LCI Industries (LCII) Q2 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Second Quarter 2017 LCI Industries’ 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 be given at that time. [Operator Instructions] As a reminder, this call is being recorded. I would now like to turn the call over to Tyler Deur from Lambert Edwards. Please go ahead.

Thank you. Good morning, everyone, and welcome to the LCI Industries’ 2017 second quarter conference call. I’m Tyler Deur with Lambert Edwards, LCI’s Investor Relations firm, and I’m joined on the call today by member of the LCI’s management team, including Jason Lippert, CEO and our Director; Scott Mereness, President; and Brian Hall, CFO. Management will be discussing second 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 may be considered forward-looking statements under the Securities Laws and involve number of risks and uncertainties. As a result, the Company cautions you that there are a 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 statements. These factors are discussed in the Company’s earnings release and 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 of 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, and good morning, everyone, and thanks for joining us on today’s call. Our teams have been hard at work focusing on our strategic goals and objectives during this period of great industry growth. Revenues in Q2 rose 24% to $547 million, up from $441 million in Q2 2016. Earnings per share grew from $1.51 per share to $1.59 per share during the same period. Our continued fast-paced growth story is a testament to how focused our team is at LCI, and I couldn’t be more proud of our team members across the organization. During the first half of 2017, we experienced some headwinds but now expect tailwinds in the back half of the year. Steel and aluminum prices in the first half of the year remained higher than they were in 2016, and labor was a challenge in the first half. Anticipated tailwinds for the back half of 2017 include stable material costs, selling price increases, lean and automation improvements as well as benefits from the improvements made and nutrition efforts on the first half of the year. It is important to note that our current results for the first half are still several full percentage points above our 10 year historical operating margins. The major story this year continued to be the amazing growth of the RV industry. Wholesale shipments continue to shatter records and roll towards 5,000 vehicles. OEM backlogs are record levels and dealer inventories appear very adequate with many dealers claiming they need more product. Fall is showing obvious signs that it will be strong while both OEMs and dealers are continuing to add capacity and opening new facilities to meet strong continued demand. June RV wholesale shipments increased 18.2% from 2016. Wholesale RV shipments for the year are up 13.3%. Consumer confidence is at 16-year high. Gas prices are stable, and consumer lending is readily available. All these factors point toward a record year for LCI as the total RV wholesale shipments could reach over 470,000 units. We believe that the popularity of the RV lifestyle, which focuses on family, community in the outdoors, coupled with affordability, many new appealing products, a strong economy and an influx of the next generating of RVs will continue to drive more growth. As our focus continued to be on organic growth and acquisitions, we continue to accelerate spending within our R&D. The success of our one-touch travel trailer leveling system continued to gain steam and thus far we've released another version for lighter-weight trailers, which will allow more travel trailer models to adopt the system. The adoption of this system by entry-level travel trailers is a sure sign that the days of manually cranking jacks up and down are coming to an end. When you consider that there're still thousands of trailers still being produced with the same manual jacks that have been around for 50 years, it is a huge area of opportunity as more and more retail customers want the ease a push-button technology to set up for campaign. We recently released this system to the aftermarket and it's been very well received. It's exciting to think about the opportunity for growth here and when you take into the account the 5 million-plus travel trailers and used on the road today with [indiscernible]. Our Electronics division in Michigan has also been hard at work preparing for this year's shelf season and a release of an exciting line of new products for 2018. We're extremely excited about these products as LCI Electronics continues to define a functionality of tomorrow's connected RV. We've put a significant amount of development into the myRV infrastructure and our viewers love the ability to connect many of their RV components’ functionality to their mobile devices. Mobile connectivity is only becoming more relevant as younger buyers come to the market and as mobile technology becomes more common and robust. Presently all the new LCI products are being designed and developed to function with this infrastructure where possible. Several other products are gaining steam in the OEM and aftermarket. Our newest entry step continues to gain praise by the RV consumer, another example of how we taken a product that's been relatively unchanged for decades and revolutionized the way it looks and the way it's used. The transformation of this product is a great example of how we can increase content by creating new value through innovation. In addition, we've several new awning products that will debut at Open House as well as our new ovens ranges and other new appliances. All-in-all, R&D is firing on all cylinder and we couldn't be more proud of the progress this year. Growth outside the RV industry and our adjacent markets continued as our sales were up to 22% from 2016 Q2. This result was due to a continued effort by our adjacent sales and operations team to take our core products and introduce them to new markets. In the next few quarters alone, our teams will attend over 15 shows and events in markets we consider to be adjacent. We always walk away from these shows with great feedback and new opportunities. Recently, we introduced our mattresses lines to the heavy trucking and college procurement industries with great reception. Mattresses for colleges and universities, for example, are estimated to be a $50 million market alone. We're one of the largest mattress producers in the country and have a phenomenal product lineup and it's time to move to other markets with this product. The acquisition of Lexington in late Q2 has bolstered our efforts in the marine industry in many ways. Having Lexington in our portfolio gives us even more credibility with both manufacturers, as Lexington has been known for outstanding quality and excellence and new product design for a decade. Our adjacent market strategy will continue to be very important as we have big opportunities to grow organically and through acquisition in these markets. Our core products, chassis, suspensions, matrices, awnings, fabricated steel and aluminum components, laminated products, windows and furniture, all have tremendous potential in several other industries and we will continue to pursue these opportunities at every turn. We have tremendous growth with our aftermarket segment. The sales grew approximately 32% from Q2 2016 to $44.7 million in Q2 2017. Operating profit improved 32% in Q2 2017 from Q2 2016. The surge in sales and profit is a testament to the hard work and dedication of the great teams we have in place, along with our committed strategy. Within our aftermarket division, we have 500 square feet, sales teams, call center teams, technical training teams, warehouse teams and marketing teams committed solely to the aftermarket, all in, about 400 dedicated team members. Our customers continue to grow business with us in all product areas. As we’ve stated before, LCI puts about $1.2 billion in component products into new RV vehicles every year. We have expanded our content into other adjacent markets, which will end itself eventually to aftermarket sales in those markets, such as marine, buses and cargo trailers. We expect aftermarket sales to continue on a great pace of growth for the foreseeable future. In May, we announced the acquisition of Lexington based in Elkhart, Indiana. Lexington is a highly regarded and respected manufacturer of highly engineered seating solutions for the marine, RV, transportation, medical and office furniture industries. Sales for Lexington for the 12-month ending in December 2017 are anticipated to be $60 million, and at $40 million purchase price, it’s our largest acquisition in the last two decades. Adding Lexington in a great leadership is a testament to our strategic plan to grow our marine portfolio and become a supplier of choice to the marine industry. We expect to leverage our purchasing sales and manufacturing capacity to immediately improve the profitability of this business. In early July, we announced the acquisition of Metallarte, a Siena, Italy-based manufacturer of entrance and compartment doors for European caravans. Metallarte and their leadership team share the same philosophy and core values as we do at LCI. They are growing supplier to the European caravan-ing industry and we are excited to have the talented the team as part of the LCI family. Metallarte marks the third business that we have acquired in Europe in the last 13 months. One of the greatest benefits of acquiring these companies is that their products are being very well received in the North American markets. As far as the rest of the acquisition pipeline is concerned, it’s very encouraging. There are several great companies that we are currently looking at that will make great additions to the LCI family, and hopefully, we will be able to discuss these in more detail in future earnings releases. While we can't specifics, most of the companies we are looking to acquire have revenues concentration outside of the North American RV space, showing our continued commitment to adjacent, European and the after-markets. Last earnings call, we addressed the well-documented tight labor market in our industry, specifically in Elkhart County, as a result of the outstanding industry growth. Over the last couple of years, we have made attrition and employee engagement the number one priority within our organization. And if you visit us lately, you can see it very easily. We feel we are bearing much better than most of our industry peers because our intense preparation and focus. As of June, our attrition numbers have decreased to a companywide average of 36%, which is far below the industry average and almost 50% reduction from our result for last year. We have invested heavily in employee programs that we believe will help us retain our team members over the long term. These added resources range from leadership, personnel, operations and HR personnel, training and leadership programming, as well as significant improvements and upgrades to our facilities across the country. People in Elkhart County are now seeking us because of all the great things about our company that differentiate us. There is no doubt that it’s working, and if we hadn’t started this cultural transformation when we did, things would undoubtedly be tougher for us. Our lean and automation initiatives are also helping us with the labor crunch in Elkhart County. Our spend on automation in 2016 was approximately $5.5 million and year-to-date we have spend approximately $15 million. Automation and lean manufacturing initiatives freed up over 150,000 square feet of manufacturing in 2016. In the first half alone of 2017, we’ve already freed up an additional 150,000 square feet of capacity through lean and automation events. We recently posted a video on our YouTube channel highlighting our latest implemented project. Automation and lean efforts improved safety, quality and efficiency. In this difficult labor market, these efforts continue to provide relief as these projects free up team members for us to move to other areas of need in the business. In addition to lean and automation projects, we are currently adding building capacity in excess of 1 million square feet and putting us online between Q3 of 2017 and Q2 of 2018. This is needed in addition to our lean and automation efforts to keep up with the growth of our core industries. As always, we thank all of our team members who work tirelessly everyday and more responsive for the company’s great success. Our goal is for every team member to think of LCI as more than just a place to collect the pay check but as a family where they can find greater sense of purpose. On behalf of our 9,000 team members, we thank our customers and shareholders for placing the trust in us. They are grateful for our partnership here. I will now turn to Brian Hall, our CFO, to discuss Q2 financial results, and then we’ll follow with questions.

Thank you, Jason, and good morning to everyone joining us on the call. Over the next few minutes, I’ll 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 second quarter of 2017 increased approximately 24% to a record $547 million. 20% of our sales growth was organic and 4% came from acquisitions. Sales to RV OEMs, our largest customer base, also grew at 24% compared to the second quarter of 2016. The RV industry continued to show strong growth as wholesale shipments of -- motorized RVs increased 17% and 11%, respectively. Sales to other OEMs outside of RV grew at 22% to $109 million for the quarter. While our aftermarket segment increased sales of over 32% to $45 million for the quarter. Acquired revenues were approximately $17 million of the $107 million of consolidated net sales growth. Motorized RV content per unit for the 12 months ended June 30, 2017, increased over $152 to $2,072 per unit, while affordable RV content per unit increased $91 to $3,104 per unit. Growth in furniture, awning, Furrion and leveling were key contributors to the increase. Our consolidated net sales for the year-to-date period increased 21% to over $1 billion. 17% of our sales growth was organic and 4% or almost $35 million came from acquisitions. International sales increased over 132% through acquisitions as well as organic export growth and now accounts for over 2.5% of our consolidated net sales. Sales of Furrion product also increased significantly, growing over 87%, and we believe even more opportunities are expected in the back half of 2017 and beyond. Q2 diluted earnings per share increased to $1.59 per share compared to $1.51 per share in Q2 of 2016. The increase in profit resulted from incremental sales, partially offset by increases in labor and material costs. As Jason indicated previously, labor costs have increased when compared to the first half of 2016, but it’s somewhat stabilized when compared to the latter half of 2016. These costs include increased wages and investments in leadership and employee talent and retention to support our growth plans. We continue to remain focused on lean automation and attrition initiatives to combat these challenges. Our capital expenditures for the year-to-date period includes approximately $15 million of investment in automation equipment, including automated anodizing lines, numerous tube lasers and robotic handling equipment, to name a few. Many of these investments come with a two- to three-year payback. Material costs, primarily steel and aluminum, have increased slightly during the fourth quarter of 2016 and first half of 2017. Aluminum costs have increased over 23% when compared to Q2 of 2016 and is a primary component for many of our products. Our material costs were higher during the second quarter even when compared to the first quarter of 2017. While steel and aluminum costs are expected to remain at these elevated levels during the back half of 2017, we do not anticipate it to be at the same degree as to first half. Non-cash depreciation and amortization also increased over $2 million while non-cash stock-based compensation increased over $1.3 million. Our return on invested capital remains very strong at just over 39% on an LTM basis and reflects our team’s focus on investments with higher return. The company's financial position with cash flow remains very strong. While using $68 million in cash for business acquisitions, $43 million for capital expenditures and returning $25 million to shareholders in the form of dividend, we ended the quarter with a net debt position of only $12 million at June 30, 2017. This position, along with the borrowing availability and our amended credit facility, position us well for future investments. That is the end of our prepared remarks. Michelle, we're ready to entertain questions. Thank you.

[Operator Instructions] Our first question comes from Scott Stember of CL King. Your line is open.

Brian, I heard the aluminum increase year-over-year, did you give the steel increase year-over-year?

Yes, steel is somewhat of a mixed bag because we obviously purchase a lot of I-beam and that price has moved slightly different than what in hot rolled. And sheet, tube has all moved as well. So it would -- I have not quantified that just because of somewhat of a mixed bag, but it's obviously it's all up across the board.

Scott, this is Scott. When you look at just hot rolled coil prices, we're close to 50% of first half of this year versus first half of last year. But like Brian said, there's other steel components like I-beam that don't necessarily -- aren't purchased in the same manner that some of hot rolled coil purchases, but that gives you some idea as to what the coil prices have done.

And as far as the price increases that you've talked about, maybe just give us a sense of the timing when that goes through, when we could see the margins start to stabilize maybe also in the context of labor and it sounds as if a lot of the cost that you put into stem to tide of attrition seems to have peaked. And maybe just talk about how that all plays out in the back half of the year and the across margin where we could -- where do your expect the gross margin getting back to in the near term.

I'm going to take you back a little bit. You look at Q1 and Q2 last year, Scott, we had lowering -- we had ample of situations. We had lowering material costs and we held back on pricing decreases that didn’t go through until Q3 and Q4, well, really Q3 last year. So with kind of a perfect storm of thoughts, if you remember which gave us -- help us attain an all-time high operating margin for Q1 and Q2, we got the opposite situation happening this year, wherein Q1, Q2, first half of this year, we had rise in material costs and we weren’t able to get pricing increases through. Those pricing increases are taking place in Q3, and they finalized in Q4. And I think the mix there, Brian…

I would say were probably a half of a quarter impact in the Q3 and a full quarter impact in Q4.

So that will obviously help us out significantly. As you know, we typically wait a little while giving the decreases back to kind of see what materials are going to do, like we did last year, we held off a little while. And to be fair with our OEM partners, we wait until we see what the materials are going to do and like we have this year. So we are just now starting to see those - they’ve already been given to our customers, we are just waiting for them to hear in Q3 and Q4. So they’ll have an impact on our financials in a favorable manner and that’s a part of the tailwinds we are talking about: material stabilizing going into Q3 and Q4, labor stabilizing. For couple of reasons, we had some -- a lot of efforts in Q1 and Q2 on the attrition efforts and engagement efforts, and all the things that we have done there, the automation and lean activities that we have done, we expect that to help stabilize labor in the back half for the year. So if you look at the material stabilizing, you look at the pricing increases that have been already given and already going into effect starting in July, that started in July some time spreading out through November in the labor situation, no, those are the tailwinds we’re speaking of.

I’ve got the one more comment, Scott. Steel prices just in the last three months are 2% less than they were in the last three and those comparable months in 2016. So at least coil prices not only have stabilized but they are actually down 2% compared to those same three months last year.

And we feel that -- as we have said for the last several quarters, we have been talking about that level of comfort range in operating margins for us at 11.5% to 12.5%, we still feel very comfortable, especially considering the tailwinds coming up here in Q3 and Q4, and then you couple that with the comps that we are looking out in Q3 and Q4, where we were at roughly 10.9% and 10.3% or 10.2% in Q4. So tailwinds look enough to keep us in that range and obviously our goal is to continue to make acquisitions with stronger margin profiles and continue to develop new products in R&D that have stronger margin profiles and continue to get margin where we can, especially around unique products or products that are unique LCI.

And just touching on that point about the margins, that 11.5% to 12.5%, is that assuming for the full year that’s what you’ll get? Or are you just saying that that’s pretty much that kind of a run rate in the back half of the year heading into the next year?

I would say that we’re always looking to -- over the next 12 to 18 months, we think the target margins within that range are still reasonable, again, as Jason noted, well above what we’ve historically ran. But I think when you look at the back half, obviously volumes is a little bit of an unknown. So you watch volumes over Q3 and Q4 and how much we can absorb of our fixed cost structure, yeah, I think we can be close to that range, but being on the high end of that range, probably not at this point.

That’s more of the 12 to 18 months lookout on a high end of the range, but certainly near term, with the tailwinds we’ve got coming, we feel confident that we’re going to be there.

Okay, just one last question. You talked about the leveling devices being introduced into the aftermarket, and I was just trying to find out can any RV, whether it’s your brand or -- I wouldn’t say your brand but just is any RV out there and how old and what’s the possible opportunity here for? This seems like it could be a huge opportunity for you guys.

It is. I’ve mentioned in our prepared remarks that there is about 5 million plus trailers out there today and then even more fixed wheels. So specifically with our travel trailer leveling system, we can fit that up to any chassis out there. Take a little bit of work and retail customer have to bring it into a service centre to get it done. It’s not something that they can do themselves. But certainly we can invest what we’re pitching to the dealer service centers all over the country and there is thousands of them. And as we get, those dealers equipped to be able to do those installs and understand how to put the leveling systems into some of these older trailers and coupled with the fact that anybody that’s RV-ing out there if camping next to somebody that’s got a leveling system. So people are winding the push button technology. They’re winding to upgrade. They’re paying for it. And we’re just now you know over the last few months have launched the travel trailer leveling program into the aftermarket through the dealers, through the WDs, even on Amazon and its starting to take route. Again, as we mentioned in our prepared remarks, we don’t know why how much longer the manual systems are going to be around, even in the aftermarket or the OEM markets because it’s just so much easier and the retail customers are clearly willing to pay for it.

One other, Scott, this is Scott. One other quick comment on the OEM front in terms of new products we talked about the content increase as far as travel trailer leveling Furrion and awnings. In terms of Furrion, the Furrion agreement came upon its second birthday just after 4th of July this year. So we’re not -- and we’re just over two years into it. It doubled since we took it over in terms of revenue. So it’s gone from 30 to 60, and run rate wise when you look at the addition of appliances now coming online, we’re looking to double, not quite double again, starting in the next quarter or so. So you look at that business, having tripled since -- more than tripled since we took it over into just over two years. We're happy -- we're real happy with what that means for our business, especially the content number. Can we talk about a couple of good products having big time effect on the content per vehicle number over the next couple of years and both of these products, like Jason is saying, on the leveling and then Furrion is another big plus.

Our next question comes from Daniel Moore of CJS Securities. Your line is open.

I wanted to just follow up on that last comment on the content side. Growth was a little late in terms of content for towable this quarter, despite a nice resurgence in fifth-wheels, and you've talked about some of new products, anything going on there and when we should expect that start to reaccelerate again?

I think the biggest piece of that is just all the low -- I mean there might be a little bit more fifth-wheel production, but the massive amount of entry-level trailers that are being produced right now that don't have a lot of content on them are really pushing those numbers backward. So I think it's impressive that we've been able to move content number forward, albeit small, just amount to $100 considering the transformation that's happened. And what products are being built today when you look at the 80-20 of that, it's a lot of small trailers with single axles, no slide-outs, one-entry door, very little windows, we've managed to continue to increase content, so without really any acquisitions in the towable space there.

Indeed, yes, it seems all organic -- or largely organic. It's helpful.

I think if you look at content on just, let's say, we hadn’t developed products or improved existing products, I think content would be down for sure.

Maybe just switching gears, the marine space obviously increasing -- increasing area of focus, maybe just talk a little bit about the supply chain there to OEMs. Who were the players? And what is it that attracts you to that space and maybe just the overall size of the market opportunity? I know it's part of your pie chart, but maybe looking out two to three years, where do you see that either in terms of revenue dollars or as a percentage of the overall?

Well, probably -- we can't give you what we think the revenue dollars will be because it's a little bit of crapshoot, But I think the most important piece of the marine puzzle is the furniture and we've made a few acquisitions there. We're now the largest manufacturer of the furniture and we feel like product hasn't changed in a long time. We feel there’s a lot of opportunity for product content add in that category, and that's the largest piece - that’s generally the largest, outside of the engine the largest content piece that the OEMs buy from a suppliers, So I think really good equipment door to the industry. We feel like with electronics and some of the appliances, glass, windows, some of those things will be some of the other big components that we add to the content of the marine and right now we're really only focused on fine-tune, so if we open the door to some of the fiber glass bolts, and the bigger bolts and the soft water bolts, certainly there's more opportunity there. It’s big in our radar and we know there's lots of opportunities. We also know that as we continue to show these marine suppliers that we're -- meet marine OEMs, a that we're a different kind of supplier that we're going to do business efficiently and cost effectively formed and in R&D that’s dedicated to develops products for them that they don’t have today or tweak products for them today that they don't have or just place suppliers to just getting that job done, that’s what happened on the RV side for us and we know that same movie will play out on the marine side. And we have got a few projects in R&D that are pretty exciting that we can't talk right now, but those are for now for marine and likely in next conference call.

Dan, this is Scott. The current rate for the businesses that we have acquired in the pontoon furniture just under 100 million and they’re been obviously some consolidation there, but we still show over 100 million and revenue growth on top of that not just on the pontoon side but that would be the other pieces like captain shares and some other revenue into the marine space as well.

Overall, it’s a big opportunity.

Indeed. And lastly just to make sure I have the numbers right. Looking out a year or two or three, those are -- 10.5 in terms of operating margin goal? Was that 11.5 to 12.5, is that right?

11.5 to 12.5.

Our next question comes from Kathy Thompson of Thompson Research Group. Your line is open.

I wanted to circle back on which you had to say about margins and really focusing a little bit more in your OEM segment. It did make some modest improvement in the aftermarket segment this quarter, which was encouraging, but still had over 200 basis points decline in that margins for OEM. I understand you are going to get about half quarter benefit to some of the initiatives you outlined in Q3, is it reasonable to assume that you will be able to call back half of that impact and really be more net positive comp since we get to Q4? It’s the first part. And how would you suggest that we look forward into the following six to eight months in terms of modeling that segment.

This is Brian. I think when you look at the year-over-year declining in the margins, you are really talking about 60-40 split between materials and labor. So certainly as we look to address the material portion of it, a lot of that coming through the price increases that we have talked about. So you are really looking to cover a significant portion of that 60% piece worth about half in Q3 and the full quarter worth in Q4. So I think that’s the way that we really spend talking about and the way I think you can look at it that it can provide little guidance for you.

So you will still have a bit of a decline but -- and may be I was a little too optimistic in being able to cut that loss in half of Q33s, if I'm hearing you correctly?

I think if you do the math, you are correct. It’s a labor piece of it. The unknown there would be the all the investments that we have made in automation and a lot of that’s taken place in the more recent couple of quarters. So how much of that we experienced to offset some of these labor challenges in the back half will be the same that will be to launch.

Any attrition improvement in the business should help soften the labor increase that we’ve seen over the last couple of quarters. A lot of that was fronted loaded in Q1 and Q2, where we made a lot of wage adjustments on average of 6% to 8% just wage adjustment, base wage adjustments, which I’ll hit and our attrition has really slowed significantly. So we expect to see some of those benefits of the back half of the year on the labor.

I think the comps when you look at the selling price increases being a full quarter for Q4, I think the fourth quarter comp becomes a lot more significant in terms of the differential from what we did last year, just around 10%, I think.

Okay, great. Just two quick housekeeping. Given that the acquisitions, what is that your expected for your D&A and also I see you’re still on track for that 65 million to 75 million capital investments that were addressed to meet a full industry grid?

You’re correct on the 65 million to 75 million, that’s still our target for the year.

Okay. And then on D&A, what’s the new, given recently acquisitions made year-to-date, guidance from that would be helpful to.

What exactly D&A?

Depreciation and amortization.

Oh, all right, thanks. Now I think that we’re looking at $55 million to $60 million for the depreciation and amortization full year.

Okay, great. Thank you. And then finally with your most recent acquisition that you are further spreading your wings into the European market. There were 2.5% of yourselves in Europe now. Where do you envision growing your revenues for Europe as a percentage of total sales. And I’m looking not just next year but over the say the next two to four years, what do you think is reasonable in terms of growth? And just stepping back and look more strategically, how you are, where you want to grow that business? Thank you.

We still have some visibility on some additional acquisitions and our organic growth over there with products that we want to build through Europe. We have spent several years now that we’ve been at least looking at the market almost 14 months where we’ve acquired some companies and have operations on the ground there. So the management team is starting to work together figuring out how we can consolidate efforts to attack the caravan market in Europe together with the companies that we have and then looking at a couple of more. But I think that its going to be a slower process and typically we really have to do a thorough job wherein the leadership teams and the products and the most important thing like I said in my prepared notes on the call was the vetting whether their products can transition to the US RV markets has been really important. We’ve been able to develop a significant part of our first acquisition sales P2K. In the US, we’re really making sure the products makes it over here and I guess this visibility -- and so on the front side, as we’re looking at these acquisitions, we’re really trying to see buying companies that can have products that the US RV companies would be interested in and that’s been a big part of the program. But all-in-all, it’s going to be a slower process but we still have a vision to be a major component supplier to that business. We see a lot of the competitors and suppliers over there with a less aggressive R&D strategy, less aggressive customer relationship strategy and that’s where I think we excel as a company in a business. And the more math we put together with respect to leadership and companies over there, the better we’ll view. But the prospects are great. And we're going to Dusseldorf in about three weeks and that's really how we made the last acquisition of Metallarte was they sought us out. They felt that we'd be good partners and we spent some time around their business and their people and they were right. I mean we felt that was a great opportunity for both of us and now we suddenly have another key component to the caravan. So I'd anticipate that our trip over there in the next month will yield some more relationships, some more acquisition opportunities and we're going to be opportunistic.

One more anecdote right there. I've gotten two phone calls in the last four weeks unsolicited that said, “Hey, I saw that you guys have made three acquisitions in the last 12 months and it seems like you want to do some further deals in Europe. Would you be interested in companies A and B?” And so we're getting phone calls like that in addition to the usual networking that we're doing. So it's obviously taking notice with companies over there that might be looking to sell their businesses.

Our next question comes from Craig Kennison of Baird. Your line is open.

I wanted to follow up on the European question that Kathryn asked, but you framed -- in North America you framed content per unit in a very helpful way when you think about the RV market, where would you say you are in terms of content per unit in the European market?

We don't have clarification on those numbers. Yes, we haven't started putting those together.

But when you look at the opportunity, certainly -- when you think about content here in the U.S., you've go the chassis which is significant piece and the chassis in Europe are totally different. So as you start to frame up what the opportunity is in Europe, you got to look at that piece a little bit different, but the rest of it is very similar.

In our slide deck we pointed out that there's about 1 billion in opportunity in Europe with existing and new products, so that's kind of how we're looking at it today. Tomorrow we'll probably have some more refined numbers around content per vehicle at least on the caravan side over there.

Yes, it's a helpful way to frame it, or it has been at least in the RV space. And then I guess the same question on marine and where…

Craig, just in rough numbers, $200 and if you look at a run rate for two of the three businesses are RV-related, but if you look at it just some roughly numbers, it would be a few 100…

That’s very helpful. And looking for something similar to that in the marine space here in the U.S. where you're just getting started?

Again, we haven't really quantified what are our ultimate opportunity is there, as Jason was mentioning we entered into with furniture being the primary opportunity for us where the real focus out of the gates on the pontoon side of things. So as that continues to evolve and we continue to -- R&D new products and look to incorporate some more electronics there as well, I think that there's -- we'll continue to refine what that opportunity looks like and then what our current run rate is to give you a little more similar comparison that we're giving you on the RV side.

We'll get that together this year. You'll start seeing those numbers this year more than likely, Craig, in terms of pontoon and content for Europe caravan.

And then I think I heard you mention approximately a 6% to 8% increase in your labor compensation if you will. If that’s right, when did that start?

You started to see some of it in the back half of last year, but a lot of it here beginning in the first half Q1 of this year and even more in the Q2.

And I know your timing has to be sequenced, your timing for a price increase has to coinside with what your discussions with partners go, or how they go. I guess I'm asking do your OEM customers expect to be able to raise price to offset their price increase they are getting from you?

Yes, they have already taken -- some of them have taken two to three price increases this year already. So it's not something that they are thinking about going forward. There is - most of the OEM, if not all of them, have already gone out with some increases this year already to because their own costs are increasing. But we have been having these conversations with them since April, so I know that some of the OEMs have recently released their second and third price increase to the dealers here in the last month or so.

And then lastly just a housekeeping, but what was the attrition rate last year. I think it was 36% in most recent period?

Last year full year is about 54%. So this year we are tracking about 36%.

[Operator Instructions] Our next question comes from Steve O’Hara of Sidoti. Your line is open. Steve O’Hara: Question also was around the labor costs and maybe as these prices increase I mean - have you see impact of people into the area and then Elkhart, the area growing, are you trying to improve things geographically? And as you sum, we they could maybe essentially biting to the growth in the industry on the retail side to your standpoint.

I can tell you that there is not a lot of housing available right now. There are some small projects going on to make low-income housing available so the people can move into the area, but it’s not significant. What I can tell you our strategy is that we are trying to be the employer of choice in the area so that we’re not looking for the people that are looking for jobs, which is a very small, small number. I think where we had our success especially over the last six to ten months that we really been hammering on attrition initiatives and engagement initiatives and our culture initiatives is that. We are attracting people from a lot of the companies around the area that just aren’t happy, just aren’t happy where they are working. If you look at the statistics, the statistics were something crazy. Like 88% of all employees either don’t like their job they don’t like their boss, they don’t like their company culture, they don’t like something about where they are working. So there until we’re looking at, it is a 1.7% that’s unemployed, we are looking at the 88% that aren’t happy and tying to create an employer of choice scenario and continue to drive people in a working. We are not having a significant problem getting employees as tight as a labor market is. So that’s hard question.

And I think for us strategically we continue when we’re looking at capacity planning, we’re looking at markets outside of the area. I mean we’re still vested here and this is the heart of the industry, but you know you can -- if you look at the soft band, the fort range, you looking in those cities that are just outside of Elkhart. I think there is opportunities for us there as we continue to play in.

So we worry about the smaller guys that get squeezed out when we’re taking and so third and fourth - that contain more or taking a lot of the employees. We worry about what’s going to happen to the small manufacturers that are still paying $10 or $11 an hour because those are the employees that are leaving. They are not happy and they’re not going to pay a lot. They are coming to companies like ours and might be paying you know $14 ot $20 on average or before that’s paying north of 25 per assembly. Steve O’Hara: Thank you very much.

I just can’t say we feel like we got a really great handle on it and then expect the labor softening for us as part of the tailwinds that will help us improve Q3 and Q4.

There are no further questions. I’d like to turn the call back over to Jason Lippert for any closing remarks.

Well, thanks everybody for joining us on the call. We appreciate all your comments and feedback and look forward to talking to you next quarter at earnings release. Thanks again.

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