquisitions, and most importantly have simultaneously kept costs low and quality and customer service high.

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, we're very pleased to be reporting a 23% increase in net income, despite the difficult conditions we face in both the RV and manufactured housing industries.

The factors contributing to the improved results are described in this press release, so I'll just add some commentary on a few items. Acquisitions continue to be a factor leading to our improved results. The acquisitions of Happijac, Steelco, Equa-Flex/Trailair, and Coach Step added about $0.02 per diluted share this quarter compared to last year and they had annualized sales of between $25 million and $30 million.

We expect that the recent acquisition of Extreme will add at least another $12 million in annual sales, and also increase the contribution of acquisitions to our bottom line.

We acquired these businesses in part because we believe that many of their products have significant competitive advantages over other products available in the marketplace, and we expect to further increase sales and improve margins from these acquisitions.

As we've said before, we've had success in completing and integrating small acquisitions for many years. In fact since 2001, we've completed 12 acquisitions which have added more than $130 million in sales, and the acquisitions continue to be part of our growth strategy.

Likewise, specialty trailers and related components remain a significant opportunity for us. In the first six months this year, our sales of specialty trailers ran at an annual rate of about $20 million. Not only will the acquisition of Extreme add more than $12 million in annual sales but it will also significantly broaden our specialty trailer product line and add to the strength of management. The results of our specialty trailer businesses are included in our RV segment.

New product introductions also continue to be a factor in our growth. In recent months, we introduced ramp doors for toy hauler RVs, and this product line has clearly been an initial success. New products like this, along with product lines added through our acquisitions, have enabled us to increase our content for industry-wide RV to $1,273 compared to the $1,244 we reported for the 12 months ending March '07. Our current content per RV is 13% higher than what we reported a year ago.

In the manufactured housing segment, industry production statistics for June haven't been released yet but we estimate that our content per home is about $1,835 to $1,850 for the last 12 months. That's down slightly from the $1,854 content per home we reported last quarter, and that slight decline is largely due to a reduction in the average size of the homes produced by the industry, and partly due to a very small amount of business that we exited because of inadequate margins.

Last quarter I mentioned that our consolidated gross margin had benefited from about a $1 million decrease in worker's compensation costs, and our worker's compensation experience remained very good this quarter, with expense as a percent of sales about the same as in the first quarter of 2007.

Strong cash flow, aided by significant inventory reductions and lower capital expenditures continues to improve our bottom line through reduced interest expense. Proceeds on asset sales and stock option exercises also improve cash flow, and together they aggregated more than $8 million in the first half of 2007.

As a result of all of these factors, we reduced our interest expense by nearly $400,000 this quarter, despite the acquisitions that we mentioned.

As noted in the press release, at the end of the quarter we were in the process of selling facilities valued at more than $10 million, which will result in additional cash flow.

At the end of the second quarter, our debt net of $36 million of invested cash was only $12 million. We used about $11 million of the invested cash to fund the acquisition of Extreme Engineering in early July.

I'll just take a minute to cover some of the other areas that will impact results over the balance of 2007. In the press release, we mentioned that depreciation and amortization expense should total about $18.5 million in 2007. I just want to point out that includes an estimate of the amortization of intangibles that will result from our acquisition of Extreme.

Stock-based compensation, including stock options and to a lesser extent deferred stock units paid to our board in lieu of their director's fees, are also non-cash charges. Stock-based compensation is running about $600,000 a quarter.

I should remind you that Drew typically grants stock options to employees every other year, and we expect to grant options this November. The last grant to employees in November 2005 included options for about 600,000 shares. Directors are expected to be granted options for an additional 37,000 shares in December.

As a result of investing our excess cash in funds yielding tax-exempt earnings, we've lowered our effective tax rate from 38.7% to 38.4% for the first half of 2007, and for the balance of the year. This move not only lowers our effective tax rate, it also improves our after-tax return on our investments.

As we've mentioned in previous quarters, we're in the process of tax audits in several jurisdictions and each quarter we review our tax positions based upon the available information and update our reserves accordingly.

With that, I'll turn it back to Leigh.

Thank you, Fred. And now we'll be happy to answer questions. Michelle?

Thank you, sir. Ladies and gentlemen, if you wish to ask an audio question, please press star followed by one on your touchtone telephone. (Operator Instructions.)

And our first question comes from the line of Kathryn Thompson of Avondale Partners. Please proceed.

Thank you. You've done a nice job of reducing debt sequentially and year-over-year. Do you have a target for fiscal '07, and what do you expect plans will be in '08, especially in light of what I would assume is continued acquisition path?

Well, yes, you know, we don't give guidance and we don't give forward-looking information. However, we'll continue on the same course that we've been on for the last number of years. If we find an acquisition that we think fits, we'll make it. We certainly have the cash, we certainly have the lending availability.

We're continuing to look at inventories to see if they can come down further. We'll try to sell the 10 or 12 properties that we have for sale -- I think we have sale contracts for four of them -- and those will be closed in the next couple of days or weeks.

So we're just going to continue to emphasize to build cash. In a tough market, cash is king, and we're not going to do anything differently than we've done in the past -- we're just going to continue to look for acquisitions that fit and that generate as much cash as possible.

Just as far as debt, is it safe to say we could see a reduction in debt?

I would expect that debt should come down, yes.

Yes, some of our debt cash we haven't paid down because we have some swaps outstanding that are very favorable to us. We have interest rate swaps and if you pay down the debt, the benefit of the interest rate swap goes away. So at least for the time being, you won't see huge declines in debt. But we will be paying down debt incrementally.

Enough that it'll have a modest impact on interest.

Oh, yes. And in fact at this point, our effective rate on our cash investments is the same as our average rate on our debt. So to the extent we don't pay down debt we're going to be adding to cash and the interest will benefit either way.

Okay. Okay. I know it's difficult for you to pinpoint capacity utilization given your structure, but could you at least clarify and say if there's been -- if it's increased or decreased sequentially and also give a year-over-year perspective on that.

Well, I'll take a shot at it first, and then I'll ask David and Jason to chime in. But we obviously have reduced capacity because we've closed a number of factories, but we've also made sure to leave plenty of opportunity to have sufficient capacity when the industries recover -- which we're certain they will recover.

But you define capacity in lots of different ways. You can define capacity as one shift, eight hours. You could define it one shift, 12 hours. You could define it as two eight-hour shifts. At the present time, most of our factories are working one eight-hour shift.

So there's plenty of room to expand it, and probably our first go-round would be to expand to a 12-hour shift or a 10-hour shift if we needed additional capacity. And we do have factories that are unsold, so if we ever had to we could always quickly open a factory, but we don't anticipate that need at this point.

Jason, do you have any different thought on that?

Yes, ditto on what you said with respect to utilizing more of our existing capacity as we close facilities. But one of the important things I tell a lot of people is we don't utilize but maybe 10% of our existing second shift availability. So if you consider second shift part of capacity, which you should, there's a ton of capacity left open on our end.

David, do you have anything to add to that?

No, you all have pretty well said it. We're still on eight-hour shifts, and if need be we can increase that two eight-hours or three eight-hours. So we still have the capacity. The problem lies when you continue to increase your shifts, you have space availability as far as finished product.

Yes, (inaudible).

I was thinking more in terms of just utilization. I mean, has your utilization -- I mean, I know your --.

Utilization has obviously gone up, because we had --.

Yes, I was just trying to --.

(multiple speakers) factories that were running at 50% and today are probably running at 80%. And that's one of the reasons for the operating efficiencies, as well.

Yes. So 50% to 80%.

Well, it's not at 80%. Just the range is in there.

Yes. So the last time we spoke, last quarter end, your utilization, it was estimated to be in the 40 to 50 range.

That's for manufactured housing and a little bit more than that on RVs.

So, but in this quarter --.

It's up slightly from that.

It's completed, it's obviously a bit higher. I just wanted to get some sense of --.

I wouldn't say a ton higher.

No, it's up slightly.

Okay. Just up slightly.

Yes. There's also been a significant amount of efficiency, so some of the production efficiencies have offset the closing of -- the reduction in capacity. We can get more out of what we have. We're producing more product per employee this quarter than we did in prior quarters.

Okay.

Can I ask you to get on the line, let some other people ask, and then we'll get you back for another question?

Sure, go ahead.

Okay, thank you.

And our next question comes from the line of John Diffendal of BB&T Capital Markets. Please proceed.

Yes, good morning, congratulations again.

Hey, John. Thank you.

I wanted to focus a little bit on the RV side. I mean, the margin was just astounding. I mean, there's a 250 basis point improvement off of very good Q1 number. And I know in the release you talked about cost-cutting and efficiency, but I wonder if there's more you can tell us in terms of what gave you that incremental margin that boosted you off of Q1 and maybe give us a new sort of run rate of cost-cutting. I think the last number we had was about $4 million, if my memory serves, so.

I'll let Fred do that for you in a minute, but I just think the margin improvement was just lots of small improvements up and down the line. Closing factories, letting people go -- and that's not an easy thing to do, to let people go, and a lot of these people were with us for a while.

But in this kind of market -- Jason and David had to take some very tough steps, and they took them. But it's --.

Yes, we don't want to give all of our secrets out.

But it was just a bunch of small things that helped raise the margin, and maybe Fred can answer --.

Yes, in terms of the cost-cutting, it's running at more than $5.5 million annually now. That's after we had a fairly significant incentive compensation program where we set aside about 20% of operating profits. That $5.5 million is after the incentive compensation impact. We've also, as we said in the press release, improved the margins on some of our newer product lines, like Axles, by improving our importing programs, expanding the importing programs, negotiating some better pricing.

And further, we've -- as I just said in response to Kathryn's question -- we've increased our sales per employee. So we're getting more production out of the same dollar, so.

So given that your second and third quarters tend to be your best seasonal quarters, is that something that -- I mean, and you're also getting ready to close another five. I mean, that $5.5 million, that does not include the closings anticipated, am I right?

That's correct.

So there'll be some more with that.

Right.

And so I mean like I said, this is -- and correct me if I'm wrong, I'm just going back in my old records here -- that's probably the best margin you've had by 150 basis points in the RV business going back to the late nineties.

Yes, by 130 basis points, actually, and that's true. But there are always caveats. Certainly the second quarter is expected to be our strongest quarter -- typically, anyway. The July closedowns around July 4th impact the third quarter a little bit, so we have to take that into consideration.

Also I think our material costs in our ending inventory are higher than they were at the end of the first quarter, and that could certainly impact our margins going forward. But clearly, we've made substantial improvements and we expect much of those improvements to continue forward.

To hold on. Okay. And you mentioned before that the importing -- I mean, is there any way that you can quantify the impact of that on the Axles? And what did that contribute to the quarter?

Well firstly, we're importing more. And as you import more, you have better sourcing, better everything else. But I don't think we're going to be able to quantify the amounts.

It's not as significant as the savings between operating efficiencies and cost-cutting, but it is significant for us. It's several million dollars.

I think -- just to chime in real quick on the Axles, we've been importing for that product since the day we started building the product, so we're just getting more efficient at building the product and got over some of the learning curves and start-up costs that we incurred with that product, and just getting better at building the product.

I think I indicated last quarter that we kind of get a double whammy -- that our margins were very low last year in Axles, but as volume has increased, margins have also increased. So it's a double-plus -- we get not only higher volume but higher margins.

And then just one last question on the MH side. I think prior to this, you hadn't really seen a lot of improvement there. You've noted yourself that the backlogs in a lot of companies are better. Has that started to have some -- I'm trying to get a sense on just the flow rate through your factories on MH sort of currently. Is it --?

I asked David and Jason that exact question before the call, and they said they've seen some business improvement -- seasonal business improvement -- but certainly nothing to get excited about.

And when did that sort of start to kick in? Because it hadn't been for you for a while.

No, it hasn't kicked in just seasonally, the monthly numbers are seasonally higher than they were in January, February, March. They're seasonally higher, but certainly not better than last year. They're still down 20% in April and May, and we don't know June yet but I guess June's going to be about the same.

In June and/or July.

Yes, so we just haven't seen anything exciting. They talked even about the federal funding in Mississippi and I think we got a couple hundred -- there was a couple hundred homes there, and we built those. And it just wasn't significant.

Right. Thank you so much.

Okay.

And our next question comes from the line of Scott Stember of Sidoti & Company. Please proceed.

Hello, good morning.

Hey, Scott.

Fred, could you maybe just dig in a little bit more on the gross margin? It sounds like virtually all of the expansion was due to the efforts that you guys placed on cutting costs. But I just want to nail down a little bit more about price increases and cycling lower-priced inventory and see how much of that really helped the quarter and how much we should see, as you mentioned, cycling some of the more expensive inventory in the third quarter that could bring down the gross margin.

Yes, most of the impact of this quarter and for the year to date relates to labor-type savings -- cutting salaried staff and increasing the labor efficiencies. The primary material cost savings were in the importing programs. So where Jason and David were able to negotiate some better imported prices or expand their program, it helped a bit. But most of it was on the labor and salaried staff size.

The inventories, particularly for steel and also I think even for aluminum, the costs we had in inventory at the end of the quarter were higher than they were at the end of the first quarter. So there'll be some impact in the first month or so of the third quarter. Steel hasn't been terribly volatile; aluminum hasn't been terribly volatile in the last few months, so we don't see a continuing deterioration there in margins because of our raw material costs. But again, it's -- and we'll find out tomorrow what tomorrow holds.

So then just in short you should probably see a continuation of the positive trends, maybe a little bit softer, I imagine, because of what you mentioned with the inventory.

Yes, I would say that's right.

Okay, and the five factories that you plan on closing, could you say the mix of MH versus RV?

I think they're reasonably smaller plants, so they're not going to have as substantial an impact. I actually don't have the mix here, but I think they are in terms of square footage.

Jason, do you know?

Yes, it's about half and half.

Yes. In terms of square footage, maybe a little more RV, but not a lot.

Okay, and you guys mentioned ramp doors for toy haulers, I guess, as being an opportunity and something that you're seeing some success. Could you talk about maybe what the run rates are annually from a revenue standpoint (inaudible)?

Jason, could you answer that, please?

Yes, I mean, the market's probably somewhere in the $15 million to $20 million range -- maybe a little bit more. It just depends on if you get into the cargo trailer markets and the horse trailer markets, and get on past RVs. But with the RV segment, it's about $15 million to $20 million, and we're approaching that and have had the kind of success in that product that we've had with any other product we've started up.

We've built off the solid customer relationships that we have, and build off our existing product base with those customers in chassis and slides and axles and other things and just try to do the very best job for them we can and provide a quality product, and it's going pretty well.

And in terms of the current run rate, Jason, I think it's running around $3 million or $4 million annually.

That's certainly (inaudible).

Yes, but (inaudible).

Yes, yes.

There's certainly room to grow.

We're just getting started there.

Okay, and just the last question -- if you guys could just give maybe some general comments. You already talked about the MH side, but the RV, what you're seeing today beyond the comments of the 5% increase so far, as far as just what you're hearing from your customers.

As I say, everybody's talking doom and gloom, and yet retail sales are up. Doom and gloom has been talked in the RV industry because the manufactured side is down. But retail sales is the thing that I look at most, and when you see an 8% increase in retail sales in May, that's a very positive sign.

That's the start of the selling season, and eventually you're going to see the inventories really cleaned up at the dealers. And then when orders come in, I think we'll see a significant pick up in the wholesale shipment. So as long as retail sales stay strong, and when you consider all the negative factors that are going on right now and retail sales of RVs are still as strong as they are, that's a very, very positive sign.

So we're optimistic, we continue to be optimistic -- particularly long-term -- about the RV industry. The demographics are terrific, the advertising campaign is still attracting the 25 through 50-year-old, the families. And Dave Webster was just telling me before the call he's out in Colorado right now and he says he's never seen more RVs in his life than he's seen on this particular trip.

So we're very optimistic long-term, and we think the inventory is cleaning up. I think the industries will do well. Maybe lackluster this year, continue lackluster with small increases, but I think in the longer term, we'll do very well as far as the RV industry is concerned.

All right, that's all I have. Thanks a lot, guys.

Thank you.

And our next question comes from the line of Barry Vogel. Please proceed.

Congratulations, gentlemen.

Thank you, Barry.

You did a fabulous, fabulous job. First question is, approximately how much additional annualized savings will you have from the five new plant closures?

We don't really talk about it until it's in the bank. It's very easy to say that we've closed plants and eliminated staff, but it's hard to do. And until it gets done, we'd rather not talk about it. I would say that generally, they're smaller plants.

So maybe a couple million dollars a year?

Yes, I wouldn't even -- at this point I wouldn't give an estimate.

All right. And you talked about the operating rates in the second quarter for your RV business and manufactured housing, and I didn't catch it. Can you give me those again?

I think what we said was the last quarter, manufactured housing was running 40% or 50% and RVs a little bit more than that, and it's up slightly.

That's capacity. Is that the question?

Utilization and capacity.

Yes.

Yes.

Yes, that.

It's up slightly. The reason it's only up slightly is because while we've cut some capacity we've also increased our efficiencies so we can make more with less.

Okay. Now, I was fortunate to have you guys take me around to the show in Louisville to see some of those products in that little area that you had? And I remembered I was very impressed with those trailer products. Can you give us some idea about what the potential market might be that the Trailair and Equa-Flex is operating in, and what Coach Step is operating in, and the potential market for Extreme Engineering?

Yes, Jason, you can probably do a better job with this than I can in terms of the steps and the suspension products.

I think for Equa-Flex and Trailair, that market's somewhere around $15 million to $20 million. The Coach Step's about $12 million to $15 million, somewhere in there, for motor homes. That's the electric step product for motor homes.

And Extreme, we really look at -- we hired a management team there that's got a lot of passion for the business and really understands the business, and our goal with that company is to really go out and look for other good acquisition candidates and really grow our boat trailer business based on the management team that we've got through that acquisition.

So, we're excited about all three of those product areas right now.

And how big do you think the potential market is for what Extreme does?

Well, the boat trailer business is obviously a big business here in North America.

Couple of hundred million dollars.

So yes, it's got to be upwards of a couple hundred million plus, if not more than that. But we're going to take it one chunk at a time and try to make the strategic acquisitions. And they've got a lot of good product ideas, a lot of good patents, and we're going to run with the passion that these guys have for the industry and that's going to do well for Drew.

Yes, I mean, two very young, very aggressive people who really know the business and they are highly respected in the industry.

Clones of Leigh Abrams and Fred Zinn.

We're old guys. These are young guys.

Yes, but they're cloning your genes, that's what they're doing.

Okay.

And as far as the Indiana losses, could you tell me Indiana losses were last year in total (inaudible)?

We lost $1 million in the second quarter, $900,000 in the first quarter. So for the first six months, it was $1.9 million last year compared to zero this year.

And the third quarter was at $1.2 million.

Okay. Thank you very much.

Okay.

And our next question comes from the line of Ed Aaron of RBC. Please proceed.

Thanks, and great job on the execution, guys. Couple questions -- hopefully this doesn't violate your guidance policy but when you consider your current run rates on the towable side, within the next 10 days or so we should come up against the period of time last year where the spigot basically turned off at the wholesale side of that business.

What would your comparisons look like once we anniversary that point in time, just based on current run rates?

Again, I can't tell you what today's sales are going to be, never mind what August, September, October sales are going to be. But I can tell you that inventories are much lower this year than they were last year. And you probably won't have the same turn-off that you had last year. It's all going to depend on retail sales.

David, you add anything to that, and I'll ask Jason the same thing.

No, I didn't get the question.

The run rate on what do you think is going to happen in the next couple of months in the RV industry.

In the towable (inaudible).

Oh, I hope we continue to see what it is right now. As you said in your opening remarks, this has been one of the -- what was it, the fourth --.

The fourth best year, yes.

Best year ever. So I'm not totally disappointed in what we're seeing in the RV industry right now. I think what we're going to see is even going to be greater, but to be able to anticipate what's going to happen is -- it'd be a hard thing.

This industry is -- both in the RV and the manufactured housing side -- it's hard to speculate what's going to happen. I've been in it for 40-something years, and when you ask me for a five-year projection, it's hard to give. It's hard to give a one-year projection.

But I like the numbers that we're seeing right now. I think we're going to see some that's going to even be better.

Just to interject real quick, my question was just more on the math behind if you assume the current production rates hold, when comparison do you significantly in, like, a week or two -- which they, if I remember correctly, is around the time when they (inaudible).

Yes. I think August 12th was the date. We had a lot of business August 12th, we had very little business August 13th.

(Inaudible) comment, what you're asking is last year, they slammed the brakes on because all of a sudden backlogs disappeared. And this year, the manufacturers have been real mindful of what happened last year, and don't want it to repeat this year, assuming there's no influx of FEMA business to keep everybody going through the fall.

So I think that everybody's been real cautious to keep healthy backlogs and not bite into them too much heading into the fall. So it looks like people are going to be able to coast into Louisville and be able to run normally without slamming on the brakes hard like they did last year.

Yes, which is healthy for us.

It's hard to be specific, Ed, because we don't have backlogs, our customers (inaudible). We have very little foresight of that [time] in terms of what we can expect over the next weeks and months.

Yes, that's fair. But my second question is just when you kind of balance current production rates with some of the restructuring stuff that you've been doing, do you expect that your margins will be any more or less seasonal than they have been historically?

It could be -- I would expect not significantly. It will depend mostly on the industries and just a tiny bit on composition of our expenses between fixed and variable. So not a significant impact.

Yes, we can guess fourth quarter margins will be the lowest of the year, though.

Sure.

Thank you.

And our next question comes from the line of Jamie Wilen of Wilen Management. Please proceed.

Hey, Jamie.

Hi, fellas, great job. Wonder if you could quantify the number of employees at Drew today versus a year ago?

Yes, there were just under 4,000 employees at the end of the quarter and last year -- I think there were 3,900 -- and last year, there was about 4,700.

Wow. Okay. Secondly, Leigh, you mentioned something about the manufactured housing ad campaign. Was it something that you're still hoping or have they actually (multiple speakers).

We're still --.

(inaudible) gotten together (inaudible).

I'm going to ask David to do that. We're still hoping. The industry has said they want to do it, (multiple speakers).

Are they getting any closer?

Yes, we're getting a lot closer, I think industry has looked at it very strongly and we're looking at different avenues that we can go. I think it's -- they've looked at the RV side of it and seen it is a proven fact that a national advertising campaign does work. And I think what we're going to see is the same thing.

One of the things that this industry is that what's happening in what we call the stick-built housing should help this manufactured housing industry. We're the only industry that I know of that can build an affordable home in the $30,000 and $40,000 range and also build a modular home that's in the $150,000 to $200,000 range.

So there's not many industries that can do that, and there's a lot of people out there that still need that $30,000 and $40,000 home -- the affordable housing. So I think we'll see some -- in the advertising program that we're looking at, I think we'll see some great aid in that.

We just don't have a timetable.

Got you. And lastly, I know your hesitancy to make forward-looking projections but if we could go backward for a second into the second quarter and if sales of your existing businesses would have been flat as opposed to down the magnitude they were and you had layered on the acquisitions that were in hand at that point in time, what kind of number do you think you actually would have earned in that case?

In the first quarter?

In the second quarter.

It's probably too complicated for me to answer, but if you --.

(Inaudible) incremental margin we (inaudible).

Right, that's what I was going to say. If you put it all together, the factors that you're talking about -- the acquisitions and maybe the different structure of the industries -- our incremental margins are about 20%.

And if you actually look at the manufactured housing segment, I think the raw numbers show that the margin on lost sales for the quarter, the margin was down 33%. And if you take out the $600,000 relating to the closed factories, it was down 23%. So you would expect that if sales went back up, the margin should be somewhere between where it's 20% and 23% that you're seeing in the financial statements.

Right.

I'm not sure that gets exactly to your question, but that would be how I'd look at it.

It does; I appreciate it. Great job, fellas, thank you.

And our next question is a follow-up question from the line of Kathryn Thompson. Please proceed.

Hi, Kathryn, welcome back.

Okay, thanks, no problem. What do you think, with your acquisitions you outlined for the quarter, what the net impact for acquisitions is going to be? What do you think that will be for the year? And this would be for acquisitions made over the past 18 months.

Well, I'll try to answer that in a minute, but I should say that the $0.02 that Fred talked about, a lot of those acquisitions were just getting started.

Understood.

Coach Step and Equa-Flex really are just getting started, so the results will be better in future quarters.

If you put all the acquisitions together, we're talking about $40 million of sales and hopefully some growth on that. Margins are a little bit -- I'm not going to give you a specific answer because we don't do the forecast, but I can give you some of the facts. Margins on these businesses are a bit higher than on some of our other businesses because there are some patents involved. We have some products that compare very favorably with their competition, so you could look at the 20% incremental margin on that business and on the new volume, and hopefully be close.

Okay. That's helpful. Thank you very much.

Okay.

And as a final reminder, ladies and gentlemen, that is star, one to ask an audio question. And our next question is a follow-up question from the line of John Diffendal. Please proceed.

Just to be clear, you mentioned there was an $800,000 I guess charge, whatever -- the $600,000 was on the MH side. So does that imply the other $200,000 was in RV, or was it (inaudible) corporate?

Yes, yes, it was just too small to point out.

It was in the RV side.

In the RV, yes.

Okay, great. Thanks.

And I'm currently showing we have no further audio questions at this time.

Well, again, I thank everybody for listening and I look forward to talking with you next quarter. So, have a great day.

Ladies and gentlemen, thanks for your participation in today's conference call. This does conclude your presentation, and you may now disconnect.