Drew Industries Incorporated Q1 2010 Earnings Call Transcript

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 |  About: Drew Industries Incorporated (DW)
by: SA Transcripts

Drew Industries Incorporated (NYSE:DW)

Q1 2010 Earnings Call

May 3, 2010 11:00 am ET

Executives

Jeff Tryka – Lambert Edwards

Fred Zinn – President & CEO

Leigh Abrams – Chairman

Joe Giordano – CFO & Treasurer

Jason Lippert – President & CEO Lippert Components & Kinro

Analysts

Scott Stember – Sidoti & Company

Kathryn Thompson – Thompson Research Group

Bret Jordan – Avondale Partners

Liam Burke – Janney Montgomery Scott

DeForest Hinman – Walthausen and Company

Arnold Brief – Goldsmith & Harris

Barry Kaplan – Maple Tree Capital

Operator

Good day and welcome to the first quarter 2010 Drew Industries Incorporated earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host of today's conference, Mr. Jeff Tryka from Lambert, Edwards; please proceed.

Jeff Tryka

Good morning everyone, and welcome to Drew Industries 2010 first quarter conference call. I'm Jeff Tryka with Lambert, Edwards, Drew's Investor Relations firm. And I have with me members of Drew's management team, including Leigh Abrams, Chairman of the Board of Drew; Fred Zinn, President and CEO and a Director of Drew; Jason Lippert, President and CEO of Lippert Components and Kinro and a Director of Drew; and Joe Giordano, CFO and Treasurer of Drew.

We want to take a few minutes to discuss our quarterly results. However, before we do so, it is my responsibility to inform you that certain 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, our Form 10-K for the year ended 2009 and in our subsequent Form 10-Qs, all as filed with the SEC.

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

Fred Zinn

Thank you Jeff, and thank all of you for joining us on the call and on the webcast. We’re really very gratified that our results this quarter benefited from our efforts and investments over the past several years. While much of the improvement in our first quarter results was due to the 99% increase in industry production of travel trailers and fifth-wheel RVs, Drew’s growth this quarter substantially outpaced the industries we serve.

And that’s clearly reflected in the increase in our content per travel trailer and fifth-wheel RV to about $2200 in the 12 months ended March 31, 2010, and that’s compared to about $1900 last March. In fact since 2001, our content per total RV has increased by about $1500. Now if the RVIA projection of 182,000 travel trailer and fifth-wheel RVs this year holds true, the cumulative increase in our content will have added approximately $275 million to our 2010 sales, compared to what it would have been if our content had not grown.

So with our focus on new product introductions, acquisitions and market share growth without that we’d be only about half of our current size. So clearly our strategy has worked over this past decade. Over the last several quarters, we’ve continued to invest in new products, both through acquisitions like the new patent pending wall slide and the new patent pending high end leveling device for fifth-wheel RVs, as well as those we’ve developed internally like the new RV entry door, the sleek new window designs, and other new products.

All of that should help Drew continue to grow. Further our efforts to expand in our manufactured housing product line have now begun to pay off. Despite a 1% decline in industry shipments in manufactured homes this quarter, and I should point out that our press release says 3%, but just about an hour ago the shipment numbers for March for manufactured housing came out a little bit better than we expected, largely in smaller homes, but despite that small increase in industry shipments in the first quarter our segment sales in manufactured housing increased by 17% year over year.

That’s the first such increase in sales in nearly four years. The sales increase was primarily due to the addition of entry doors to our manufactured housing product line, market share gains in our window product line, and growth in our sales of after market replacement products.

In a few minutes Joe will give you some details on our recent growth in those markets. While this was still a down quarter slightly for the manufactured housing industry, the rate of decline slowed substantially and our segment sales increased, which of course is good news.

Our sales growth in the future will likely include new product areas, such as components for mid sized busses, and components for various types of specialty trailers. In the last few months our sales of those products, while still not a significant part of Drew, have increased as we expanded our efforts in those markets.

On the cost side of our business the continued improvements in our production efficiencies offset a portion of the impact of higher raw material costs last quarter. However as the higher cost of steel, aluminum, thermoplastics, and other raw materials flow through our income statement over the coming quarters, the impact on our cost of sales will increase.

I should point out I want to clarify that the $25 to $30 million increase in raw material costs that we spoke about in the press release is an annualized basis based on the raw material prices that we currently know. Historically as most of you are aware we’ve been able to pass on much of the raw material cost increases to our customers through sales price increases and we certainly hope to accomplish that this year as well.

Turning to conditions in the RV industry the 99% increased in industry production levels during the first quarter of 2010 resulted to some extent from increases in dealer inventories. While under certain circumstances an increase in dealer inventories can be a cause for some concern, most industry analysts reported that dealer inventories coming into 2010 were relatively low in relation to retail sales levels.

Further recent dealer surveys by these analysts indicate that retail sales of total RVs increased significantly in March. We certainly hope that those surveys will be confirmed by the March retail data which should be out in about three weeks.

Certainly the key to 2010 is for retail sales to improve during the balance of the spring and summer selling season. But whatever the course of the recovery in the RV industry its very clear that many, many Americans still cherish their RV lifestyle and they’ll continue to choose RVing because it’s a cost effective and family oriented way to spend their leisure time.

And in fact the RV industry association is promoting just those benefits of RVing in their current advertising campaign. In the manufactured housing industry there have not yet been any significant signs of improvement although it was nice to see the rate of decline slow so dramatically in the first quarter, however I continue to believe there is opportunity for growth in the manufactured housing industry in the coming years.

Or the 20 years prior to the sub prime boom in home financing, manufactured housing shipments represented 20% or more of single family housing starts. Almost each and every year, year in and out, good years and bad. During the sub prime years, when extremely low cost loans were available for site build homes, manufactured housing share of the single family housing market dropped precipitously to well below 10% from 20% down to 10%.

Since the sub prime level burst this market share has increased somewhat to about 12% despite that interest rates for manufactured home loans remained historically high relative to rates for site built home loans.

And I think as the economy recovers I believe that manufactured housing will share in the growth in single family housing starts, particularly if rates for manufactured housing loans become more equitable in relation to site built home loans. In the meantime we remain profitable in that segment and we continue to pursue further market share growth, increased after market sales, and additional efficiency improvements.

Last quarter when we spoke I said that we were pleased with the fourth quarter results in light of the state of the economy but we were far from satisfied with the bottom line. Since then the RV industry in general and Drew’s results in particular have improved faster than our expectations or probably anybody’s expectations.

However we will continue to strive for increased sales in both our existing markets and in new markets, as well as further improvements in our operating efficiencies and our focus continues to be on improving our long-term profit potential.

Now I’ll ask Joe to discuss the results in a little more detail.

Joe Giordano

Thank you Fred, last year at this time I discussed declines in sales and operating profit, goodwill impairment charges, extra expenses, and a reduction in our borrowing availability. This quarter I will be discussing substantial improvements in our sales and operating profits, as well as an increase in our borrowing availability.

This dramatic change is the result of increased wholesale RV shipments, our market share gains, and the implementation of operating efficiencies and cost cutting measures by our operating management. Unfortunately accounting rules do not allow our goodwill impairment charge in the first quarter of 2009 to be reversed to reflect the subsequent increase in fair value of our businesses.

As Fred mentioned in addition to our goal of increasing content of our products in new RVs and manufactured homes we have gained a greater share of the after market for replacement components in both the RV and the manufactured housing industry.

For the 12 months ended March, 2010 our manufactured housing and RV after market sales were approximately $20 million, an increase of 25% from the $16 million for the 12 months ended March, 2009.

Our manufactured housing entry door product line which was added just six months ago, has quickly gained market acceptance and for the first quarter of 2010 had sales of approximately $0.50 million including new and after market manufactured homes.

We anticipate this new product line will continue to gain market share in 2010. Our content for travel trailer and fifth-wheel RV continues to grow, increasing 16% in the 12 month period ended March 31, 2010 as compared to the 12 month period ended March, 2009.

In addition our content for travel trailer and fifth-wheel RV for just the first quarter of 2010 alone increased 13% as compared to just the fourth quarter of 2009 alone. This increase is due to market share gains, new product introductions, but a portion of this quarterly increase in RV content is seasonal, also occurring in the first quarters of 2005 through 2008, apparently due to RV manufacturers modestly building inventories of our products.

It appears that in the first few months of each year our customers replenished their inventory including our products, as wholesale RV demand increases ahead of the spring retail selling season. Because the first quarter of 2009 included a $45 million goodwill impairment charge and $4.9 million of extra expenses, this quarter we included additional tables in the press release identifying the classification of these extra expenses in the statement of operations and by segment for 2009 in order to provide comparability to the first quarter of 2010.

For the first quarter of 2010 our cost of sales were 77% of sales compared to 88% of sales in the first quarter of 2009, again excluding these 2009 extra expenses previously referred to. Cost of sales in the 2010 first quarter benefited from the spreading of fixed costs over a larger sales base, operating efficiencies, lower group insurance and warranty costs, and fixed cost reductions.

While cost of sales in the 2009 first quarter was negatively impacted by abnormally high raw material costs as well as the low levels of industry wide RV production. In recent months raw material costs have once again risen to abnormally high levels well above what we experienced in the fourth quarter of 2009 and are continuing to rise as the economy improves.

As Fred said we are attempting to obtain price increases from our customers to offset these rising raw material costs. Selling, general, and administrative expenses as a percent of sales was 15% for the first quarter of 2010, down from 23% in the first quarter of 2009, again excluding the 2009 extra expenses.

This decline in SG&A as a percent of sales was achieved primarily because of the significant fixed cost reductions implemented by management and the spreading of fixed costs over a larger sales base. Operating profit in the first quarter of 2010 as compared to the same period of 2009 benefited from fixed cost reductions of approximately $1.5 million.

Because of the growth in our business additional cost reductions may not be as significant over the balance of 2010. Because so much has changed over the past year we find it useful to also compare our results for the current quarter to the most recently completed quarter, excluding the extra expenses in the fourth quarter of 2009.

First quarter of 2010 operating [and] profit increased by $4.9 million or 12% of the $42 million increase in sales, again as compared to the fourth quarter of 2009. This profit increase was lower than the 20% incremental margin we would typically expect due in part to higher raw material costs as well as retirement costs, partially offset by improved operating efficiencies.

The fourth quarter of 2009 also benefited from lower than typical warranty costs which did not recur in the first quarter of 2010. On March 31, 2010 our trailing 12 month EBITDA exceeded $50 million and as a result the maximum leverage ratio [covenant] in both our line of credit and shelf loan facilities increased from 1.25 to 2.5x the trailing 12 month EBITDA, increasing our borrowing availability under these facilities to over $130 million.

However our more than $50 million and short-term investments as well as the cash we expect to generate in 2010 are expected to be more than adequate and no borrowings under these facilities are anticipated. During the first quarter of 2010 we completed two acquisitions, aggregate consideration for which was $21 million paid at closing plus contingent earn out to be paid over the next six years depending upon the level of sales generated from the new products.

The present value of the estimated earn out payments have been recorded as a liability in our balance sheet. We are required to record interest expense on the change in the present value of this liability. So, assuming no bank debt we anticipate recording net interest expense of approximately $2 million in 2010 including $1.6 million related to these earn outs and approximately $300,000 for fees on our line of credit.

Despite our high level of cash and investments interest income in 2010 is not expected to be significant due to anticipated low interest rates and our policy of investing in only extremely safe investments. Also as a result of the acquisitions completed in the first quarter of 2010, the company recorded $8 million of goodwill, and $24 million of other intangible assets.

For the full year 2010 amortization of these other intangible assets from these two acquisitions is expected to be approximately $1.1 million increasing the estimated depreciation and amortization for 2010 to $17 million, compared to projected capital expenditures for 2010 of between $6 and $8 million.

Our tax rate in the first quarter of 2010 was 39.9% consistent with our full year 2009 expectations of an effective tax rate between 38% and 40%. Finally for the first quarter of 2010 we have included amortization expense within the segment operating results rather than as a separate line item. Prior period segment results have been revised to conform to this new presentation and we have included prior year information for 2009 and 2008 in the press release.

This reclassification was made in light of recent acquisitions to match the amortization expense for patents, customer relationships, trademarks, etc., with the associated revenues. Thank you for your time, now I’ll turn it back to Fred.

Fred Zinn

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Scott Stember – Sidoti & Company

Scott Stember – Sidoti & Company

Could you maybe just remind us the last round of price increases that you had to put through for commodity costs, just give us a framework of how successful you were.

Fred Zinn

We face this issue all the time, commodity prices have been volatile for several years. The last huge increase was in 2008 when steel costs tripled and we were successful at passing on the vast majority of those cost increases. Its no different really than any other commodity price increase that we faced over the past three or four years, so, hopefully we’ll be successful but we’re still in the early stages so we’ll have to wait and see.

Jason Lippert

In 2008, I think is the big answer to this question. It was early in 2008.

Scott Stember – Sidoti & Company

And as far as costs, it looks like at least by the comments that probably not a whole lot more, as far as efficiency improvements you have been able to do a lot to offset rising raw material costs in the past, could you just maybe touch on some of the things you could do going forward.

Fred Zinn

First I think there will be some additional cost cuts, but now they’re balanced out. If the market continues to grow and our sales continue to grow its not as easy to reduce costs in some cases we’re adding some balancing off the cost reductions.

But efficiencies have done very well. Jason do you have anything in particular to add to add to that in terms of production efficiencies.

Jason Lippert

No nothing specific, when we got in the consolidation mode in late 2007 and 2008, we’ve just kind of been on that bandwagon consolidating facilities and the more we’ve done the more we see that there is to do so the bulk of it is done, we’re doing some skinnying up here and there.

Fred Zinn

I would add just one bit of color to that, I notice that at the end of March our number of production employees was actually lower than at the end of December. But December we were gearing up for a very strong first quarter but apparently Jason had been able to implement some additional efficiency improvements at least as far as labor goes.

Scott Stember – Sidoti & Company

If we could flesh into the 75% increase in April sales that you alluded to in the press release, obviously mostly RV and can you just talk about the manufactured housing, how it did.

Fred Zinn

We don’t really have the segment sales yet, but just from the feel of it and from speaking to people I think there’s been a little bit of spotty strength in the manufactured housing segment. I don’t think we’re seeing any explosion in sales or significant increases like we did in RVs but I think at least for the time being its better than bad. Certainly a lot better than continuing to see double-digit declines.

Scott Stember – Sidoti & Company

And just lastly can you just talk about the competitive landscape, you’ve been able to pick off some product lines from some sales competitors in the past, could you just talk about what’s still out there just in the high level.

Fred Zinn

I think it always surprises me the product lines that we do get into to and which competitors survive and which ones fail, I would say to be honest with you if when we were sitting here a year ago I probably would have thought there would be more opportunities. But the industry recovered fairly quickly and small mom and pop suppliers probably thought they can last another year, they’ll get a better price.

So while I think we did very well in terms of the opportunities, we just recently acquired the wall slide product, and the [fifth] end leveling device, and before that several other small acquisitions, I think we did fairly well may not have been the win fall that we were thinking about in terms of acquisitions.

Operator

Your next question comes from the line of Kathryn Thompson – Thompson Research Group

Kathryn Thompson – Thompson Research Group

Could you give us, I know what steel pricing was last year but this year is basically put in perspective the $25 to $30 million into [the paid] increase for 2010.

Fred Zinn

The $25 to $30 million is relative to where we closed 2009, so the fourth quarter give or take of 2009. Last year, when Scott asked about the last price increase I probably should have mentioned that in early 2009 we also saw a huge steel price increase. So last year it was on a roller coaster, both steel and some other commodities.

Its sometimes hard to talk about the relative increase unless you’re very specific about the period you’re measuring against. In this case we’re measuring against fourth quarter prices as they flowed through our P&L. And that’s where we see steel prices and aluminum and thermoplastics right now, so its not what we experienced in the first quarter.

If we updated all of our costs for the year based upon today’s steel or most currently available steel, aluminum, and thermoplastic, at such prices, it would $25 to $30 million higher than it would have been at fourth quarter price levels.

Kathryn Thompson – Thompson Research Group

In the past you’d said that raw materials are just north of 50% of your cost of sales, and of raw materials, steel is about 50% to 60% of that, does that still hold true and how much is aluminum of your overall raw materials.

Fred Zinn

Steel is still in that same ballpark and that includes, those numbers include components that we may buy that are made of steel. Its not just the raw steel that we buy but it is still in that neighborhood of 50-plus percent of our raw material costs. Aluminum is much lower, I don’t know, maybe 20% of that or 15% of that or something like that.

Kathryn Thompson – Thompson Research Group

Fifteen to 20% of your raw materials.

Fred Zinn

No, of the steel, so its 5% or 10% of—

Kathryn Thompson – Thompson Research Group

And just to clarify in terms of passing on price increase, I know that you’ve dealt with this a number of times in the past as you’ve mentioned in the call, but are you able to pass on the increase in terms of dollars or on a percentage basis.

Fred Zinn

Historically its been just in terms of dollars. Let me Jason fill in some color on that but historically we’re passing along the cost increases without margin, is that fair to say Jason.

Jason Lippert

Yes.

Kathryn Thompson – Thompson Research Group

And what’s the pushback been from customers so far.

Jason Lippert

Most of its, we’re just going out with now because we’re carrying some inventory but its, all of our customers know what commodities do, they track it as closely as we do and because on a larger scale it effects them with the wide variety of commodities that they buy and we’re just the steel portion so they’re tracking what’s going on in our industry and they’re prepared for it and the negotiations end up fair for both sides in my opinion.

We’ve done this probably three times since 2007 and it always ends up well for both of us I think.

Fred Zinn

I think that’s the key, what Jason in the middle there said about negotiations between our customers and us winding up with a fair result and we hopefully will get a significant portion of price relief that we need.

Kathryn Thompson – Thompson Research Group

And how long does it take to really just from start to finish when you announce a price increase for it to really flow through numbers.

Jason Lippert

It depends on where we’re at with inventory for that customer and it depends on where the start date is obviously of the increase but its kind of hard to put a pinpoint and say, hey this is where we end up as company.

Kathryn Thompson – Thompson Research Group

You mean it would take three to six months, is that reasonable.

Jason Lippert

No, I would say three or less for the most part. Again depending on the inventory, some might be a little bit longer, some might be a little shorter. Some we’ve already put into place.

Kathryn Thompson – Thompson Research Group

Just talking a little bit about moving to retail demand in March you said you’re hearing some improvement, any color on that and also how much order visibility do you realistically have in the current market and how is this versus last year.

Fred Zinn

Most of the color we get on retail demand comes from you Kathryn. Of course we’re reading everybody’s dealer surveys and there’s some good ones out there including yours and listening to our customers so most people are saying that March retail should be up. They expect it was up certainly double-digits. So we’ll wait and see.

Jason Lippert

Registrations are coming in pretty strong according to a lot of our customers right now.

Kathryn Thompson – Thompson Research Group

And how is your visibility today versus last year.

Fred Zinn

In terms of order flow, its about the same, really, we can see we have orders just for a very short amount of time and I know Jason and his team are talking with our customers all the time, but our visibility is measured in weeks, not in months, so I don’t know whether its four weeks or six weeks, but beyond that it gets a little bit more complicated.

Jason Lippert

Yes, that’s correct and our customers, the manufacturers have a lot, visibility a lot farther out and I think its fair to say that their visibility is a lot longer today than it was last year at this time.

Operator

Your next question comes from the line of Bret Jordan – Avondale Partners

Bret Jordan – Avondale Partners

A couple of quick questions, one of those just on Jason’s comment about registrations coming in pretty strong, is that sort of April data that you’re getting back through the channel.

Jason Lippert

Yes, that’s recent.

Bret Jordan – Avondale Partners

And then in 2008 when you had the last big pricing pass through was that pricing then generally passed through at retail pricing as well as, at some point get absorbed into the channel where they take some [margin] cut or is the consumer usually pick up the tab.

Fred Zinn

My impression is and I’ll let Jason fill in, but my impression is that everybody pays a little bit. So we don’t get 100% and our customers eats a little bit and the dealer eats a little bit and consumer depending on the nature of the price increase, the consumer might see some additional costs in the RV.

Jason Lippert

And a lot of the time too one of the areas we work with customers that’s a time for them to start looking seriously at maybe taking advantages of some cost cutting or efficiency measures we’ve offered up in the past where there’s a little bit more incentive when there’s a price increase facing them to do those kinds of things and soften it for everybody.

Bret Jordan – Avondale Partners

And just a follow-up on your last response, I think you had said it was likely within a quarter that any incremental input costs can be passed through.

Jason Lippert

Yes.

Fred Zinn

I think what happened in 2008 we kept seeing increase after increase. So we were always a little bit, that quarter behind or so. We’ll have to wait and see what time this takes with the strong economy its hard to predict what kind of further increases we’ll see in raw materials or whether they’ll come down.

Bret Jordan – Avondale Partners

But its not a multi month negotiation process, this is generally a price sheet is rolled out and accepted or rejected.

Jason Lippert

More or less.

Fred Zinn

There’s always some negotiation. Our customers are in business to make money just like we are and so there’ll be pushback’s undoubtedly and discussions back and forth hopefully it won’t as Jason said, hopefully won’t take an extended period of time, but it could take a short period of time to get price increases through.

Bret Jordan – Avondale Partners

Is anything going on in the motor home space with this new slide technology you have. Have you gotten any incremental footholds there.

Jason Lippert

Do you mean with respect to the end wall slide on motor homes specifically.

Bret Jordan – Avondale Partners

Yes.

Jason Lippert

Yes, I think that’s one of the large target areas we’ve got right now. We’ve got a lot of traction in the motor home side of the business right now specifically because it takes all the large bulky slides out from under the floor and we put them right in the wall and integrate it to the slide out room of the unit.

Bret Jordan – Avondale Partners

Is that actually be installed now or is that still sort of in discussion process.

Jason Lippert

No, we’ve got business going on right now. It’s a 35 lb slide out mechanism compared to the old system’s weight anywhere from 150 to 250 lbs per mechanism. Motor homes are obviously a lot more sensitive than the towables to weight.

Operator

Your next question comes from the line of Liam Burke – Janney Montgomery Scott

Liam Burke – Janney Montgomery Scott

In your discussion you talked about the after market business growing looks like to about 14% or 15% of total revenues, just generally could you give us a sense as to what the growth expectation would be and what the gross margin implication would be for the after market rate vis-a-vie OEM sales.

Joe Giordano

We really don’t give any projections or forecasts, I do know that this has been a area of focus for us and we will keep our efforts there. Last year we had talked about the entry door business for manufactured housing that we were getting into and that being a $25 to $30 million market of which about half of that was in the after market itself and we again, I talked about just having $0.50 million of sales in that now so there’s some opportunity in area for growth there.

And again we don’t give any forward-looking information in terms of what we think the sales would be there.

Fred Zinn

And just to clarify the after market isn’t 15% of our sales, that $20 million that Joe mentioned that was for the trialing 12 months.

Liam Burke – Janney Montgomery Scott

And on obviously you laid out your capital budget for the year, are there any priorities you have there, any kind of delayed [investmenting] that you’ve based on a slower 2009.

Fred Zinn

No I don’t think so, I think as we see opportunities we have the cash to invest which is always good. If we see opportunities to improve our efficiencies, we’ll invest where we have to but I think right at this point we’re still talking about that $6 to $8 million, so its quite modest.

Operator

Your next question comes from the line of DeForest Hinman – Walthausen and Company

DeForest Hinman – Walthausen and Company

Can you talk about the raw materials as a percentage of cost of goods sold, what level that was in the first quarter and then also the fourth quarter 2009.

Fred Zinn

I can give you some generalities there, usually we think more in terms of material costs as a percentage of sales and they were just north of 50%, so it may have been up a point or two or whatever it turned out to be in the first quarter as compared to the fourth quarter but generally its between 50% and 55%.

DeForest Hinman – Walthausen and Company

And can you give us a little bit more color on the movement we’re seeing in the SG&A line, we had a pretty sizable sequential increase, I know some of that’s probably driven by the increase in sales, I know we do profit sharing but over the last few quarters the number has really moved around quite a bit, can you kind of give us some color about how to think about that as we progress through the year.

Fred Zinn

The SG&A line has obviously both variable and fixed costs. As you said one of the biggest variable costs is the incentive compensation that varies not with our sales but with our profitability. So, the stronger the profits the more we’re accruing for incentive compensation. But included in SG&A as well are distribution costs.

We put our distribution costs, shipping, freight type costs, in SG&A as well so a portion of the non-incentive compensation SG&A is also variable. Does that help at all.

DeForest Hinman – Walthausen and Company

Well I guess another way of asking it either from a dollar perspective or a percentage of revenues perspective, there’s just a lot of variability there and maybe some help from a modeling perspective as to some type of range we can be looking at for the remainder of the year.

Fred Zinn

Yes, I don’t think that’s something that we have disclosed in the past and not prepared to do that right at this point although I would say that a few percent for our distribution costs just a few percent for the freight and delivery costs, and the balance as you know we accrue 20% of our, approximately 20% of operating profits for incentive compensation.

So if this quarter was more profitable, as this quarter was more profitable than last year part of that increase is the 20% incentive compensation accrual.

Joe Giordano

And last year was a loss so there was no incentive compensation in last year’s first quarter of 2009.

Fred Zinn

I think the question was to fourth quarter.

Joe Giordano

And as we’ve said when you’re looking and modeling we don’t typically get into the cost of sales and SG&A line, the sanity check is the 20% incremental margin when looking forward and trying to project a model.

Fred Zinn

That’s exactly right.

Joe Giordano

Now again in 2010 as we’ve said half a dozen times already the biggest factor of that will offset or impact that 20% incremental margin will be raw material costs. We just have to monitor that piece of it.

DeForest Hinman – Walthausen and Company

And speaking of the raw materials in the past we’ve been in a balance sheet position, I know either it was a year ago or a couple of years ago we did some pre buy on imported steel, are we looking at anything like that at this point.

Fred Zinn

Not at this point. I think its very difficult in this kind of economy to know whether steel is going up. Its not only supply and demand it’s the forces of China so it is very difficult and I don’t see us doing an awful lot of pre buying. Jason do you have any other thoughts on that.

Jason Lippert

No, steel has been flat the last couple of months and there’s talk that the steel prices will either level off or maybe even fall this summer, fall. So, we’re just kind of taking it month to month. It rose real rapidly in a real short period of time and smarter for us to just kind of play it month by month right now.

Fred Zinn

I think if you ask a dozen analysts on where steel prices are going to go, you get a dozen different responses, so we’re not smart enough to make a big bet on it.

DeForest Hinman – Walthausen and Company

And can you kind of comment on the acquisition pipeline, what you’re seeing from wall to wall perspective, are they moving away from what we’ve historically paid.

Fred Zinn

Certainly in terms of pricing things have changed, we rarely if ever talk about a multiples of prior earnings. We’re looking at in the case of an acquisition of a business as opposed to a patent or an idea, as the last two were, but in the case of an acquisition of a business we’re talking about assets, maybe some earn out.

If things go better than we expect maybe they get some additional payment so in terms of the pricing it is just a different way of formulating our offer. In terms of the pipeline we’re still seeing opportunities. If we had something to announce we would but at this point we’re just continuing to pursue those that come our way.

Most of our acquisitions have been as much opportunistic as strategic. We make acquisitions because we think we can do well with them, but when you’re dealing with a small business owner, usually if a small family owned business its very hard to convince them when to sell. They make up their mind when to sell and then we evaluate the opportunity.

DeForest Hinman – Walthausen and Company

And this is more of a high level question on the balance sheet historically we haven’t really held very large amount of cash, home [inaudible] class, 10 years or so, we find ourselves in a position again with a lot of cash, we’re still looking at acquisitions, you just did two in the first quarter. We still have a lot of cash, is it our position to maintain a very high level of cash or do we look to get some of that back to the shareholders at some point.

Fred Zinn

Its certainly been our position to hold a high level of cash, while we are debt averse, we won’t borrow as much as other companies. We have no problem borrowing for the right opportunities. Our first priority for spending our cash and for even incurring debt would be for acquisitions. And at this point we hope and expect to see enough opportunities so that we need to keep our cash for the time being available for that use.

But I understand that at some point if we’re not spending as much on acquisitions and growth as the cash flow that we’re generating we need to think about returning some to stockholders so at every Board meeting, quite a few Board meetings, that’s a topic that comes up for discussion.

DeForest Hinman – Walthausen and Company

My last question is just an update on some properties we had for sale, I think we talked about those on previous calls, but I don’t know if we mentioned them on this one.

Joe Giordano

There have been no significant changes during this quarter. I think the market is starting to pick up a little bit in some of the areas but there’s been no significant movements.

DeForest Hinman – Walthausen and Company

So those properties are for sale still.

Fred Zinn

There’s 10 Joe?

Joe Giordano

Yes, there’s around 10, three of them are under leases for the next one to three years. So there’s seven actively being marketed.

Operator

Your next question comes from the line of Arnold Brief – Goldsmith & Harris

Arnold Brief – Goldsmith & Harris

That’s Arnie Brief I believe.

Fred Zinn

We know who you are Arnie.

Arnold Brief – Goldsmith & Harris

Sometimes I don’t know who I am, just a few questions, what would be the impact of the housing credits that were in effect and now expiring, having expired, what would be the overall impact of that transition and financing on manufactured housing and as a [collary] why would you think interest rates on manufactured housing mortgages would come down when the outlook for interest rates on a longer-term basis is probably for them to go up. And then second question is could you, you did a little bit but could you do a little bit more on giving us the size of the market on some of the new products and acquisitions that you made for those particular products.

Fred Zinn

Let me try and answer them in order, I think your first question related to the housing credit, the $8,000 housing credit, and from all reports it had virtually no effect on manufactured housing. You need to have a lender even if you have an $8,000 credit, you still need to find lenders to provide the financing for the purchase, and there weren’t an awful lot of lenders available.

Arnold Brief – Goldsmith & Harris

So the expiration will have no impact.

Fred Zinn

Yes, I don’t think the expiration will have any significant, from the people I’ve spoken to, the expiration will have no significant impact. In terms of the interest rates on manufactured homes I wasn’t saying that the interest rates would be lower, would decline, I’m hoping although I don't know if I’m expecting, I’m hoping that the differential between a manufactured housing loan and a site built home mortgage will decline.

Its higher than it has historically been, its not the highest its ever been but relative to the average over history its high. And of course that influences more people to buy site built homes. When the financing for site built homes is relatively less expensive than historically it would be.

Arnold Brief – Goldsmith & Harris

You don’t think the tax credits on housing shifted people towards site built homes versus—

Fred Zinn

No, I don't think so. I really don’t know but if you think about it, on a $300,000 site built home, the $8,000 credit was a couple of percent, 2.5%. But on an $80,000 manufactured home it was a 10% credit at its peak anyway. So, I don’t think so. There aren’t good statistics on it so I don’t know for sure but my gut tells me it probably wasn’t.

Arnold Brief – Goldsmith & Harris

How about the second question, market size from the new products and acquisitions.

Fred Zinn

For the recent acquisitions, I think the biggest acquisition obviously we made is the wall slide. We tend to focus on the wall slide piece of that acquisition but there were a number of other components. We had some other nice products and I don’t know maybe the wall slide is half of the value or something like that of that acquisition and I think the market size there is hard to peg because where we’re looking at first is what our opportunity is to increase our share.

And as Jason said that starts with motor homes or at least starts in part with motor homes. But as the product develops we could see it become a very significant portion of the overall slide out market. Now there are if there were 180,000 towable RVs, [inaudible] RVs and maybe an average of something like 1.5, you could be talking about 250,000 or 300,000 total market for slide outs in towables in addition to what you find in motor homes.

I’m rambling on here a little bit but it’s a very big potential. We don’t know how much of that huge market this new wall slide will capture. We’re hoping to fill in and expand our market share but I don’t know how much of the total market we’ll be able to capture.

Arnold Brief – Goldsmith & Harris

How about some of the other new products.

Fred Zinn

The others are more modest, the plays there for us are that the seller didn’t have the financing to go after the big players or for whatever reason couldn’t expand the way we believe we can expand. But they’re not of the same order of magnitude as that slide out.

Now expect for, it wasn’t an acquisition but the after market efforts we’re making are fairly significant. I think Joe mentioned $25 or $30 million and that was door alone, manufactured housing and we’re increasing our efforts on bathtub and other thermo formed products, both RV and manufactured housing.

We’re increasing our efforts on after market windows particularly for manufactured housing and a number of other products.

Jason Lippert

One of our largest focuses is content, I mean we’ve got arguably the largest selection of products in the industry as a supplier for RVs and as a lot of the products we’ve introduced over the last two, three, four years become increasingly popular more and more manufacturers want them so we’re doing a bigger and better job making sure that the rest of the community gets some of those content pieces.

Arnold Brief – Goldsmith & Harris

You discussed the raw material cost increases in a lot of detail, what concerns me is that we’re seeing cost increases during a period where generally manufacturing capacity is running at pretty low levels of utilization, what’s the outlook for these raw material costs as you look out one or two years and the economy continues to recover, they could be rather [inaudible] I would think.

Fred Zinn

Unfortunately I’m not the expert there and there probably aren’t any experts there in particularly steel. Steel is a big number for us and its not only the domestic economy, its not only supply and demand, it’s the role that China plays in both supply and demand. So its impossible really to peg. But our customers use a lot of steel and they use a lot of other commodities.

They know what the markets might be and we’ll work with them over time to offset as much of those whatever raw material costs we see.

Arnold Brief – Goldsmith & Harris

And this question has been asked but maybe I’ll elaborate a little bit it seems to me that given your level of cash and the cash that you’re generating at this point, I wonder that you’ll be able to use all that cash in the businesses that you’re currently in. You discussed it a little bit maybe you could elaborate or would you again, I’ve asked this question before, look for a third leg on the stool.

Fred Zinn

I think those are all possibilities. I think you’ve known us for quite some time, you know that we’re not going to rush into anything particularly in new markets. That doesn’t mean that we can’t develop a third leg on the stool as you say.

So I think that is an opportunity for us that we continue to explore and more than that I really can’t say. We’ll see how the acquisition landscape turns out, what kind of opportunities we have both within the RV and manufactured housing markets and outside, but as you know we’ve been cautious in the past about exploring other markets and we’ll continue to be cautious.

Operator

Your final question comes from the line of Barry Kaplan – Maple Tree Capital

Barry Kaplan – Maple Tree Capital

I was just wondering if just from your perspective what you’re seeing in terms of availability of financing down the chain to your customers, to the dealers, and ultimately to their customers, if there’s been any improvement at the margin and also just out of curiosity, I was wondering how that tow and stow is doing.

Fred Zinn

In terms of financing Jason’s probably a lot closer to it than I am, but what I’ve seen, what I’ve heard in analyst reports and in talking to others is that there has been some improvement on the retail level. I think even maybe in particular but certainly a little bit of improvement also on the dealer finance level and hopefully that will continue. I don’t think there’s been anything dramatic yet. Its not like the floodgates have opened up but improving at the margins.

I think the quotes that I saw were on the order of you still need a 700-plus FICO score to get a loan but now you can actually get them as opposed to just talking to you about them.

Jason Lippert

I think improvement is the key word, that’s kind of what we’re hearing more and more every month.

Fred Zinn

And tow and stow, still nothing significant. Jason, anything in recent days on that.

Jason Lippert

No, it’s a big marketing campaign project, early stages, and we’re reaching out to a lot of the potential big buyers of the product and make a little bit of progress every quarter so whether or not it plays out to be a big component of ours, we’ll know in the next 12 to 18 months.

Fred Zinn

As you know we introduce a lot of new products, and I think we’ve got a pretty good track record of success in those new products. Not every one turns out to be a barn burner. We don’t have a huge investment in tow and stow and if it turns out to be a winner, that would be great. And if now we move onto the next one.

Operator

There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

Fred Zinn

Very good, well I certainly thank all of you for your participation in this call. I look forward to speaking with you again at the end of the second quarter. I also spend a fair amount of time on the road speaking with investors, and I would be delighted to speak with any of you when I visit your cities.

And we’ll talk to you soon; take care.

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