LCI Industries (LCII) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2012 Drew Industries Incorporated earnings conference call. My name is Jasmine and I'll be your 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. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I will now turn the presentation over to your host for today's conference, to Mr. Jeff Tryka with Drew Industries' Investor Relations. Please proceed.

Thank you, Jasmine. Good morning, everyone, and welcome to the Drew Industries' 2012 fourth-quarter and full-year conference call. I'm Jeff Tryka with Lambert Edwards, Drew's Investor Relations firm. And I'm joined on the call today by members of Drew's management team, including Fred Zinn, President, CEO, and a Director of Drew; Jason Lippert, Chairman and CEO of Lippert Components and Kinro, and a Director of Drew; and Joe Giordano, CFO and Treasurer of Drew.

We wanted to take a few minutes to discuss our fourth-quarter and full-year results. However, 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 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 in our Form 10-K for the year ended 2011, and in our other filings with the SEC.

With that, I would like to turn the call over to Fred Zinn. Fred?

Thank you, Jeff. Thank you all for joining us on the call. I just want to mention that Leigh Abrams, the Chairman of our Board, is also here with us on the call.

Before discussing Drew's results, I would like to take this opportunity to congratulate Jason Lippert and Scott Mereness on assuming new leadership positions at Drew this coming May. Most of you know by now that I'll be retiring in May, and that Jason will become Drew's CEO, and Scott will become Drew's President and COO. We're also very pleased that Joe Giordano will remain as Drew's CFO. Joe will be relocating out to Jason's and Scott's neck of the woods in Elkhart County, Indiana, which, as you know, is the center of the RV world.

I think a lot of you have already had the opportunity to meet and to talk with Jason and Scott and Joe, and you know that they are an exceptionally talented and experienced team. They have the drive, the energy, and the strategic insight to take Drew to new heights. They have each been essential to Drew's past success and they are key to our future.

As importantly, they have developed an extraordinarily strong and broad team of executives and managers who are highly capable of contributing to Drew's success. I know that sounds a little bit like a speech, because it is part of my prepared remarks, but it's also very true. And I think everyone here at Drew -- our Board, our management team -- we're all very comfortable with this succession plan we've been through, that our Board implemented over the last couple of years. And we're all looking forward to continued success for Drew.

In the meantime, however, you're stuck with my somewhat notoriously long-winded speeches for just a little while longer. We're quite pleased with both the continuing strength in the RV industry in general and the strong demand for our products in particular. Drew's sales of components for new towable RVs increased 29% this quarter. For more than a decade, we have consistently outpaced the RV industry growth. And we've done that by providing outstanding products and outstanding service to the leading producers of RVs across the country.

This growth has enabled us to achieve a record $900 million in sales in 2012. We look forward to achieving new milestones in sales and profits in the years to come.

RV industry fundamentals also appear to be solid. While recent industry production levels have exceeded retail sales, that's to be expected, I think, both seasonally and in a recovery mode. I think most industry analysts report that dealer inventories are now in line with retail demand. Further, based on data regarding the age of RVs on the road, there has been some conjecture that we may be in the early stages of an RV replacement cycle that could boost retail sales in coming years.

Of course, improving our bottom line is the top priority of our entire management team. Our production efficiencies at several key facilities did improve in the fourth quarter. However, the impact of this improvement was masked by continued costs for facility consolidations and lean manufacturing initiatives, as well as other transitory cost increases, which we expect will decline over the next two quarters. We're also in a position to achieve significant improvements in the bottom-line results of several of our newer product lines as we progress through 2013, including awnings and extrusions.

We understand, however, that actual results speak much louder than expectations, and that our actual operating profit margin in 2012 did not meet expectations. However, 2012 was a year of significant accomplishments. In 2012, we achieved a 24% increase in net income, and we gained significant momentum in our efforts to expand outside our core markets. Sales to adjacent markets were up 68% compared to 2011. And, together with our aftermarket products, sales to new markets exceeded $130 million last year, about 15% of consolidated sales. Even within the RV market, we continue to develop new opportunities for growth through new products, such as awnings, and a 91% increase in sales of motorhome components to our OEM customers.

So, encouraging RV industry fundamentals, along with our solid growth in both the core markets and in the new adjacent markets is an exciting combination for us.

Further, in 2012, we returned $45 million to our stockholders through the $2.00 per share special dividend in December. And this followed a special dividend of $33 million, or $1.50 per share, just two years earlier. These dividends, paid during a period when we also made significant investments in our future through acquisitions, capacity expansion, and productivity initiatives, exemplify our commitment to optimizing long-term stockholder returns.

We are committed to continuing our track record of generating favorable returns on assets and equity. In that regard, Drew's return on assets in 2012 increased to 9.6%. Our return on equity reached 12.7%, well above the last reported median ROE of 8.9% for the S&P small cap 600. Drew's executive compensation programs are designed to reward us for achieving high returns on investments. This incentivizes our executives to undertake external investments or internal growth projects only if we can expect high returns. In 2013, we are expanding these performance-based compensation programs to include even more key executives.

So for many companies, this long string of accomplishments I just cited would be cause for a celebration of 2012 as a banner year. While we are pleased with our success, we are not nearly satisfied, and will continue to devote our efforts to profit improvement and return on investment. We are quite comfortable that we have numerous opportunities to improve during 2013, including those we created through long-term investments in the past few years, those resulting from RV industry growth, and those we are continuing to identify. And we expect to handle those opportunities without disrupting our emphasis on production efficiencies. We look forward to reporting improved bottom-line results in 2013, particularly in the second half of the year.

Once again, I really would like to express my personal confidence in Jason, Scott, Joe, and the outstanding team they filled. Having been a part of the Drew organization for 32 years, I take pride in knowing that Drew will continue to be in their very capable hands.

And now I'll ask Joe to review our results in more detail.

Thank you, Fred. Our sales for 2012 increased by $220 million, of which approximately $60 million was from acquisitions completed in 2012 and in the latter half of 2011. The balance of this increase, $160 million, was due to industry growth, market share gains, expansion into other markets, and new product introductions.

While we are pleased with our sales growth in 2012, we are continuing to pursue new market opportunities, develop new products, and make improvements to our existing products. For example, we combined the best features and the best production methods of the RV entry door business we acquired in early 2012, with our existing RV entry door, and developed a hybrid product line incorporating the best of both RV entry doors. These recent improvements are just a few in the long list of improvements we have made to RV entry doors over the past few years, allowing us to capture more than 50% of the RV entry door market.

In 2012, we also continued our investment in a new RV awning product line, with a market potential in excess of $75 million for OEMs and an estimated $75 million of aftermarket potential. Awning sales in the fourth quarter of 2012 were nearly 50% higher than the third quarter of 2012. And in our first year of producing and selling awnings, our sales reached an annual run rate in excess of $10 million, capturing approximately 10% to 15% of the OEM market share for awnings. Additional market share growth is expected for 2013.

Over the past 12 years, our towable RV content per unit has consistently grown from year to year, reaching over $2,700 in 2012, including a $365, or 16%, increase. This growth has been primarily from acquisitions, new product introductions, and market share gains. One of the underlying factors in our growth is our ability to anticipate and respond to the constant demand for new features by the RV consumer. For example, as consumers want to make their RV experience more enjoyable, demand for easier leveling systems for RVs has substantially increased. As a result, our sales of leveling products, including our patented level up system, were approximately $35 million in 2012, compared to less than $10 million in 2010.

In order to meet the rising demand for these and many of our other products, we have consolidated and realigned many of our facilities to gain efficiencies or add capacity where needed. In addition, during 2012, we continued our investments in aluminum extrusion, awnings, and the aftermarket, and incurred costs related to process changes and lean manufacturing initiatives. As a result of the costs incurred with these investments and initiatives, as well as lower operating efficiencies resulting from the training and other costs required to meet the $220 million sales increase, our operating profit margin for the full-year 2012 was negatively impacted by more than 2%. During 2012, these costs primarily impacted our RV segment, except in Q4 2012, where the facility realignment costs also impacted our Manufactured Housing segment, and were the primary reason for the decline in the MH segment operating profit margin.

In the coming quarters, we are striving to further improve our production efficiencies, as well as continue to improve the returns on the numerous investments we have made over the past couple of years. As a result, for 2013 -- in particular, the second half of 2013 -- we believe we have implemented improvements to increase our margins and recoup much of the margin we lost in 2012. As compared to the fourth quarter of 2012, we expect to achieve improved operating profit margin sequentially in the first quarter of 2013, reflecting the improvements implemented.

However, I want to point out that when making comparisons from the first quarter of 2013 to the first quarter of 2012, the significant increase in demand and the many factors that negatively impacted operating profit margin in the last several quarters, did not have a significant of an impact in the first quarter of 2012.

To meet our current and projected capacity needs, as well as improve operating efficiencies, our capital expenditures for 2012 were $32 million, which included approximately $3 million originally planned for 2013. We estimate our maintenance capital expenditures for 2013 will be approximately $15 million, consistent with our long-term average of maintenance capital expenditures of approximately 1.5% of revenues. Further, based on our current growth expectations, we estimate that our growth-related capital expenditures for 2013 will be approximately $10 million to $15 million. Our 2013 growth CapEx includes our new glass tempering line, some new metal fabrication equipment, and our new ERP software. 2013 depreciation and amortization will be approximately $25 million. SG&A as a percent of sales increased from 11.8% in the 2012 third-quarter to 13.8% in the 2012 fourth-quarter, and compared to 13.7% in the fourth quarter of 2011. The increase in Q4 2012, as compared to the third quarter of 2012, was primarily because of the impact of spreading fixed costs over a seasonally smaller sales base, as well as higher incentive compensation as a percent of sales.

The effective tax rate of about 30% for the fourth quarter of 2012 was lower than the effective tax rate of about 36% for the first nine months of 2012, due primarily to higher than expected federal tax credits. The effective tax rate for the full-year 2013 is estimated to be 37% to 38%.

Thank you for your time. Now I'll turn it back to Fred.

Thank you, Joe. And, Jasmine, you can open it up for questions now.

(Operator Instructions) Daniel Moore, CJS Securities.

Given -- you've touched on this a little bit, but given incremental expenses incurred this past year, and then when we think about the strength and demand that we're looking at going into fiscal '13, at least early on, what is your level of confidence in being able to achieve or come close to the 20% incremental operating margin goal for 2013?

Well, it's -- Dan, it's an unusual year, because we are hoping to gain efficiencies as well as gain some incremental -- improved incremental margins on our increased sales. So I'm not sure I can think of it as strictly in terms of incremental sales. But we do -- incremental margins, rather -- but we do expect to get back much of the 2-plus-percent margin loss we experienced in 2012, particularly in the second half of the year.

So, as we progress through this year, we expect things to get better, sequentially better and relative to the seasonality, of course, of our business. But by the second half of the year, we expect we'll have gotten back, gained the -- re-gained the efficiencies that we had before this 2012 year.

Very helpful. And a quick follow-up. When you talk about new products or adjacent market opportunities of -- obviously, you've had several successes in the last 12 months. Anything in particular in the new product pipeline that you're particularly excited about going into 2013?

I think we've got a bunch of stuff. Jason, you want to talk about both -- some new products or --?

(multiple speakers) Yes, I think we're -- yes, sure. Sure. Yes, we're -- we've got a lot more of the same coming in 2013, I mean, with some of the products we introduced in '12 and '11. It usually takes a year to 18 months to 24 months to really get good visibility out in the market. So all the OE's see what we're doing.

So, I'd say leveling, awnings, doors, slide-outs, I mean, a lot more of what we've been talking about the last 18 months, but specifically leveling and awnings are real attractive. And we've got other new products that we're introducing this year that, again, over the course of the next 18 to 24 months, we feel will gain a lot of momentum as well. You'll hear more about those in future calls.

Yes, and I think the same thing, Dan, is true almost verbatim in the aftermarket. It takes 12, 18, 24 months to really get established and get yourselves into the catalogs. And hopefully, we'll start to some accelerated growth in the coming quarters there as well.

Perfect. One last one and I'll jump back in queue. To what extent is the strength in retail RV demand being driven by incentives by some of your customers? And is there any risk that some of the larger manufacturers are training customers to sort of wait or push for generous incentive packages?

It could be. I guess it's a question, Dan -- and Jason, maybe you know the answer; I don't, really. I don't know how much of the incentives that our customers are offering go to the dealers; how much go to customers. But I think relative to the cost of an RV, the overall incentives are relatively modest. So I don't think it has a huge impact on retail demand. Could it draw in a little bit? Sure. I guess it could.

Jason, have you heard anything different in terms of the impact of the --?

No, not really. I think your question pretty much sums it up. I would say that, if anything, some of the diversity in product in some of the new products coming out are having arguably a bigger draw than what sales incentives might. But, you know, certainly, it's got to have some impact.

Perfect. Thank you very much.

Scott Stember, Sidoti and Company.

Can you maybe touch on the startup costs in 2012 and, again, on the comparisons? Joe, you briefly just touched on, I guess, like the first quarter and how it could look.

In the first quarter of last year, between raw material costs and startup costs and inefficiencies, we had about $0.09 worth of charges. It seems, at least in the back half of this year, that we've seen a lot of that abate, particularly with overtime levels coming down quite a bit. Correct me in my thinking, if I'm wrong, but we should see some continued advancement in profit growth on a year-over-year basis, I would assume, just given the fact that some of these things like overtime have abated as much as they have. Can you just touch on that?

Sure. Let me kick it off and then Joe can jump in. I think that the first quarter -- well, I think you're right. The press release did talk about $0.09. It did get even more than that in the second and third quarters. So, for the year as a total, I'm going to use a slightly different approach there, but it probably cost us about 2% or a little bit more in margin for the year in total.

It did accelerate a little bit in the second and third quarter, particularly. Certain parts of the business got better. Certain input costs got better. Certain input costs got a little worse over the summer time. I think we have seen, in the fourth quarter, a nice improvement. Some improvements we were really pleased with, at some of our key facilities, in terms of the scrap costs, the production efficiencies, and the overall level of margins that particular facilities are generating.

In this quarter, it really was masked by those other costs we talked about. And we expect those to abate over the next six months. So I don't think we're going to see, all of a sudden on January 1st, we're going to recapture all that margin, because we still will have costs of consolidation and improving efficiencies at facilities where we did consolidate. We'll still have some lean manufacturing costs. We'll have the usual -- or, hopefully, a little less than usual, hiring costs and such. I think we'll see a progression of improved results as we go through this year.

Right. Yes, I was just trying to clarify. So, again, we should see some improvement in the first half of the year, but we would see the lion's share or a bigger piece of it in the back half of the year?

Yes. But I do want to make sure everybody understands. The first quarter of last year was a pretty decent quarter. It had those $0.09 in it, I admit. But I think it's almost more, I don't know, instructive to think about out-of-the-ordinary type costs.

You know, we always have some startup costs. We're always going to have some product line where material costs are higher or labor costs are higher. And I think more of those out-of-the-ordinary costs hit us in the second and third quarter. So, for comparative purposes, you have to keep that in mind and even in Q4 with the consolidation costs.

Got you. And, Joe, on the SG&A on a year-over-year basis, it was up about 10 basis points. Could you just speak to that real quick?

Yes. It was primarily in a couple of areas. I would put -- the lean manufacturing would probably be one of the more significant areas. Selling and transportation. We talked about facility realignment costs in total. Part of that realignment involved moving stuff and transportation-related type costs. So that's also in your SG&A number. That would probably be a couple of the areas.

And I think I mentioned -- or I should have mentioned that we are expanding our program of rewarding our executives, based upon returns on assets or returns on investment. And we did pretty well in return on assets, particularly in return on equity in the fourth quarter. Inventory turns improved and there were some bonuses built in for those as well.

Got you. And so the majority of those $2 million of cost in the fourth quarter were in the, it seems, in the G&A line?

No, I think it's spread out. I would say the majority is probably in cost of sales and the portion is -- the balance would be in SG&A.

Got you. That's all I have for now. I'll jump back into the queue in a minute. Thank you.

(Operator Instructions) Kathryn Thompson, Thompson Research Group.

This is Wenjun for Kathryn. So, RV industry backlogs were up. Could you just comment on what you're seeing from customers in terms of RV product demand?

Well, I think our customers are pretty optimistic right now. Jason, you've got your finger on that pulse. You want to comment on that?

Sure, yes. They're very optimistic right now. And, of course, we can generally, usually only see three to six months out at a time. So, the short-term outlook looks good, and all the other variables are right for the industry to sell wholesale and retail units. So, the products are good; the activity is good. So, right now, I mean, we're building a lot of product.

Okay, great. And then, you mentioned that $60 million in sales growth from acquisitions. Can you please comment a little bit on the environment for acquisitions this year (multiple speakers) -- and next year?

I'm sorry. I couldn't hear the last part of your comment there. I'm sorry.

Just comment a little bit on environment for acquisitions in 2013.

Oh, sure. Sure. You know, as I always say, and I think it's always true, or has always been true anyway, we've continued to see acquisition opportunities. We didn't close that many this year. We closed a couple of small ones in the very early part of the year. Last year, or 2011, rather, was a very big year for us. And I don't think it means anything really that it slowed down between 2011 and '12.

I think the opportunities are still there, and we'll close them when the price is right and when the returns we can expect are right for us. Also, I think -- and I think I have mentioned this in prior calls as well -- our menu, so to speak, of potential acquisitions has grown. Because we're now looking at the adjacent markets where we're starting to supply product as well as an acquisition opportunity.

Okay. Great. Thanks and good luck.

Thank you.

And at this time, we have no further questions. I would like to turn the call over to Mr. Fred Zinn for closing remarks.

Well, thank you all very much. Jason and Joe and I certainly look forward to speaking with you again after the first quarter of 2013. We'll be on the road a little bit meeting with some investors over the coming months and calling some of you up. And we look forward to those conversations as well. And good luck to you all. And, as we always say, we're available to make calls with you at any time. Thank you very much. Take care.

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

Company Disclaimer -

This transcript contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to financial condition, results of operations, business strategies, operating efficiencies or synergies, competitive position, growth opportunities for existing products, acquisitions, plans and objectives of management, markets for the Companys Common Stock and other matters. Statements in this transcript that are not historical facts are forward-looking statements for the purpose of the safe harbor provided by Section 21E of the Securities Exchange Act of 1934 (the Exchange Act) and Section 27A of the Securities Act of 1933 (the Securities Act).

Forward-looking statements, including, without limitation, those relating to our future business prospects, net sales, expenses and income (loss), cash flow, and financial condition, whenever they occur in this transcript are necessarily estimates reflecting the best judgment of our senior management at the time such statements were made, and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by forward-looking statements. The Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made. You should consider forward-looking statements, therefore, in light of various important factors, including those set forth in this transcript, and in our subsequent filings with the Securities and Exchange Commission (the SEC).

There are a number of factors, many of which are beyond the Companys control, which could cause actual results and events to differ materially from those described in the forward-looking statements. These factors include, in addition to other matters described in this transcript, pricing pressures due to domestic and foreign competition, costs and availability of raw materials (particularly steel, steel-based components, and aluminum) and other components, availability of credit for financing the retail and wholesale purchase of products for which we sell our components, availability and costs of labor, inventory levels of retail dealers and manufacturers, levels of repossessed manufactured homes and RVs, changes in zoning regulations for manufactured homes, sales declines in the industries to which we sell our products, the financial condition of our customers, the financial condition of retail dealers of products for which we sell our components, retention and concentration of significant customers, the successful integration of acquisitions, realization of efficiency improvements, interest rates, oil and gasoline prices, and the outcome of litigation. In addition, international, national and regional economic conditions and consumer confidence affect the retail sale of products for which we sell our components.