Good day, ladies and gentlemen, and welcome to the Second Quarter 2019 LCI Industries Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this call is being recorded. It is now my pleasure to introduce Victoria Sivrais with Clermont Partners Investor Relations.

Good morning everyone, and welcome to LCI Industries' second quarter 2019 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 forward-looking statements. These factors are discussed in the company's earnings release and its Form 10-Q 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?

Good morning, everyone, and welcome to LCI's second quarter 2019 earnings call. During the second quarter, we delivered solid performance, benefiting from sequential margin expansion in the aftermarket and volume increases outside of our core RV market; operational efficiencies; improvement in healthcare costs; and material cost improvements. Consolidated revenues for the quarter were down 8% to $629 million compared to the prior period which showed a sequential improvement from the first quarter of 2019. This revenue softness was driven by the challenging environment in our RV OEM business where LCI sales were down 14% due to the lower production RV environment where wholesale was down about 20%. On a very positive note, our diversification strategy continued to gain momentum as the decline in the RV OEM revenue was partially offset by strong performance in our aftermarket segment and marine market. We are also pleased to report that our marine, adjacent, aftermarket, and international sales comprised over 40% of our last 12 months' sales as of June 30th, a figure we expect to grow further as we continue to successfully execute on our strategy to diversify more revenues away from the OEM RV space. Despite the lower RV demand and production environment due to the recent inventory correction, we have managed to continue content growth as LCI's content per towable RV and motorhome increased 2.2% and 1.2% year-over-year respectively. The industry-wide reduction in RV inventory is continuing to improve as over 40,000 units have been removed from the pipeline during the second quarter. That said, the impact of these inventory channel issues to our top line results has lessened during the second quarter as year-over-year comparisons become more favorable. We believe the industry is in the late stages of this inventory correction, and that we will have a better sense of…

Thank you, Jason, and good morning, everyone. Our consolidated net sales for the second quarter decreased 8.1% to $629 million compared to the prior year. The decline in year-over-year net sales reflected a 13% decrease in RV wholesale shipments, partially offset by continued growth in the company's aftermarket segment and international markets as well as continued increases in content per unit for marine. Q2 2019 sales to RV OEMs declined 14% compared to the prior year, primarily due to the ongoing industry inventory correction, which we believe to be in the final stages. We estimate the industry has removed over 40,000 units during the second quarter alone and anticipate another 30,000 units to be removed during the third quarter. The current RVIA forecast for 2019 wholesale shipments is for just over 415,000 units, which is still in line with our estimates. Realizing the September industry open house could have a significant impact on fourth quarter production. Retail demand has softened somewhat and we are expecting mid-single digit decline for the remainder of the year, which is still a top 5 year for the RV industry. Content for towable RV increased just over 2% compared to the prior year while content per motorized unit increased just over 1%. The continued industry shift towards entry-level products as well as recent decontenting efforts made to counteract the impact of tariffs have negatively impacted our content per unit. However, we are excited about the upcoming open house as we have continued to gain traction in products such as OneControl and our SolidStep, both expected to have strong showing. Q2 2019 sales to adjacent OEM markets of $169 million remained flat compared to the prior year. While acquisitions contributed only $4 million in net sales to the quarter, we saw headwinds in many of the…

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

This is actually Spencer Hanus on for Greg. So you guys noted -- you noted in the release that dealer inventory correction is in the final stages. Do you guys have any additional color on the timing of when dealer inventories are expected to be normalized?

We feel that they're starting to get obviously more normalized as we sit today. But I think everybody's kind of hanging out waiting for the September open house and model change to see how dealers are going to act toward restocking. So I mean, we feel good. We feel guardedly optimistic about where inventories are at today. I drove around a lot of the lots this week and a lot of the OEM lots are more empty than they have been in the past. So they just, it's all going to depend on their confidence and how retail is going over the next 1.5 months as we get into the September open house. That's, that'd be our two cents there.

Okay. That's really helpful. And then can you talk about the cadence of your sales throughout the quarter and how that compared to July?

Yes. I mean as we have discussed in the past, comps have continued to get more favorable for us. So certainly when we were looking at some industry being, RV industry being down 20%-plus, that certainly become a little more favorable. So you're starting to see that in our overall sales. So us being down 8% in the quarter, you can see July was down 5%. I do think that at least our expectations for Q3 or July is a pretty good proxy for that, and then should start to see further gains throughout the remainder of the year as comps get better. So it's, yes, hopefully that answers your question.

Yes. That's great. Thank you guys.

Thank you.

And our next question comes from the line of Kathryn Thompson with Thompson Research. Your line is open.

This is actually Brian on for Kathryn. I wanted to start with the margins in the quarter. I know you guys gave some decent color on the drivers for the improvements. But if, break out kind of maybe by percentage of how much the margin improved into those few buckets and how sustainable those are for Q3 and Q4 would be helpful?

Hey Brian, it's Brian. The, I guess first and foremost, if you go back to the color we gave from Q1 to Q2, we've been steadily for the last 2 or 3 quarters seeing 20 to 40 basis points of improvement from materials alone as we get into cheaper layers of steel and aluminum. We, as we said in the prepared remarks, I do expect that to continue at least in the Q3 as well. On a net basis, we're continued, we're still consuming steel and aluminum at 20%-plus above where we were back in 2017. So we're still at elevated levels, but they've come off quite a bit from where they were a year ago. So we, we'll see some favorability there, but also be giving back some price to our customers as well. So net-net, I would expect to see 20 to 40 basis points improvement from materials to continue on a quarterly basis. But the key driver then above and beyond that going from Q1 to Q2; one, you just consider the volume. So at a normal incremental margin, we usually say anywhere from 15% to 25%, so even if you look to that where a 20% incremental margin, we did better than that. Some of that's coming from, we haven't historically done a lot of sequential margin comparisons, but payroll taxes get favorable etc., things like that. Now that's just unique to, from a Q1 to a Q2. But the rest of the stuff which is really coming from operational efficiencies, labor savings, low overtime, those are things that, we're right-sized for this level of business today, and I anticipate those to continue. So now when you look from a Q2 to a Q3, I don't know that you continue to see 35%-plus incremental margins. But we saw that from Q1 to Q2, but then margins, the way to look at it is maybe using our historical range of 15% to 25% and going into a seasonal sales decline in Q3, it usually end up being towards the high side of that. So maybe a 25% incremental to use in that analysis. So again, I know I'm kind of rambling a little bit, but that's, hopefully that's good color.

That was. And just on the SG&A line, on a dollar basis, a little bit lower year-over-year and you said you kind of expected a same level. Anything to call out for Q3, kind of with the summer sales slowdown that you mentioned, any differences?

No. I really, I've been talking about that $80 million to $85 million range on a quarterly basis. Certainly there is a little bit of variability, so that helps going from Q2 to Q3. But for the most part, we've made some decent cuts there and expect us to continue to operate within that range.

That's it, thank you.

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

Maybe just broadly talk about the RV market, a lot of it's been made about the weather that took place for 6 months of the year, May through June impact on the, in the Midwest, on the boating business in the RV. Maybe just talk about what you've been hearing from a weather perspective and weather in July as things started to warm up a little in your perspective, in your touch points, have you heard that things have improved somewhat?

Yes. So, Scott, it's Jason. Retail, yes, obviously over the last couple of months is trended a little bit down. But July seems, from all of our touch points seems like it's gotten markedly better. I mean we're, from our standpoint on weather, weather is good and bad every year. I don't, I think we had some, definitely had some bad weather in May and that probably timing-wise had a dampening effect on some retail and wholesale shipments. But overall, if you look over 12 months, and I don't know how much weather is going to really play into it, but we're, our focus on the market right now when you look at retail and wholesale, again as we're going to kind of wait to see what happens at open house, the inventories are definitely way down. But we're anticipating kind of a flat to down mid-single digits retail next year, and maybe a 400,000 unit wholesale number next year. And you look at back in September of last year, we really took a hard line on where we thought volume was going and the industry association was talking about 430 to 445. And we were, we immediately went to 415 and adjusted the business and rip cost out to adjust to that 415, and it turned out to be a good move because we acted fast and didn't wait. So we're going to make the same adjustments for a 400,000 unit number which is still a great number. But like I said on the first question, I think that we're guardedly optimistic about retail over the next couple of months given dealer inventories and where we know they're at and where we know OEM inventories are at. There's definitely an opportunity there. Whether retail actually comes out and buys is -- remains to be seen. And on boats, they seem to be just be entering the same inventory inflated cycles that we had with RV last year almost the same time. So we're kind of anticipating -- at least in the pontoon side -- we haven't seen quite the drop on the powerboat side of the business, but on the pontoon side, we're anticipating kind of inflated situations they're going have to work through over the next 12 months probably. That's just kind of our view on that. But we're still relatively new in the marine market and we're going to continue to innovate, develop products and gain market share and offset some of that retail and wholesale drop on the pontoon side of our business and replace it with -- offset it with content and mix.

And Brian, you made a comment about the content gains getting -- or contracting a little bit because of tariffs. Maybe just talk about that a little bit deeper. And then with regards to list 4 that was announced last week, maybe just talk about your potential exposure there?

Yes. I mean, certainly I think that we've been talking for years about a shift towards entry-level products, that certainly exists today. And sometimes on a quarterly basis, we see even heavier moves. So I think as of late, we've seen a decent move towards entry-level product that certainly hurts our year-over-year content numbers. At the same time, you have got de-contenting that's been taking place. And we've been talking about it and that hasn't necessarily shown up in a significant way. But over the last couple of quarters, you're starting to see some deceleration of the content -- year-over-year content growth number. So I think some of its attributable to that from a tariff perspective, we're not anticipating list 4 to be all that significant for us. List 4 had come out at a 25% level previously, now they're talking 10% level. So as it relates to the past tariffs that we've had to work through from a pricing perspective, it's relatively insignificant.

And what I'd add to that, Scott, is that most of our product lines have already been hit by tariffs coming into this list 4, but you look back at the challenging environment we've had from -- really 2017 is when commodities started jumping up and then the first round of tariffs hit in February 2018 and it's been over a year now since the first rounds hit. And it's I think a testament to the team and our relationships with our customers to work through this. And like Brian said, a lot of the content challenges we've had is -- that's the OEMs' biggest way to deal with and our biggest way to deal with these tariffs to figure out how to lower costs of components or change out higher cost components for lower cost entry-level type components to be able to combat some of the inflation that the consumer would otherwise see if we just kept selling the same components all the time. So hopefully that answers your question.

Just lastly looking into next year and assuming the acquisitions that you guys just made and some of the newer products that you talked about that are coming out at open house for next year's product line, maybe just talk about where you think -- can you get back to mid-single digit growth on the content side next year?

We certainly think we can on the RV side and we're certainly going to grow faster than that on the marine side as if you look at our acquisition pipeline, it still is as good as it's ever been for us and if you look at the last $0.5 billion in acquisitions we made almost $475 million of that spend non-RV-related acquisitions. So our mix is going to continue to change as we look at Europe and aftermarket and marine and the rest of the adjacent markets. And we've got lots of great opportunity there. The margin opportunity and content and market share growth opportunity in all those markets are really favorable for us. We've had good responses from a lot of the customers in those markets. So we'll continue to work hard on the innovation side on RV and we mentioned OneControl and electric leveling and stabilizers are a big part of that opportunity, but we've got other new products that we'll be launching probably in Q4 that we can talk about next quarter. We'll give you more color there, but we tried to give you some color on a few of the big ones that will impact the open house coming up here, new model year change for the RV OEMs in September.

Got it . Thanks again. Thank you.

And our next question comes from the line of Daniel Moore with CJS Securities. Your line is open.

July down 5% given the destocking that continues apparently at least most of Q3. Is that a good proxy for what you expect to kind of the full quarter to look like? Do you expect sequential improvement through the next couple of months? Any thoughts or color there would be great.

Yes, I mean, I think there it's a good proxy. I think there's an opportunity to do a little bit better, but albeit very slightly, so I think I'd use it as a proxy.

Helpful. And on the margin side, I know this has been diced a couple of different ways, but if OEMs obviously if input costs are going down, you've got to give some of that back eventually. Are you seeing a little bit more aggression on the part of OEMs? And I just want to make sure I understood your comments correctly, net-net you still expect 20-40 basis points sort of net improvement on raws even net of the price declines, is that correct?

Yes, that's correct, Dan. If you want to give any color on kind of what you're seeing with the customers aggression? Last part of the...

Yes, yes. So these are all going to be challenging environment, so we've got to win every deal we've got, but it's on us to help work with the customers or work with the customers well to decontent and provide opportunities that provide lower prices and lower cost on our product lines across the board. So we've been doing that for the last year and we've done well at it. I mean in this challenging environment we have ripped our costs out of the business and right-sized our business to be able to put out some good margins getting closer back to historical margins and targets. So I think that you just need to look at the history here and say, okay, when the environment gets challenging, how are we going to respond, and we respond by getting creative and innovative with product lines and changing products to be more cost-effective and try to keep our content up so they're not ripping our components out of the vehicles just to take price out of the total vehicle. So hopefully I answered your question.

You did. It's very helpful and great progress on the cost reduction front. And last sort of attack at this gross margin question, we were up 160 basis points year-on-year. If you get the same kind of benefit from raw materials and if I look more on year-on-year basis rather than sort of sequential, is that a reasonable thought process for Q3 as well?

Good question, Daniel.

Maybe some decrementals versus Q2, but up versus Q3 last year?

I'm just checking our margin last year. Yes, it looks like a good proxy, it's a reasonable way of looking at it.

Very helpful. Last one and I'll jump out, but just on the M&A front, pipeline looks really good. I'm wondering if you're seeing, as the environment has gotten a little tougher if you're seeing multiples come down or more opportunities either North America or Europe or kind of status quo?

Yes, as we maybe would have outlined earlier we're kind of split evenly between our Europe, aftermarket and adjacent markets in terms of opportunities. The pipeline is very full, the deal costs are not getting any cheaper, I can tell you that. I wouldn't say that they're getting more expensive, but we've got lots of opportunity and it just feels good to be in a spot where we've got choices. I mean 5 years ago we were only looking at RV deals for the most point. We were looking at some other deals here and there, but the team is excited about all the opportunities. We're really excited about Lewmar. They are a premier brand in marine and will lend to the Taylor Made brand and other brands we already have started accumulating over the last few years on the marine side. You look at Taylor Made, we mentioned that I think we're up 470 basis points on operating margins in just little bit more than 12 months after owning them. So the synergies we're able to realize with some of these acquisitions in the adjacent aftermarket in Europe are really good. I mean we've been in the Europe market the last 4 years or so scoping out opportunities and really developing good relationships and listening to customers and who they, our customers over there and who they want us to kind of look at. So we've made some good acquisitions over there and we're building a good business with a great team over there with great leadership and great products. And we were over there maybe 3 or 4 acquisitions ahead of Thor. So we've got our feet planted and we're, now we're able to kind of connect with Thor and Hymer over there and make some, started having some really great creative conversations about synergies between our businesses which wasn't completely possible that way before. So it's exciting all the way around.

Appreciate the color and looking forward to the open house. Should be an interesting one this year.

Yes, we'll see you then.

Sounds good.

And our next question comes from the line of Bret Jordan with Jefferies.

Could you give us some color I guess on the U.S. marine business, whether the slowdown is more pronounced at the dealer level or the retail level? Are these dealers just destocking out of fear [indiscernible] a slowdown, or they're seeing a considerable slowdown?

So, yes, I mean, I was at a show last week and again I think the dealers are in a similar spot to where the RV guys were last year this time, starting to feel inventories being inflated a little bit, retail was definitely slow for marine because of weather. In RVs you can move around the country, but if you're going to be north and use your boat in the north you're kind of stuck and probably going to delay the decision a little bit. So definitely I think they're feeling a little bit of it, but I think retail is going to be better through at least July when the numbers come out. Again, powerboats we've noticed a little bit of a dip, but not what we've seen on the pontoon side of the business. And again we're going to continue to work through some innovation and content growth through both powerboat opportunities as well as the pontoon market that have lots of good opportunity for us and we're going to continue to look at acquisitions. Our marine pipeline is full there and we just made a good acquisition in the marine space and we're going to try to leverage synergies between our existing U.S. businesses and the new Lewmar business and the already Taylor Made business that we have over in Europe. So we're excited about integrating Lewmar and growing them with our foundation, strong foundation here, and then look at more acquisitions and more content and innovation. So we'll try to -- we'll try to get through some of the -- offset some of the dip that they might see through inventory inflation and offset it with, whether it's good acquisitions and then content growth through our existing business and our new acquisition.

Right. And could you give us any color what you're seeing in the European consumer trend? I guess the trajectory there, are they feeling relatively better or worse than they were maybe last quarter?

I think it's -- I think they're -- the behavior and attitude over there has just been kind of flat. It might be getting worse in some of the other countries that are having some difficulties, but the big retail country over there and wholesale country is Germany, and things seem as good as they've been the last couple of years. They definitely doesn't seem deteriorating there. And that's the one we really look for because that one can move the needle. Certainly the U.K. has had some ups -- bumps here the last few quarters. But we're kind of waiting to see how that shakes out there. And they're a 20,000 unit piece of the total market over there. So it's not even insignificant, but it's not as big as what Germany would be if they had a hiccup.

[Operator instructions] And I'm showing no further questions at this time. So with that, I'll turn the call back over to President and CEO Jason Lippert for closing remarks.

Well, everybody, thanks for joining us on the call. We're excited to announce a solid quarter here. We look forward to talking to you next quarter on our next earnings call. Thank you very much. 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 wonderful day.