Good day, ladies and gentlemen, and welcome to the Third Quarter 2017 LCI Industries Earnings Conference Call. [Operator Instructions] As a reminder, this conference call may be recorded. I would now like to introduce your host for today's conference, Tyler Deur. Please go ahead.

Thank you. Good morning, everyone, and welcome to the LCI Industries 2017 third quarter conference call. I'm Tyler Deur with Lambert Edwards, LCI's Investor Relations firm, and I'm joined on the call today by members of LCI's management team, including Jason Lippert, CEO and a Director; Scott Mereness, President; and Brian Hall, CFO. Management will be discussing third quarter results in just a moment. But first, they've 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 a number of risks and uncertainties. As a result, the company cautions 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 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, and good morning everyone, and thanks for joining us on today's call. Explosive growth of the RV industry and share gains in our key markets continue to fuel another great quarter for LCI and we couldn't be prouder of our teams for what they've accomplished. As we head into the last quarter of the year, the momentum LCI and the industries have going, is truly exciting. Revenues in Q3 rose 35% to $555 million, up from $412 million in Q3 2016. Diluted earnings per share grew from $1.19 per share to $1.26 per share during the same period. We're putting up top and bottom line numbers that are second-best year on record and doing it at a time when labor and material environments are particularly challenging. Industry growth has created some capacity constraints, but I can tell you that we are among the best in the industry right now for on-time shipments. The explosive industry growth, tight labor market and rising raw cost in our key raw categories of steel and aluminum have had an impact on our business in the last couple of quarters. But, we've taken measures to ensure that we continue toward target operating profit levels. Wage inflation has been significant as there are 25,000 more jobs than available workforce in Elkhart County. Without our culture transformation and attrition initiatives in place, which has helped lower attrition from 65% this year to 38%, we would certainly be experiencing even higher labor costs. These initiatives required investment as we improved air quality at our welding plants, remodeled and expanded our facility break rooms, bathrooms and other common spaces, as well as added more amenities for all our team mates in all areas. With respect to raw materials, we've seen aluminum spike 20% since last year, and…

Thank you, 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 third quarter of 2017, increased approximately 35% to $555 million, a quarterly record and an increase from the second quarter of 2017, which is typically our strongest quarter. It is important to note that 83% of our sales growth was organic, with the remainder coming from acquisitions. Sales to RV OEMs, our largest customer base, grew at 36% compared to the third quarter of 2016. The RV industry continued to show strong growth, as wholesale shipments of towable RVs and motorized RVs increased 26% and 13%, respectively. Sales to other OEMs outside of RV, grew at 28% to $106 million for the quarter, while our aftermarket segment increased sales at over 34% to $49 million for the quarter. Acquired revenues were approximately $24 million of the $142 million of consolidated net sales growth, primarily affecting net sales to the adjacent industries and motorized RV business categories. Motorized RV content per unit for the 12 months ended September 30, 2017, increased over $195 to $2,152 per unit, while towable RV content per unit increased $147 to $3,172 per unit. It is important to note that the year-over-year increase in towable content per unit is the greatest that it has been in over 7 quarters. Growth in furniture, awnings, appliances and leveling were key contributors to the increase, partially offset by the continued shift towards more entry-level products, which tend to carry less content per unit. Our consolidated net sales for the year-to-date period increased 25% to over $1.6 billion. Net sales for the…

[Operator Instructions] Our first question comes from the line of Greg Badishkanian from Citi. Your line is now open.

Hey guys, this is actually Fred Wightman on for Greg. We were hoping you could just sort of walk us through the timing of that $38 million benefit that you guys outlined. It sounds like the pricing should be enacted by 1Q '18. But if you could just sort of help us think about those benefits from a timing perspective that would be great?

Sure, Fred. So this is Scott. From a timing perspective, the majority of the increases will go in effect in Q4 with an increasing -- in an increasing fashion, almost fully realized in the Q1 income statement.

Okay. And then if we look at sort of -- are you guys confident this is really just a lag in pricing, given sort of the way the contracts are structured? Or are you seeing more pushback from OEMs, given consolidation or is it something else?

Yes, I mean -- this is Jason, Greg. We're coming into the call and we've already got our price increases laid out with our customers. I mean like I said in our prepared remarks, you know when pricing spikes and when material cost spikes, there's always a lag. I mean every single time through the 23 years I've been with the business, when material cost spikes, it is a lag to get to the customers. We've got to find out, how real it is? And we have to make sure that we're doing everything we can internally to mitigate some of those costs, so that we're not going to our customers with all of that. That usually takes a quarter or two and it did this time. But we're coming into the call with all the pricing baked in for the Q4 and Q1. So we're not coming, saying hey, look, we've got to go figure out how we're going to get it. So hopefully, that helps, the hard part of it is over. But what we have to keep focused on is materials and where they're trending through the course of next year and we'll keep you updated as we go along.

Makes sense. And then the last one. Just as we start to get some more details about potential corporate tax reform. How are you guys thinking about that? What type of a benefit could you see? And what would you do with any of the increased cash?

Yes, I mean, we're certainly -- this is Brian. We are looking at -- we don't have a lot of cash locked up outside of the country. So that is certainly something we're looking at, but that's not a significant piece of it. Otherwise, we're looking at what the effective rate would be? What we would do with the additional cash? I think would be to continue to execute on our current capital deployment strategy, which is a focus on higher returns and looking at acquisitions and capital expenditures, the continued focus on automation projects, that would certainly free up some capital to do those types of investments.

Great, thank you.

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

Hey guys, this is Steven Ramsey on for Kathryn. Just a few quick questions. You called out on gross margins, the raw materials and aluminum. Is there any way you could quantify any other materials that were major drivers or the labor impact?

When it comes to -- this is Brian. When it comes to materials, I don't have the details in front of me, but foam is another one that we continue to call out, as our furniture business has continued to grow. So that would be another one in addition to steel and aluminum. We use a lot of foam, with both the Marine side and the RV furniture side of our business. And as you look at -- we've talked over the past few quarters about materials and labor and maybe what that mix might look like, they're fairly equal in magnitude, maybe it leans a little bit more 60-40 to the materials versus labor.

Excellent. And then thinking about modeling aftermarket margins, is there any way you could help us think about the trajectory there?

One thing I would say because we've had some questions around this on a few different quarters. The margins in that business seem to be a little volatile and a lot of that is given the high-growth rate and change in customer mix. We certainly find that whether we're selling to retail dealers versus wholesale distributors. There's different margin profiles and their buying habits tend to be a little bit lumpy. So that -- as far as projecting future margins, that certainly comes into play. Another item would be the -- just the significant investments that we're making in the infrastructure for that business and growing 30% plus year-over-year. You know to build out the customer service group that you need to support that is a continued focus to us.

I think, long term -- this is Scott. I think long-term, we've maintained on previous calls that our aftermarket business would be marginalized, would be anywhere from 50% to 100% greater than our OEM margin. And when you look at this year's results and even the quarter's results, it's not a whole lot off of the low end of that projection. So I think long-term, we expect it to be higher than our OEM business. And like Brian said due to the investment and mix and building that out, little bit less than it was a year ago, but we're still happy with how it's expanded as compared to our OEM margins.

Excellent. Then the last question, on the content growth this quarter, last couple of quarters, can you kind of help us think about how much of that was driven organically? And how much was driven by M&A?

So 83% of our revenue growth was organic and 17% was through M&A.

And when you're looking at the towable -- if you try to break it down between towable and motorized, towable is almost all organic growth where motorized has got some motorized business that we picked up from the Lexington acquisition.

Excellent, thank you.

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

Good morning, thanks for taking questions. Couple have been touched on, but maybe switching gears. If we think about just capital allocation. Brian, you touched on it, you know largely it's been dividends and of course M&A. Wondering, if you've had any discussions about potentially adding share repurchases to the mix, given the strength of the balance sheet, exceptional cash flow to be opportunistic and maybe when you hit little speed bumps like we did this quarter?

Yes, Dan, we continue to have open dialogue with the board and look as an option for deployment. But we look at it no different than we look at the other investments that we have in the pipeline, whether it be an acquisition or a CapEx item and what kind of return we think we can get on it. So certainly, we're looking at it. But we've got a lot of opportunities in the other categories as well. So we continue to focus it, where we think we can get the best return.

And if you look at the Top 3 categories in dividends, acquisitions and internal CapEx, we've got plenty of opportunities there over the next 12 to 18 months.

Very helpful. Along those lines, I know you don't want to get into 2018 guide yet, but just as you think about building out capacity, updated figures for CapEx this year, do we expect similar levels next year in '18? Might that move a little bit higher? Your thoughts here?

We'll probably likely update you in Q4, that's probably the best answer right now.

Got it. And acquisition pipeline, you've got another selling season in Europe here. Have you gained enough traction at this point to warrant maybe some additional aggressiveness? Or how comfortable are you from here continuing to seek out and build out acquisitions in that market?

Yes, so we now have three businesses that we own in Italy and over 200 team members there. So first and foremost, we've got a great base of companies that we're working with and they're growing, organically growing the businesses now. So we are pleased with the organic growth that they've been able to achieve, since we've acquired them. Furthermore, in terms of the acquisitions, it definitely -- there's a lot of opportunities in Europe. And again, we're taking our time, analyzing where we want to be and how quickly we want to move there. As you've seen over the last 18 months, we for sure have dipped our toe in the water and moved slowly in terms of size and the number of deals that we've done over there. But we -- we're optimistic that, that business over there is up double-digits this year and expected to be up double digits next year in terms of the industry. So things are just as positive over there as they are in the United States, so it's part of the pipeline. And then flipping back to the North American pipeline, a similar type story. So we're looking at deals like Jason said in his prepared remarks, we're looking at deals across all of our parts of the business. And we're excited -- we didn't close a deal in Q3, but we're actively looking at lots of different opportunities. So stay tuned.

Very helpful. Lastly, and then I'll jump out. You gave a lot of content details, just maybe update us on the penetration in leveling devices in towables? And maybe a reminder of what the -- where we are now and what the total market opportunity looks like there?

Sure, this is Jason. The penetration in towables is, we've almost completely penetrated to the fifth wheel market, which is approximately 20% of the total towable volume. So our big opportunity in travel trailer leveling is with the 300 plus thousand towable units that don't have leveling today. So we penetrated about 10 brands and still early innings. It's a big ticket item for some of these low-cost trailers. So they're not making this decision as quickly as some of the fifth wheel brands did, that could afford it, a little bit easy -- a little bit more easy. So it's definitely retail driven, there's a lot of retail chatter out there about just simplifying set up through having leveling systems on trailers. So we'll see more and more. We're the front-runner in that race, we've really got the premiere system there. And we'll continue to see it grow.

Appreciate the color.

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

Good morning guys, thanks for taking my question as well. I just wanted to go back to margin and make sure I understand maybe a change in commentary. I think on the last call, you were hopeful that you would get half of the benefit of the price increase in Q3 and then the full benefit in Q4. And it sounds as though you're going to get all of the benefit you thought, but it'll stretch into Q1 of next year. And just curious, if there was a change in the rate that customers accepted that price increase? Or some other dynamic?

Yes, Craig its Jason. I'll tell you a couple of things. First, yes, the rate of acceptance was a little slow, but we introduced another pricing increase since Q2. So the reason why we're saying more of a Q4, Q1 load was the price increase that we announced in Q2 was relatively a small one. And we announced a bigger one later in Q2, that we're announcing on this call. So bring everybody up to speed anyway. So that's probably part of the confusion.

Okay, that helps. And then, I think you've talked about a margin target in the 11.5% to 12.5% range. And just wondering if you could put that into context of the 190 basis points in margin expansion you expect. Just looking at 2018, should we be inside of that 11.5% to 12.5% range, once we get the full benefit of this 190 basis point increase?

So yes, for full year 2017, so far we're 10.6% in terms of operating margin. If you look at, again, it's a big if, so people need to understand that materials definitely are volatile and so we have to look at that. But if everything else was equal, we look at kind of a full year number this year, adding to that the 1.9. So we definitely feel that we could be for sure in that range, maybe towards the higher end of that range. So I think somewhere between 12% to 12.5% might be acceptable.

I tell you Craig, this is Jason. We definitely got the volume headed into the next several quarters. And we had a customer give us their forecast, just the other week and -- it was about represented about 18% of the total RV market. And their forecast was up about 29% from now till May. So those are -- that's a significant jump. The volumes going to be there. We spent a lot of time adjusting capacity, adding capacity, adjusting our labor force to prepare for that, and be best situated from a bottom line standpoint. And we acted swiftly on the pricing changes and the volatile raw materials we saw through Q2 and into Q3. So I'd say with those things, that we're really well prepared to get to the target operating profit that we talked about last quarter over the next 12 to 18 months, 11.5% to 12.5%.

And then finally, you commented on an automation project that looks exciting. Maybe talk about how that could unfold in 2018? Will we get one-fifth of that benefit, if you will, that $30 million benefit in 2018? And then, is this a precursor to other projects that you could undertake?

This is Scott, Craig. So the project is going to take close to or just over a year as far as the equipment and the building to be built and equipment to arrive. So it's really from a timing standpoint more of a 2019 project. So the expected benefits from the project will be more realized in 2019. Jason's cash-flow numbers on the project probably were on the conservative side, if you wanted to take a little bit, it's going to be at least that. If you wanted to take a little bit more aggressive approach, it could be a little bit better. So it could be maybe pay back in three to four years as opposed to 5. But it's a huge project, we're being conservative about it. We've got a world class external partner that's helping us build and implement this system. So we've got -- we feel like we've dotted I's and crossed T's in terms of risk management, by selecting a great partner outside, we've got a dedicated team inside. So we feel like the project will be managed well and the risk -- the downside risk of anything found or hampering the benefits will be minimized, because we have great teams internally and externally working on the project. And then, looking at other larger projects, we definitely feel like -- so if you take a step back and you look at our lean progression over the last four or five years, we've started with things like floor space -- square footage saving, trying to condense what we're doing on the shop floor. Then we started looking at small projects, less in complexity that would be using a baseball term, given the World Series last night, singles and doubles, now we're getting into triples and home runs, just in terms of size and benefits. And I think that's where our shareholders probably expected us to be a few years ago. We took our time. We made sure that we were conservative in how we rolled out our lean culture and the projects that we took on in the early years. And we feel like our team is much more experienced at looking at these larger projects. So each of our major product lines are looking at, what can they do additionally -- bigger project to drive increased margin at the bottom line and help redeploy employees to other parts of the business, given the fact that our October sales were up 40%. We have the continued need of more people. So any automation project gives us a benefit of redeployment of people into other parts of our business.

And Craig, we have done a lot of smaller robotics projects, more than we've ever done in previous years. And as we continue to have more and more success there, we get more and more comfortable to implement more. And that's one of the reasons that our CapEx numbers were up a little bit this year, just because of capacity as in automation and lean.

Got it, thank you.

[Operator Instructions] Our next question comes from the line of Steve O'Hara from Sidoti. Your line is now open.

This is Frank [ph] on for Steve. I just had a follow-up on the margins. I know you mentioned some of the input cost. But I was just wondering what we can expect for gross margins for the full company going forward?

Sorry, can you repeat the question again, Frank?

On the gross margins, you mentioned some of the input costs are higher and the lag behind that. So I was just wondering if you can break out maybe for the rest of the year, and then heading into 2018, where we can expect on a gross margin basis?

Well, without getting too particular, we expect the brunt of the increases to hit in Q3 and Q1 -- I'm sorry, Q4 and Q1. And you know we've said that it's about 1.9% improvement in operating profit, when you look at the totality of the increases and the labor improvements that we've made in total. So, does that help?

Yes, that's great. And then I just had a quick other one on acquisitions. Is there any one area that you guys would look to focus on? Or is it -- I know you've mentioned spread across the board, if there was one area to focus because you talked about...

Well I can tell you that, with our RV content and the concentration that we've got in market share in RVs, we're looking more towards our adjacent markets, aftermarkets and European RV market industries to focus on acquisitions. The RV market in North America will continue to provide opportunities here and there, but there's a significant number of opportunities in the other markets and industries that we're in.

Great, thanks.

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 comments.

Yes, I would just like to remind everybody that over the last 20 years, all of us that have been with the business. There's been a constant up and to the right trend with revenues, profits and content improvement. And I attribute a lot of that to the fact that we've got a long-term management team with the business and we're going to continue to focus on the long-term strengths of our strategies. So thanks everybody for being on the call and we'll talk to you in the next quarter. Thanks.

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