Good day ladies and gentlemen and welcome to the LCI Industries’ Q1 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call maybe recorded. I would now like to introduce your host for today’s conference Tyler Deur from Lambert Edwards. Please go ahead.

Thank you. Good morning everyone. And welcome to the LCI Industries 2017 first quarter conference call. I’m Tyler Deur with Lambert Edwards, LCI’s Investor Relations firm. And I’m join on the call today by member of the LCI’s management team, including Jason Lippert, CEO and the Director; Scott Mereness, President; and Brian Hall, CFO. Management will be discussing first quarter results in just a moment. But first, they have asked me to inform you that certain statements made in today’s conference call regarding LCI Industries and its operations maybe consider forward-looking statements under the Securities Laws, and involve number of risks and uncertainties. As a result, the Company cautions you that there are number of factor, 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 statement. These factors are discussed in the Company’s earnings release, in its Annual Report on Form 10-K and in its other filings with the SEC. The Company disclaims any obligation or undertaking to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made, except as required by law. With that, I would like to turn the call over to Jason Lippert. Jason?

Thanks, Tyler. Good morning everyone and thanks for joining us on today’s call. As we continue to focus on strategic plan and objectives total revenues in Q1 reached approximately $498 million up almost 18% from $423 million in first quarter of 2016. Our EPS grew from $1.45 per diluted share to $1.71 per diluted share an 18%. April sales were very strong coming [indiscernible] million compared to $145 million in April of 2016 a 15% increase. The industries that we serve on a roll and enjoying steady and solid growth, the top story for our company through Q1 is continued RV industry growth the shipments top the record 40 year high. Backlog are at record leveled off so with some OEMs backward into August on several product lines and dealers are reporting great retail traffic and record show attendance. Additionally OEMs are continuing to add capacity in opening new production facilities to meet continued increased demand. Once you factor these and along with the customer confidence at a near 60 year high and the stability and gas and consumer lending always indicators point to a banner year for 2017 where shipments could reach over 450,000 units. In addition we remain very positive about our organic sales growth as we estimate our total addressable market opportunities are just over $4 billion. We and other industry leaders have been saying for the last two years now that we feel confident that the industry will hit 500,000 units at some point before 2020 and we still feel strongly about that statement. RV products are attractive and more affordable with more technology and features that are clearly attracting new age groups and authenticities to the European outdoors lifestyle. In a recent RV business in Wells Fargo survey 88% of the dealers surveyed said they…

Thanks, Jason and good morning to everyone joining us on the call. Over the next few minutes, I will provide some additional color regarding the financial results, as well as point out some highlights of our cash flows and financial position. Our consolidated net sales for the first quarter of 2017 increased approximately 18% to a record $498 million, 14% of our sales growth was organic and 4% came from acquisitions. Sales to RV OEMs our largest customer base also grew at 18%, compared to the first quarter of 2016. The RV industry continued to show strong growth as wholesale shipments of towable RVs and motorized RVs increased 12% and 16% respectively. Sales to other OEMs outside of RV grew at 17% to over $95 million for the quarter, while our aftermarket segment increased sales at over 20% to $36 million for the quarter. I would also note that April 2017 sales for the aftermarket segment grew in excess of 28% over the prior year, driven both by seasonality and new business. Acquired revenues were approximately $17 million of the $76 million of consolidated net sales growth. Consumer confidence, low interest rates, strong U.S. truck sales and favorable demographics are all factors pointing to a bullish outlook for the RV industry. Retail sales of towable RVs are up over 12% when compared to the previous year. We would anticipate the increase in retail to be much higher once all of the various states have reported. Motorized RV content per unit for the 12 months ended March 31, 2017 increased over $164 to $2,022 per unit, while towable RV content per unit increased $80 to $3,058 per unit. Growth in furniture, awnings, Furion and leveling were key contributors to the increases. We’re even more excited about the opportunities to come, such…

[Operator Instructions] Our first question comes from the line of Daniel Moore from CJS Securities. Your line is now open.

Good morning, Jason, Scott, Brian. And thanks for taking the questions.

Hi, Dan.

Hi, Dan.

You gave a lot of detail, Jason. Thank you very much. I mean as it relates to a lot of the components, labor costs, some input cost, just taking a step back looking at EBIT margins that last year a huge step-up 370 basis points. A little step back in Q1 down to 100 plus. Just looking at fiscal 2017 and all the puts and takes, do you expect to be able to match the 12% EBIT margin that we saw in 2016 this year or some of those headwinds that we talked about maybe – make that a little bit more challenging?

Hey, Dan. Yes I think that all-in-all, yes, we feel comfortable with the 12% and I think we’ve made some comments on that toward either Q3 or Q4 last year in our call. Brian will give color in a minute. But as you know, we’re improving margins over Q3 and Q4 last year. So we’re heading in the right track. We’ve got some a little bit of headwinds, we’re fighting with labor as we discussed but all-in-all feel like that number is obtainable.

Yes. I would add to that Dan. When you really go back and look at 2016 and the overall 12% plus that we earned for the year, Q1 was 13.2% to Q2 was 13.5% And then we saw some pretty sizable reduction to 10.9% and 10.1%, a lot of that as we’ve discussed previously was were changes in our commodity prices the timing of when we’re putting through price reductions with our customers as well as the increasing labor costs that we were saying through the latter half of the year. So when you look at 2017, I look at Q1 has been an improvement over the latter half of 2016 and you should start to see some better comps as we move beyond Q2 of 2017.

And just to close out the question, I think to just – having investment and programming and labor and attrition initiatives and everything that we’re doing, that starts to recede a little bit as we get into the rest of the year. So as Brian said, comps should get better as we get pass Q2.

Really, helpful. Appreciate it. And then getting a little bit more granular as it relates to gross margins, can you give us a sense or isolate the impact of rising input costs aluminum and steel that we saw in the quarter.

Yes. Dan, this is Scott. So in terms of material cost, it definitely has been a little bit more of a headwind than the last time we spoke. In terms of last earnings call, first and foremost, next we always talked about raw materials being involved pool and one other thing that we have to look at when raw materials go up, our potential price increases. So both them always match up and nice to see from quarter-to-quarter. So you look at this first quarter, this year, we’re seeing some impact there primarily due to aluminum. But as you see, price increases going to fact and potentially that volatility mitigating we feel like we should be able to control that.

Got it. And lastly talked about adjacent – maybe some larger acquisitions in the pipeline. That obviously – do we expect to see more like Sessa internationally or I’m sure you’re looking sort of across the board? Where is the greatest area of opportunity that you’re seeing maybe either geographically or via end market?

I think because as we’ve stated, so often our real growth looks to be the adjacent market category and still some in RV and some international. But the greatest opportunity for us – are in the adjacent market. So and that’s kind of what we’ve shown over the last two years of acquisition strategy there’s a lot of acquisitions, I mean adjacent markets with marine and bus and cargo trailer and especially the vehicles and things like that. So that’s kind of the focus and we would have said in the past, we want to take international slow. We feel, we’ve got a great strategy there because it’s such a different culture and different market and everything’s a lot different than what we deal with here in the states as we’re taking that strategy – we’re taking that strategy slow but calculated.

Dan, this is Scott. Just one more quick comment there, when you – a lot of you guys have spent a lot of time looking at the $4 billion slide of market opportunity, but within just a reminder within the RV space of roughly $1.8 billion – just over a $1 billion is products that we would grow organically. So when you think about it from an acquisition standpoint of the $1.8 billion and within North American RV, it’s really only $800 million give or take and acquisition opportunity is there and then $2.2 billion in non North American RV market. So definitely you could expect that the trend of non North American acquisition – non North American RV acquisition being a little bit more prevalent – are probably high just based on the numbers that we have laid out. Jason talked about a few new markets today that we still don’t have in the $4 billion market, he talked about hitch market and even the cargo management market. So those are things that I’ve always told people that are not in that market. So we’ve got lots of upside. We do now have close to 200 team members in Europe after those two acquisitions. So the first two were a little bit small but now it’s boots on the ground and leadership team in place it’s little bit easier for us look at slightly larger deals. But like Jason said, we won’t venture too far – size wise too far from where we are. At least, right now we won’t in Europe for sure.

Thank you very much. And did I hear April aftermarket up 28%. Is the right number?

Right, yes.

Perfect. Thanks, gentlemen.

Thank you.

Thank you. Our next question comes from the line of Kathryn Thompson from Thompson Research. Your line is now open.

Hi, thank you for taking my questions today. Just digging a little bit further into segment margins, first, could you just confirm that for at least the OEM side labor and raw materials with a greater driver for margin compression? And then second digging a little bit more into aftermarket. How much of the margin compression was driven by mix, labor, raising raw materials or other factors, we should take in consideration. Thank you.

Yes. I think when you look at the reduction in margins just year-over-year, Q1 to Q1, I look at labor and over – labor and materials within our gross margin to be somewhat equal and the driving force there of the reduction. Specific to aftermarket, I think that what’s driving most of that would be changes in mix. Not 50-50, so I’d put greater weight in change and mix versus the increase in additional cost – operating cost there.

And I’d add that real quick that mix is, it’s always, I saw as literally a mixed bag because the mix shift can change, we can see more fifth-wheels produce, but just more entry level fifth-wheels produced and not be a bigger driver as what you might think. But also just to add that we’re mention we’re putting 1 million square feet online here in the very near future. So we have a lot of investment around that in getting people and equipment and process is ready to put that online and we can just put it online in Q2 and Q3 all at once. So we got to prepare for that and plan for that and we’re seeing some of that as well. So a lot of investment in the business right now, similar to 2014 but I think the real story in terms of how 2017 – 2018 is going to be different than 2014 that we’re running 100% attrition in 2014. So as you can imagine it’s a much harder to deal with the growth and have the new capacity and deal with all that with 100% attrition and that is where we are to-date just about 40%.

Kathryn, this is Scott. I just add one more thing again when you look at margins, I think like Brian was just saying our quarter-by-quarter margins you’ve got to look at – I think the right way to look at it would be the full year of 2016 as compared to what we turned in for the first quarter this year. 13.2%, 13.5%, 10.9% 10.1% it’s largely the material tailwind started we talked about halfway through the third quarter of 2015. And then four quarters in Q4, Q1 and Q2 so these comps and the way to probably best look at it would be a full year operating margin which is 12.1% and we turned into 11.9%. So I think I would encourage everybody to continue to look at it that way as opposed a great comp versus something that maybe sounds worse than it actually is.

And we’ve got – just not to keep piling on. But we have some materials benefit Q1 last year with respect to materials obviously. And we’re seeing the opposite of that now. We didn’t set the decreases in place until midway through the second quarter, last year. No different than we’re not going to set the increases in place till second quarter this year. So hopefully that’s helps give you an additional color.

Yes, just one just clarification there. You said labor and materials would roughly equal impact in the quarter. Is that for a consolidated or was that just for the OEM segment in particular.

Consolidated, but really OEM is the larger segment.

Yes. Okay. And just to follow the margin question. And there’s a lot of talk about labor, materials and mix. But to what extent to have newer acquisitions over the past six to 12 months impacted your margin profile as you pull those into the company.

I think that a lot of these adjacent that we’ve discussed this many times in the past that a lot of the – our focus on adjacent industries as well as aftermarket they tend to be favorable from a margin perspective and international seems to be a little bit different and move at slightly different phase. But it’s – those are relatively small when you look at the last 12 to 18 months worth of acquisitions.

I would just answer the question. I don’t think acquisitions really have impacted us positively or negatively, when you look at our overall book of business.

In the past year.

In the past 6 to 12 months.

Okay, perfect. That’s helpful. Then finally on acquisitions know that you had a few comments with CJS just prior. But taking just another step at this – as you look at acquisitions we know you’re more focused on aftermarket. Basically, markets outside of your core market but with that said would you be open to taking on a larger acquisition in the industry in which you participate?

With respect to the aftermarket or just…

Aftermarket and OEM. I mean what’s your comfort level in terms of potential acquisition size, you’d willing to take on? Given where we are in the cycle and your relatively clean, your very clean balance sheet?

Yes. We’ve made comments [indiscernible] call and others where we’re starting to look at bigger deal. But they got to stick with our – we’re sticking with our discipline. Multiples have changed in the last 12 months. And you get your bigger deal sides and multiples are different. So we’re that filing with all that carefully. But I’d expect to say that we’re looking at the deals that are larger than historical. You want anything to add that.

I mean I think Kathryn, we’ve talked in the past that our appetite for debt and leverage, it’s different than other companies. I still would consider our company on a forward basis if you look out over the next three to five years still fairly conservative. That being said, I think we’re more apt to carry a little bit of debt to fund some acquisitions. And if we ventured in the neighborhood of one that – maybe even 2 times debt or EBITDA rather, that’s not something that we look at as super risky, first and foremost. And secondly, when you look at larger acquisitions you probably will be – could potentially be getting into that type of range.

Okay. That’s helpful. And you gave a number for your April aftermarket sales anything in terms of the OEM segment or is it just a matter of backing out the numbers that you gave for your total April number.

Overall, we’re 15%. So if you kind of fact of the 28% out of that for aftermarket.

Okay.

Obviously, a little bit lower. But wholesale was up, 17% in March, and 12% on the year obviously, and retail still really strong. And I think that, again that’s a real driver and we’ve shown historically that what we’ve got a proven track record when there’s growth there to get out there, we’re not only successful getting the growth but we figure out how to get efficient real quick on it and year-over-year we get better. But with 12%, 12% wholesale and almost 12% in retail with the results that we have so far for industry shipments in wholesale, it’s – an industry shipments retail to get a little bit better with future month reporting. So it’s a lot of good news right now.

Thank you very much.

Thanks.

Thank you. Our next question comes from the line of Craig Kennison from Baird. Your line is now open.

Great. Hey, thanks for taking my question. Again on margin here, just curious if the cost pressure you’re seeing is enough to justify a price increase and if so how does how quickly does that move through the income statement?

Yes. We’ve mentioned a couple different times, we’re definitely looking not a product-by-product customer-by-customer basis as we would normally do it. And certainly, we’re experiencing most of the pressure on the material side there is a lot of aluminum products, labor overall that’s an issue that everybody is dealing with. So the pressure is kind of equal on all sides there, but typically you would see at least a quarter, lag I would say before you really start to see any impact of adjustments.

And Craig several of our product lines are set up on kind of an index move. So that index move was a look back we see those changes and future quarters after we look back. Scott, I don’t know, if you want to add anything.

Yes. I mean those mechanisms would either be a one or two quarter look back. So they do have a little bit of lag. Again the two primary raw material inputs that we have steel and aluminum in that order, they’re volatile, I mean just looking at the kerbs over the last year to year and a half, they could come down just as quickly as they’ve gone up. So we’re patient, but at the some point in time aluminum probably has shown a little bit less volatility in terms of up and down it’s been consistently going up since the beginning of 2016. So I think we have a little bit more focus on aluminum based products, windows, doors, awnings, aftermarket type products, slide outs, those types of things that carry a heavy aluminum content in their bill material.

Thanks. And then on the CapEx front, you’ve got a bigger agenda this year in terms of your capital priorities. Could you just review in a little more detail what your big plans are and where you see the most return for that spend?

Yes. So I think Brian on the last call, Brian had talked about 2017 CapEx, initial forecast in the range of $65 million to $75 million. We’ve got two big projects and some other cost will for sure slip over into 2018. So I guess, I’m given it here maybe on a forward 12 as opposed to just calendar year 2017. But we’ve got two projects, one new building being built currently under construction in Fort Wayne that will consolidate to Fort Wayne furniture facilities and that one plant under one roof. And then we have a facility in Mishawaka just to the West of Elkhart that would allow us to expand our aftermarket as well as Furion growth. Do you think about Furion being a distributed item? Obviously, with that sales growth we’re going to need more warehouses in space for that product line. So we’re preparing for that. So the Mishawaka add there would be as a way to alleviate space constraints for Furion growth as well as success in the aftermarket. That being said, those two projects are going to exceed $25 million in CapEx money on combined. And again, that would be expected over the next 12 to 13 months give or take. So those are out of the $65 million to $75 million those are the two biggest projects that we have. We’ve got some other big ones but those definitely would be some of the big ones. And again talk about when we add building it sometimes carries a step function. So you look at the last time we added aftermarket space was back in beginning of 2014 where three years later, we’re talking about adding that Furion is coming up on it’s two-year birthday in July in terms of when we went deal, so we’re two years into that and now needing some space there. And then our furniture plant in Fort Wayne is a labor play as well as a capacity play. So we’re trying to move slightly outside of the Elkhart County market to deal with the tightening labor market. But we often need space due to the success of the marine furniture market that we’re having in that space as well as adding some additional redeem capacity for our RV furniture that’s located in Goshen.

Thanks. And lastly on that Furion comment you made. Could you just share more detail on how you see that relationship unfolding on next let’s say 12 to 24 months.

Well, from a space standpoint, so we’ve just been reviewing in the last couple days and it’s all based on how successful the products are, but products upgrade, the cost upgrade, we got commitments from our customers and again these are products that carry quite a bit of content per vehicle in terms of dollars but they’re also quite large. So that means that we’ve got to be prepared from a spaces and logistics standpoint. But the $800 million market opportunity within the Furion group of products is out there. And I think we’ve commented on past calls that we have relatively low market share, not zero, but closer to zero than $800 million. So lots of upside and we’ve got to be prepared for that growth. And so with the building add in Mishawaka that’s really a part of that preparation for the growth.

And I would add Craig on that. We’re super excited about the Furion line of products. I mean they have done everything that they said they’re going to do and provide us new product opportunities and product development. We’ve got several new products coming on line, excuse me, by the end of the year and right now, I think we’re in the – out of the $700 in content, we feel there is through other product offerings, that they’re going to put online over the next couple of years, we’re in maybe $125 range. They are opening up their innovation center here on May 18 and so $5 million facility that, that’s going to be able to showcase kitchens and electronics products and all the different products that they’re going to launch – do a big launch for our customers and the public in couple weeks. So we will able to talk a lot more about products that are going to add significant content in the next 12 months by the next earnings call.

Yes, Craig just a clarification, because I know in the speeches and what not we talk about the Furion content over X amount of months or years. When you look at $800 million on 400,000 units, the math there is it’s different than some of the numbers quoted. So I just want to make sure everybody understands that what we quoted today is kind of that near-term expectation, it’s not necessarily the full potential. But we’re being conservative when we talk about a few $100 or $600 to $700 as opposed to – it changes on a regular basis. And we’ve got – all markets for that. So we’ve got aftermarket, we’ve got cargo trailers, sequestering trailers, buses, marine. We can put – we can put Furion products into most of the markets that we’ve – that we’ve gotten our adjacent.

Got it. Thank you.

Thanks, Craig.

Thank you. Our next question comes from the line of Steve O’Hara from Sidoti & Company. Your line is now open. Steve O’Hara: Yes. Hi, good morning.

Hi, there. Steve O’Hara: Hi, just question maybe you address – I had some connectivity issues. But can you just talk about the difference in the tax rate. You mean it seems like it’s pretty common this quarter, was there offset in SG&A – I mean if you look at the cash flow statement, it looks like there’s a few non-cash items that hit. And I’m just wondering if that was above the line or below the line and maybe that’s contributed to maybe some of the margin pressure.

Right now, Steve. There’s not any additional cost that’s offsetting up in the SG&A line, I mean you do have increases in stock based compensation slightly year-over-year but it’s not offsetting that $5.2 million benefit that’s running through the income tax line this year or so. It really not to bore everyone with the details of the gap, but I will because it’s my world but it’s really just the appreciation in the market value of our stock versus the value that the stock-based compensation is reflected through our P&L. So as our stock prices is went up it creates more of a benefit and that in – historically it always went through equity and now it’s running through the income tax line. Steve O’Hara: Okay. So the $5.2 million that’s on the cash flow statement that was in the tax line?

Yes. Steve O’Hara: Okay. All right, thank you. And then I just hate to just beat the dead horse here. But on the April sales growth number I mean I think it was lower than maybe the January number I don’t know if that’s a seasonal issue or and it sounded like there were some of the components of the total number were a bit higher. I mean what your confidence level that that’s not a bad number going forward. How do you feel about that?

I think it’s just a testament that the industries continuing strong, I think there’s a day short on this April versus last April and that has a significant impact obviously if where days different but on a quarter of value have been out and like I said in our initial comments that the OEMs are rolling they are adding new plan some up every month. We’ve got grand design Jayco, all the store facilities, motorhomes towable are like for force driver they’re all adding plans right now for there’s new capacity coming on line and wholesale is strong and retail is strong. So we’re just trying to deal with the growth the best we can given all the other constraints and challenges there are with labor and other things. And the investments that we’re making but like I said its lot easier to deal with these great problems with a much lower attrition number than we’ve historically dealt with. Steve O’Hara: Okay. I think that will do it. Thank you.

Thanks, Dan. Steve, sorry.

Thank you. [Operator Instructions] Our next question comes from the line of Daniel Moore from CJS Securities. Your line is now open.

Thanks, again a quick capital allocation question. That I’m probably know the answer too but I’ll ask it anyway. You’ve always favor dividend specials in the past now were regular and the occasional special. But we have the sort of bifurcation in what’s going on in the industry versus the fear of the cycle and it creates a little bit more volatility around your stock. And I’m just wondering if you might think about adding buybacks to the mix to be opportunistic given your obviously continued positive outlook, going forward, just any thoughts there.

It’s certainly something that we consider on a regular basis with our board. We’ve looked at the opportunity versus where we see the value of our stock and will continue to do so.

Fair enough. Appreciate it.

Thanks Dan.

Thank you. And at this time, I’m not showing any further questions. I would like to turn the call back over to Jason Lippert for any closing remarks.

I just want to thank everybody for being on the call today and stay tune for second quarter results. Thanks very much.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have great day.