Good day, ladies and gentlemen, and welcome to the LCI Industries Fourth Quarter and Year-end 2018 Earnings Conference Call. [Operator Instructions]. As a reminder, today's conference is being recorded. I would now look to turn the call over to Ms. Victoria Sivrais. Ma'am, you may begin.

Thank you, Victor. Good morning, everyone, and welcome to LCI Industries 2018 fourth quarter and year-end conference call. I am joined on the call today by members of LCI's management team, including Jason Lippert, CEO and Director; and Brian Hall, CFO. Management will be discussing the results in just a moment, but first, I would like 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 would 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 in its annual report on Form 10-K and 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?

Thank you, and good morning, everyone and welcome to LCI's Full Year and Fourth Quarter 2018 Earnings Call. We are pleased to report a record annual revenues of approximately $2.5 billion, a 15% increase over last year, and fourth quarter's revenues that reached $537 million, which were down slightly from the prior year. On a segment level, our OEM sales were down 4% to $486 million in the fourth quarter. I would note that while the industry and wholesale was down around 20% for the recent quarter, our sales were only down modestly due to the successful execution of our diversification strategy. Our focus on diversifying our business has been very intentional to first mitigate the cyclicality that we see in our RV business, and second, to leverage our expertise in sales and operations for other markets, where we believe our focus on innovation and broad product line ownership will drive market share gains and success like we've experienced in RV. We remain confident that in the next four years, our RV segment can be less than 40% of our total business and our results to date are on track with that goal. For 2018, RV represented approximately 63% of our total revenues, down significantly from approximately 90% shortly after the last recession. We expect this growth in our other markets to be organic as well as large gains through our M&A activity, looking to identify and integrate strategic acquisitions that support strong returns to shareholders and non-RV categories in Europe, adjacent markets and the after markets. We have proven our ability to outperform industries in 2018 and we believe we will continue to do so as we execute our strategy in the coming years. Turning to the RV OEM Segment. As we have stated before, the originally forecasted growth…

Thanks, Jason. Good morning, everyone. Over the next few minutes, I'll provide 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 fourth quarter decreased 2% to $537 million compared to the prior year. The decline in year-over-year net sales reflected a 17% decrease in RV wholesale shipments as dealers normalized their inventory levels, largely offset by continued growth in the company's adjacent OEM industries, aftermarket and international markets. Q4 2018 sales to other OEMs outside of RV grew 45% to $146 million compared to the prior year, while our fourth quarter aftermarket segment sales increased 24% to $51 million compared to the prior year. Q4 2018 sales to RV OEMs declined 16% compared to the prior year due to the previously mentioned decline in wholesale shipments, partially offset by strong organic growth in North America and abroad. Acquired revenues were approximately $59 million, primarily impacting adjacent OEM and aftermarket sales. As expected, our fourth quarter operating margins were negatively impacted by the effective fixed cost absorption on the lower RV sales volumes. Our teams continue to be focused on cost reductions to combat the decline in RV sales and have shown favorable reductions. However, the severity and speed of the correction make it difficult to quickly rightsize the business. We are excited to see material margins finally equalize year-over-year, and in fact materials and direct labor both showing slight margin improvement during the fourth quarter. That said, we would expect some relief from our actions to begin to materialize as we head into 2019, which, along with the seasonal increase in RV volumes is expected to contribute to sequential margin improvement for the first quarter. Q4 2018 diluted earnings per share adjusted to…

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

It's actually Fred Wightman on for Greg. I think in the release, you talked about January sales being down 9%, part of that was due to declines in production but also to weather. Could you parse out the impact of those two items. So what's due to sort of lower wholesale volumes and what the weather impact is?

Yes, I think a couple of key comments there. Fred, as you know, we would've - I think we ended up 9% down without the weather-related activity that pretty much shut Indiana down for the last week of January. We would've been close to flat, call it down 2%. For - that speaks to how much our other markets, whether it's adjacent's or adjacencies or Europe aftermarket, all those that picked up the pace there. So - and also the OEMs are probably going to be on the down 30% range as they were already off a week, some two in the beginning of the month for holiday shutdown and then the full last week. So you're comparing us may be down 9% with an industry that's down probably close to 30%, so...

Okay, that's helpful. Then I think in the past you guys had talked about 2019 at an industry level seeing sort of flattish retail. I mean is that still how you guys are thinking about it, I think you'd also talked about, during the prepared remarks, some positive traffic coming out of the early retail shows, but do you think flat is still something the industry could see?

Yes, in short, I think, flat is probably realistic.

Great. And then just real one final one. Heard some positive commentary on the margin front. I think it seems like you were expecting some sequential improvement into 1Q but how should we sort of rationalize that commentary with some of the continued wholesale declines that you talked about? I understand part of that's due to weather but just sort of help us put those two together.

Yes, Fred, this is Brian. We seasonally will pick up volume in Q1 and then even further into Q2, so we certainly would hope to get continued leverage on our fixed costs along with some of the strategic cost reduction initiatives that we have in place. So that's primarily what you would see along with that, I had mentioned that our materials and labor were very slight tailwind in the fourth quarter, but that's the first time we've seen that in the long time. So we would certainly anticipate as we work through some of those layers of - within our inventory that Q1 would start to see a little bit of that, but then even probably more within the second quarter.

And her next question from the line of Kathryn Thompson from Thompson Research.

Just a follow up on gross margins. You typically do have sequential improvement between Q4 to Q1, it's been done really in the previous five years. It will be helpful for us to better understand as kind of the magnitude of which you're thinking in terms of that improvement, and really the puts and takes that drive that improvement overall.

Yes, so volume will be a big piece of that obviously, we had November and December of Q4 at roughly just a couple of weeks of production each month, which is less than what we typically see, both of those months, Kathryn. Looking into Q1, sequential improvement, we're looking into the neighborhood of 200 to 300 bps over our Q4 results, again volume is going to be a big piece of that. We missed a little bit in January because we had that unforeseen week down at the end of the month with weather, but the rest of the quarter looks decent from what we see with orders already, I probably said a couple of times during the call but our largest customer called us this week and put all their plans back up to five days in March. So that's part of the light of the end of the tunnel we've been looking at. They wouldn't do it if they didn't feel that their order book and their outlook was good enough because everybody's been in a real conservative inventory tightening mode and production tightening mode. So hopefully, that gives you a little bit of light. Brian, might want to add a couple of things.

Yes, I think the one last thing I would add, along with the volume is certainly the January 1 price increase that Jason mentioned in his prepared remarks. So that's kind of the last piece that we've been waiting on to help cover some of these increased input costs and tariffs, et cetera, that we've been absorbing. So that's the other point I would make.

And as your customer, when do they last produce over - regular five day workweek?

It's been spotty, Kathryn, but most of our customers have been at four days for several months.

I mean, I would imagine it would have been at least since last May. Is that...

No, no. it's been - I mean, May was kind of when everybody started reducing rates, but they didn't start reducing days, which are kind of like the big cuts, the 20% type cuts, and so later in the summer, early fall.

Okay. And then on gross margins, you - just following up on that with the raw material component of it, off 150 bps this quarter versus 100 bps in the prior quarter and now you have pricing actions in January, but you also had several in 2018 and there have been some drops in key raw material cost, including steel. Maybe help us understand kind of the puts and takes on just for the quarter reported of what was the driver, how much is the - more volume. I mean, I know you said that volume is a big component, but it would seem that some of the pricing actions should at least help you to at least maintain margins as you did in Q3. So instead of down 150, maybe you would've at least been down 100. Does that make sense? I'm really just kind of understanding - I feel like there should of been a little bit more oomph from the pricing actions in 2018 playing into...

I'll start, I'll just say that most of our pricing took effect in January 1. We did have a few marginal things happen through the course of the year, but kind of the true-up and making sure that we got everything that we needed with all the activity that was going around with tariffs and tariff-related commodity increases really happened in January.

And Kathryn, I'd add to that. I mean, a couple of different points. One, when we were sizing the business for 540,000 units, we took on a lot of inventory. So our inventory, you can look at that and see how it's progressively increased throughout the year, and those are all significantly increased cost. We've spoked previously and had stated that we never did chase price increases all the way to the top of the input cost market, so we stopped a little bit short to wait for it to come back down and then you got hit with the 10% tariffs during the latter months of the year, of which we really didn't cover any of that here until January 1. So we - while input costs have come down slightly over the past 3, 4, 5 months, call it, we had to eat through those layers, we were also absorbing tariffs at the same time, which a lot of that's now right at here during the first quarter.

And part of the inventory situation is just that we were prepped early in the year for a much larger volume, so the inventory as volumes continued to slow through the Q4, it's taking a lot longer for us to eat up and we'll be continuing to eat through that in Q1. That's why we talked about Q2 kind of seeing a better improvement.

And I really - we've been talking about materials and price increases all year. I mean, these last two quarters, we've really started to see that flatten on a year-over-year basis and then show signs of slight improvement. So that leaves you with the real issue during the fourth quarter as the steep decline and volumes and the absorption of the fixed cost on that.

And historically too, just to throw in as a last comment. When commodities go up, our margins typically are almost always down. We've had - we've seen that since summer. We're seeing rising commodity prices since really the summer of '17. So - and then almost conversely likewise if commodities are falling, almost always, our margins are trending back up. So historically, that's just always been the case.

So a little bit of just timing, a little bit of just working though elevated cost of inventory, so - and the price increase, okay. Just a housekeeping item, just - how interest expense for the full year?

Yes, I mean, the interest expense, wait, go ahead, maybe clarify your question.

For fiscal '19.

Yes, I would anticipate our interest to continue at the level it is today, fourth quarter. That seems to be the - with our leverage and expectations for the year, it seems like the fourth quarter run rate is what to expect.

And our next question comes from the line of Craig Kennison from Baird.

I think Kathryn addressed a lot of the commodity related issues in your gross margin, but I'm curious if we isolate that and neutralize that, if you will, how should we think about incremental margin or detrimental margin in your businesses? Some people are certainly going to model based on a downturn scenario, and we're just trying to do the math on what incremental margins might look like in that type of scenario.

Craig, I mean, I don't think anything's significantly changed in our business. I would expect that in the past, we've talked about anywhere from 15 to, I mean, a wide range based on the products in the markets that we're looking at, but anywhere from 15% to 25%, I think in the - if you're modeling any kind of downside, the 25% for sure is - would be a typical decremental margin, but that's with materials flat, and I think that that's certainly a tailwind that we're expecting to see that should help to minimize that.

Is that at the operating margin level?

Yes.

Got it. And for those of us trying to model for 2019, any light you want to shed on the direction of gross margin, SG&A and SG&A as percent of sales and operating margin?

Yes, I mean, outlook from the bottom up, I'd say from an SG&A view, if you look at the fourth quarter, year-over-year, it's pretty close to flat on a dollar basis and that's got things in it that are little out of the ordinary like some severance cost, et cetera. So I'm looking at that percentage of sales and anticipating that, that's an expectation for 2019. From a gross margin perspective, we've talked about the appreciation of the margin that we're anticipating certainly in the front half of the year, beyond that it's a little far out to throw out numbers at this point but the 200 to 300 basis point improvement in margin that we think we can get from sequentially from Q4 here in the Q1 and on the Q2, I think that's a good gauge and a lot of that's coming from the volumes at the gross margin level.

I'll try to put that into a model but do you think that adds up into margin upside or downside relative to 2018 at the operating line?

It should result in upside, depends on how good your model is.

Well, we'll find out. And then on the topic of working capital, obviously you had mentioned some commodity issues related to working capital in your investment and inventory early in the year. But just overall, if you look at 2018, working capital efficiency seemed to decline. Just talk about what's driving working capital and efficiencies and then may be just talk through cash flow as it relates to your CapEx outlook and working capital outlook.

Okay. yes, I think that while we were talking earlier, easily the first bullet point is the fact that the volumes we were expecting were well above what actually came to fruition. So as we bring in the inventory ahead of time and then everything started to decline, that certainly went against us. As you get closer to the end of the year, with what the markets were doing, we were certainly doing some hedge buying as things were running up to make sure we were mitigating that as much as we could, and then as things started coming down, with a little bit of uncertainty and our view of the long-term market, we were taking advantage of that. Third, you would have Chinese New Year as well, we typically tend to bring on little more inventory here towards the end of the year. So these volume, it certainly takes a little bit longer to work that number down, but it's something that our teams are focused on here in the first few quarters of 2019 with the expected increase in volumes to hopefully start to work inventories down. On a receivable basis, day sales, as you see in our reports, that has continued to grow, certainly, no collectibility issues, it's really more of a change in the mix of our business with international and into the adjacent emerging markets. A lot of those just come with different terms and what we're accustomed to in the RV business. So as we've reached - we're approaching 30 days DSO, certainly not something to be too concerned with, in my view, it's - maybe we were just - we're typically accustomed to the nice 20-day DSO that the RV business gives us.

And then just on CapEx and other priorities for cash, including the buyback?

Yes, we're clearly focused on the pipeline and M&A that Jason mentioned previously. We've got a lot of opportunities there. We do think depending on what our stock does, we certainly vet that on a daily basis to see what opportunities are there from a repurchase perspective. And then we've already mentioned that on the CapEx front, we've certainly pulled the throttle back on that and are anticipating a range of $55 million to $65 million for 2019. And within that number, I'd say, you still have a pretty significant carryover investment in the beam line that we've been talking about for the last 12 months. So as that project comes to completion, we'll have some cash outlay there and the rest is really more the basic replacement of CapEx.

And then finally, Jason. Just on the M&A and consolidation strategy. Clearly, it makes a lot of sense to diversify beyond RVs. Do you feel like you have the right skill set, clearly, within RVs, I mean, you live in Elkhart, you know all the right people, you've really done a wonderful job consolidating that industry. Do you have sort of the same attributes to successfully consolidate outside of RVs or what do you need to do maybe backfill and get that skill set to make sure you make as attractive an acquisition outside of RVs?

Yes, that's a good question, Craig. I think the big thing there is that with adjacent markets especially, I mean, we've been at that since 2010, so we've been developing a lot of relationships inside those adjacent markets since then, over the course of the last eight years. So we've steadily developed really good relationships and trust in those industries. Europe's been more recent obviously but we've been going to the show there for six years, meeting a lot of people. So the big piece of that is just trust, a lot of the companies we acquired from 2000 to 2010, I didn't know a lot of those guys but when I was running M&A back then, it was about our reputation in the industry, it was about our people, it was about sitting down with these targets and developing a quick level of trust, knowing that we didn't know each other and that doesn't change with adjacent markets, or Europe or the aftermarket, where we're really looking to - at a pretty big pipeline considering what we had in RV, which we thought was big, but when you add all these other markets and we even got more pipeline available to us and are looking at more targets than we ever have. But to me, it all really boils down to trust and our management team's long in the business, so we've got a good reputation there. I've been at it for 24 years, and when you do - we've done 60 acquisitions since I've been with the company and our team, and the sellers will not look at us if we don't have a great reputation. So I think the fact that people continue to come to us and look to sell their business to us tells us we've got a pretty good reputation in the market.

And our next question comes from the line of Daniel Moore from CJS Securities.

Just a follow up on the capital allocation question. In terms of the repurchase authorization, how aggressive do you envision being in deploying? And kind of remind us what - between that and M&A opportunities, what level of leverage range you'd be comfortable going up to?

Well, as Brian just talked about, we've got a pretty significant upside on our pipeline for acquisitions. So between adjacent, European acquisitions, and we're to turbocharge Europe now with Thor's recent acquisition of Hymer. It makes more sense for us to get more active quicker there. And then aftermarkets as well. So we've got a pretty substantial pipeline and we'd likely look at those, all those opportunities first and foremost.

Yes, and then, Dan, I'd layer onto that. We've always taken a very disciplined approach to taking advantage of all the investment opportunities we have, and so that coupled with the - we've always been - we're very comfortable at a leverage of 1.5x EBITDA, and for the right deals, we can go - certainly go above that, there's comfort there. So that would be the other part of it that as we look at that opportunities within that pipeline and our - whether we take advantage or don't take advantage of a share purchase, et cetera.

Helpful. Maybe just a little bit of color on what your expectations are for growth in the aftermarket revenues as you look at 2019 relative to what we've seen in the last year or so?

Well, in aftermarket, I think, we're around 30% plus there and we expect that to continue to grow, it's kind of cyclical to RV, so I think we saw 37% growth in just the month of January, and we don't think that, that will change much because there is a lot more aftermarkets we're attempting to get into and we still haven't taken all that's available to us on the RV side specifically.

Got it. And then lastly.

So nice growth.

Perfect. Jason, tricky question, but what type of - you mentioned the 40% goal a couple of times in your prepared remarks. You've obviously mentioned previously in terms of overall revenue by 2020, getting that RV OEM revenue down to 40% or so. What type of growth and/or overall RV OEM revenue at that point in time do you envision in order to get there?

Well, if you - and just to clarify, we're talking about 40% of our business revenue's going to RV by 2022, so over the next four years. But we've modeled in probably a flattish-type growth over that four years for RV with a chunk of the growth coming from the aftermarket year up in the adjacent markets including marine. So it's not that we don't expect the RV to do better, but we've just modeled in a conservative growth number for RV. Does that answer your question there?

It does. Now that's very helpful.

And our next question comes from the line of Scott Stember from CL King.

I have a question. You had said that, in January, I guess, that if you don't have that week off related to the brutal temperatures that your sales would've been down like 2%.

That's right.

Do you expect to catch up the business that was lost within this quarter? Or does it remain to be seen?

I think it remains to be seen, but I know a couple of OEMs decided to work Saturday that week when the weather warmed up to kind of catch up a day. You might see a couple of other manufacturers to do the same thing, catch up on some Saturdays just to catch up there. And others will just say, "hey, look, we're - we need those days to continue to work inventories down" but it's kind of a mixed bag, if that helps.

Okay. And on the non-RV side, looking at the adjacent businesses, we know that obviously very good quarter, and it sounds as if within the at least January, that there were some very nice increases as well. But maybe just talk about marine side. I know there's been some talk about pontoon boats softening a bit. How is that impacting you, if at all?

I mean, we're seeing a lot of growth out of a lot of the boat manufacturers, and we do pontoon products obviously but we also sell a lot of windshield to a lot of the mid and high-level powerboats. Really, we don't see - I haven't heard any of that, I was just at a couple of places the other day and volume's up at a couple of the pontoon places here locally that are doing some real volumes. So - and again we're - like we did in RV, through the earlier recessions of the 2000s, even though you might see a blip here or there in the industry, as we get into something, we're going to continue to grow through those blips in the first 10 years, we might be more susceptible to ride the ebbs and the flows as we concentrate our market shares, but our market shares are far from maximized in the marine business right now.

And, Scott, I think most of what I've seen as maybe mid single-digit expectations in marine depends on the boat segment, but that kind of seems to be the consensus, so...

So just to be clear, outside of RV, you really have not seen any material slowdown in your business?

No, as a matter of fact, we made a $130 million acquisition with - in revenues of Taylor Made in early 2018. Our full year revenues - their 2017 revenues, I think, were $130 million, but we're up what - by $170 million in '18. So that business has grown really nicely, and most of that's marine, so...

Okay. And just lastly, Jason, you touched on a couple of new areas. I know we've heard you talk about mattresses of the college and hospitality, but residential housing market and construction equipment, that seems a little bit newer to us over here. Maybe just frame out those last two, the overall opportunity there, and how far along you are in getting into those businesses?

Yes. Well, some of the newer markets we're doing some market studies and trying to figure out how big those markets are, but on the mattress side, we know it's hundreds of thousands of mattresses annually, and we're quietly one of the larger or largest manufacturers of mattresses in the country just with all that we do for the RV business and aftermarket. So we don't have a good gauge of the mattress side of things, and when it comes to some of the construction equipment and things like that think it's a new markets, power sports, YouTVs and things like that. They're all markets that we're trying to figure out what the size is there and we're trying to look at strategic acquisitions that could put us in good with some of those customers. Residential market is something we're just looking for residential, commercial builders of buildings and entry to mid-level housing to get in on our window products because it's a really standard product, it's high quality, and for entry to mid-level projects, we should be able to get a lot of business to distributes there. And whether it's college mattresses or hospitality, medical, the camps, things like that and mattresses are - the industrial or power sports or residential building products, these are all markets that we're just deciding that we're going to start making a run at, so there's a lots of upside in all these areas. And we'll give more color on that down the road.

[Operator Instructions]. Our next question comes from the line of Steve O'Hara from Sidoti & Company.

Just on the - I know there was some, obviously, excess inventory around dealer - at the lower level last year. It would seem like some of that has been worked down with the wholesale declines and wholesale shipment declines. And can you - do you have a sense for maybe where that is relative to if retail is flat this year? How much more dealer inventory needs to come out or should come out and how do you think about maybe your wholesale or your sales to the various markets versus kind of the wholesale overall with kind of high - what I think is still pretty high finished goods inventories at the OEM level?

I'll give you a couple - this is Jason, Steve. I'd give you a couple of thoughts, one is, we're going to continue to drive content up, so in some cases our content is going to exceed whatever OEM production goes down because of inventory levels and things like that. But when it comes to the actual inventory levels and what we think things are going to balance out, it's - there's a few different things going on, interest rates are causing dealers to carry a little bit less, so it just depends on every individual dealer's comfort level with the interest rates, where they are and where they might be going to determine how much less they're going to carry than in the future - in prior years historically, because when interest rates go up, we definitely know that they're going to carry less inventory. So that's one of the things that's going on, that's kind of a target. And the other thing - the other big piece of that is retail. Retail has got to stay steady. So we got to have that question answered. And we feel it's going to stay steady, we feel the economy is good, we feel that the demographics are good, we feel that the products have never looked better and then better positioned for the people that are out there buying RVs. So there's a few different things. But like I said earlier, the fact that our largest customer went to five days in March, that's a pretty big sign that there's a little bit more comfort with dealer inventories or dealers are giving the OEMs a little bit more favorable sentiment that inventories are in a little bit better position, I wouldn't say they're in a great position by any means but they're definitely better than where they were midway through last year.

Okay. And then maybe just on the - comment about the largest customer. I guess, I would assume, one of these largest customers is one of the ones that kind of push the metal last year. And I'm just - what's your - I guess, is there a way to maybe avoid some of the boom and bust of the past where you get the sense that there's maybe more checks and balances in place where OEMs aren't maybe pushing where they should be breaking or that kind of thing?

Steve, that's a million dollar question. If you can figure that one out, you could probably have a new career. But I don't know, I'd just say that between dealers and OEMs, they have to figure it out, it's really difficult and complex because there's thousands of dealers and they all carry inventories and run their businesses a little bit differently. It's a lot different than probably the auto industry that may be is a little bit more sophisticated in forecasting and how the OEMs kind of control the inventory out in the - at the dealer level. But it's not any secret that our businesses isn't as sophisticated as an auto business and it might take more time. But I think every time we go through something like this, we get a little bit smarter about inventory and things like that going forward. Certainly, everybody is going to watch retail numbers more closely than they ever have, as we've gone nine years without a year-over-year decrease, and now all of a sudden, we've got a decrease. People are going to watch retail closely, and I think that's going to be a good, helpful decision-making bullet point for the OEMs going forward.

I think another thing I'd, Steve, is we're in a little different place today where we've been historically as an industry with the amount of capacity that's there. In the past, you would see such significant backlogs that a lot of orders replaced it one point in time at the open house and then the OEMs run hard to produce all those units and then it stops and then it goes and given where we're at today with the amount of capacity that they have added, it makes for a shorter lead times and a little bit - it's a little bit easier to then monitor dealers, reception to take on more or less inventory as those lead times shift. So that's - I think that's a little - slightly different dynamic we're in today.

And I'm showing no further questions at this time. I'd like to turn the call back to Jason Lippert for closing remarks.

We appreciate everybody for being on the call and listening in today. And we look forward to talk to you guys when we issue our first quarter results in a couple of months. Thank you. Bye-bye.

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.