Ladies and gentlemen, thank you for standing by, and welcome to the LCI Industries Third Quarter 2019 Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today’s conference is being recorded. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Victoria Sivrais, Investor Relations. Thank you. Please go ahead, madam.

Good morning everyone, and welcome to LCI Industries' third 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 their 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 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 third quarter 2019 earnings call. In the third quarter, we further executed on a diversification strategy, which has driven continued outperformance in a challenge macro environment. Third quarter revenues were $586 million down 3% from the same quarter last year, due to softness in the RV OEM market, our wholesale shipments declined double-digits. That said, our continued content increases in towable RVs driven by our focus on our customers, product innovation, and continuous improvement in our manufacturing businesses, allowed us to perform significantly better than the market. Furthermore, we delivered another quarter of year-over-year growth in our adjacent markets, aftermarket, and international markets which now exceeds 41% of the total net sales for LCI. From a profitability standpoint, we improved operating margins across the business on a year-over-year basis as we benefited from our operational improvement initiatives; we started implementing late in 2018 to the first nine months of 2019. In our OEM RV market, content for towable RV increased 2.2% over the same quarter last year, largely due to continued development and innovation to existing products. We saw a slight decline in content for motorhome which decreased 2.9% year-over-year primarily from a shift to smaller motorhomes in 2019. Although, lower RV volumes continues to impact performance across the industry, as dealers work to correct inventories, it appears these de-stocking efforts are in the final stages and should be close to complete as the year comes to a close. Overall sentiment from dealers following the RV Open House in September was positive and production ordering patterns following this event is exceeding expectations by most counts. Most of our RV customers have maintained rates going into the fall while some have increased production rates. We remain confident in the long-term outlook for the RV…

Thank you, Jason, and good morning everyone. Our consolidated net sales for the third quarter decreased 3% to $586 million compared to the prior-year, an improvement from the 8% decline reported in the second quarter of 2019. Revenue for the quarter were impacted by a 13% decrease in RV wholesale shipments as dealers continued to correct inventory levels offset by continued year-over-year growth in our aftermarket segment and adjacent and international OEM markets. Q3 2019 sales to RV OEMs declined 9% compared to the prior-year, primarily due to the previously mentioned decline in RV wholesale shipments, partially offset by continued gains in content per unit. It appears dealers will likely complete the final corrections of their inventory levels as the year draws to a close. For our estimates the industry removed over 35,000 units during the third quarter alone. The current RVIA RV shipment forecast for 2019 stands at 401,000 units at the lower range of our estimates. Due to the initiatives we began over a year-ago to right size our operations, we will continue operating efficiently in this lower volume environment, which we expect to continue into 2020. That said, recent RV shipment data for September 2019 indicated an uptick in wholesale RV shipments during the month, a positive sign for the industry in terms of a return to stabilization amongst the OEMs. Content per towable RV unit increased just over 2% compared to the prior year, while content per motorized unit decreased by 3%. Content per unit growth has tempered somewhat as a result of the wholesale mix shift towards some smaller entry level product units. However, we have continued to develop innovative products to increase our content levels on current units and counteract this shift with the prime example being the massive growth in market share that…

[Operator Instructions]. Our first question comes from Kathryn Thompson from Thompson Research. Please go ahead.

Hi, good morning, this is actually Brian on for Kathryn. Thank you for taking my questions today. The guide for -- probably it’s not the guide but the actual October sales being up 4%, I think in previous quarters, you've mentioned that that kind of sales is what to be expected for the quarter. Can we kind of expect the same thing for Q4 being up 4% as well given October is up 4%?

Hey, Brian, this is Brian. I think, kind of as I mentioned, in my speech, we're still getting production schedules from a lot of our customers for November and December. So it's kind of hit or miss on who's running, who's not running. So as we pull that information together, it's obviously going to continue to change but I think right now that 4% for October is a good gauge for the quarter at least that's what we're using within our estimates.

Okay. And then any idea how that would break out between travel trailers and motorhomes, which kind of in Q3 seemed to have opposite momentum sequentially, is that going to continue that trend or is there something else given those order patterns which you are seeing?

Maybe a little -- it’s Jason. Maybe a little bit towards that trend but because motorhomes are so small, it's not going to move the needle much on the grand scheme of things.

Thank you. Our next question comes from Dan Moore from CJS Securities. Please go ahead.

Hi, good morning. It's Pete Lucas for Dan. Just looking at gross margins, how much of a benefit would you say you enjoyed due to declining raw material prices?

About 50 basis points in the quarter. So we've been pretty steady -- steadily picking up about 20 to 40 basis points each quarter. It ended up being about 50 for Q3; I would anticipate 20 to 40 basis points to continue in the fourth quarter as well offset by some of the fourth quarter seasonal volume declines from a margin perspective, but material should continue to be favorable for us.

Great. And if sorry, looking at cost structure, if shipments were to stay about the levels, they are now the $400,000 level for the next year. So overall structure -- is the overall cost structure where you'd like it to be or do you think there's some other opportunities out there that could expand efficiencies and help margins from here?

Yes, I'd say that that's probably true. I mean, we're -- we're on the -- probably the back 25% in terms of our momentum for cost reductions and just re-looking and restructuring, how we're set up across the company, but how it is, we had nine years of growth and we were always adding ahead of where the industry was going and the growth that we were seeing, especially in the RV set of our business. And when we made the decision to start turning back last year, and reducing costs, you continue that momentum for a while and I’d say we're in the latter 25% of that momentum and then we'll hold for a while. So, it's always good when that kind of stuff happens, we get a check and balance on where we're at and we start really digging deep and looking and we still got lots of opportunities, especially around continuous improvement.

Great, thanks. And last one for me, regarding RV inventory, so a lot of talk about those. But in terms of marine inventories, where do you think we are in terms of inventory de-stocking there and what are your expectations for shipment growth going forward?

Yes. I think that it’s accelerated a little bit here in recent months. I mean, certainly retail on the marine side got off to a slow start. And that's what caused a lot of the inventory build during the first part of the year. But retail data has been pretty solidly at least within pontoon space, which is pretty critical for us. So some of the other categories have been a little bit behind, but I think a lot of the inventory build came from the pontoon space. And so I would expect that that nothing will change here in the near-term, but when we get into the season into 2020, they should be in a much better position.

Thank you. Our next question comes from Scott Stember from CL King. Please go ahead.

Jason, though last couple of quarters, you've given what you think your take on where retail sales in RV space will come out by the end of the year. I know we only have about two months left or a little less than that, but just where do you see things trending right now, particularly with the backdrop of a couple of good big retail shows in the industry as of late?

Yes. So we were really hanging on how Open House was going to end up and it's been several weeks now and orders are starting to shake out and it looks -- it looks probably a little bit more positive than what we're anticipating going in. Now that said, we were going and anticipating maybe some further reductions. So the fact that most of our customers stayed relatively stable and some increased a little bit was really a good sign for us. And we've got production rates pretty much set through the end of the year and it feels a lot more solid and what we were anticipating coming into the big Open House. So hopefully that continues through 2020 and we have solid retail there but things feel a lot better today than what they did about a month and a half ago.

Hey, Scott, I will jump in. I know you look at this data too so. I mean the revisions on the preliminary retail data was those revisions were pretty significant the last month or two. So I think that was a positive sign for me that it seemed like retail had kind of been tracking towards 10%. But it seems like it's comfortably could stand in that high-single-digit range. So I think that was one positive thing that at least that we were looking at.

That all said, well, I just would make the final comment that we're still adjusting our business cost structure below in the 400,000 unit level, just to play conservatively so.

Got it. And on the content side, did you start to see any impact in the third quarter from your decision not to distribute Furion products anymore, and then, after answering that, maybe just talk about some of the where you think organic content growth to go excluding Furion next year?

Yes, I think Furion didn't really hurt us here in the third quarter that transition is planned for January 1, so nothing concerning there. From a content perspective, we've seen a steady slowdown in the year-over-year content growth the last three quarters. I would expect that during fourth quarter to that we start to see things turn back the other way. I mean, we had a great, great show. As Jason mentioned in his prepared remarks about OneControl and electric leveling and stabilizing systems, solid step et cetera. We had a pretty good Open House. So I would expect that at least on the RV side that our content starts to track back the other way.

Got it. And just last question, Brian, I think on the last few calls or last call, you might have talked about potentially having to get back some price to OEMs, just given the fact that raw materials will come in, but it seems just through your commentary by Q4 that, that hasn't happened and if it has is kind of just in the mix -- in the net mix of what you're expecting for 4Q.

Yes, I mean, it's certainly happening. I mean during second quarter, third quarter, fourth quarter, again, some more through our indexing programs, we've continued to give back so that that significantly impact our chassis business primarily. We've certainly seen some on the aluminum side too. So there's been some givebacks that we've been incurring. They've been pretty steady out over the last few quarters though. So it's not as though you're seeing it all hit in one quarter.

Thank you. Our next question comes from Brandon Rolle from Northcoast Research. Please go ahead.

Good morning. The retail data you guys provided would imply a September retail data was down, or September retail was down about low to mid-double-digits. I know the retail shows have been strong and a strong Open House, I guess outside of those shows as have you seen any improvements in retail at the dealer level? Thanks.

I don't know if we've seen it yet. There's not a lot of gauges, post the Open House show. There's a few shows fourth quarter but I think the anticipation is the retail is going to stay steady from where it is today which is still down mid-single-digits. So until the show starts happening first quarter, next year, it's really hard to gauge kind of what the pace is going to be going forward but we're cautiously optimistic right now.

Thank you. Our next question comes from Bret Jordan from Jefferies. Please go ahead.

Good morning. This is Mark Jordan on for Bret. I just have a quick question on the European RV market, so as we’re heading towards the year-end, how healthy do you feel the market is? Do you have any expectations for 2020?

Can you repeat the question? Your voice is a little muffled there?

So as we're heading towards year-end, how healthy do we feel the European RV market is and do you have any expectations for 2020?

Yes. So I think outside of Germany things are pretty stable or off just a little bit, but the biggest production country is Germany and they just released some record numbers. They're anticipating having a record year, this year for that country's retail. So that's solid. Thor I think continues to have an impact over there and we're staying joined with them to take advantage of many opportunities we can as they continue to get more involved and try to impact and influence Hymer’s growth strategy. So but I think overall, the market is pretty, pretty flat maybe up a little bit but Germany is doing really well and that's where all the volume is.

Thank you. Our next question comes from Craig Kennison from Baird. Please go ahead.

Hey, good morning. Thanks for taking my question. Sorry for the background airport noise. Just a question Jason on RV One. What's your vision for that platform is this an area where you know kind of a winner take most market where if you can establish your market share dominance, you can extend that lead. Secondly, is there an aftermarket opportunity there and so is there anything to that business in the marine space? Thank you.

Yes. So there's not many control system out there. Our brand is called OneControl. We've as we noted in the initial comments, we're starting to really pick-up traction with market share. I think that all the OEMs certainly are recognizing that technology is a critical piece of the content and the needs that the consumers are asking for going forward. And now that roughly 25-plus-percent of the RV OEMs are equipping their RV standard with some type of control platform and I’d say, we have a significant amount of that market share more and more going to jump into it. And we continue to add more features and functionality to it from a control standpoint. We've recently adapted voice controls so that you can kind of use it like an echo. You've got features that allow us to be able to connect with the coach off site, so much like lot of the residential features on electronics today. If you want to you shut your lights off from home or, or turn something on, look at the cameras, you can do a lot of that stuff from our system now. And then you've got probably the most critical feature is just troubleshooting problems from remote. So with many of our devices that are connected through the OneControl system, they'll send signals when there's errors or malfunctions in products like slide-outs or generators or things like that. We can know when those problems are happening as the customers finding out they're having a problem. So, I think that's pretty revolutionary with respect to troubleshooting and problem solving, which is one of the biggest issues our industry has today. So we can better troubleshoot and solve problems for the consumers that has to bode well for this system. And then from an aftermarket perspective, we are -- we do have bolt-on additions for our system out in the aftermarket that a consumer could buy, if they don't have a certain module or -- or controls, that they want with a system they can add it on, on the latest versions of our OneControl system. So it's going to continue to advance and I think the great thing is like anything else is we've got a head start. There's only a couple other guys out there in the space. And to my knowledge, we’re the only ones that are manufacturing, engineering, and designing the product stateside. So we've got a speed advantage, which is really important in the technology space. So hopefully that answer your question.

It sure does. Just a follow-up if I could. As you look at your M&A strategy, to what extent does that platform on the technology side give you maybe an argument to make that you're the best partner from an M&A standpoint as you plug in some component into that broader ecosystem?

Yes. And even kind of the reverse of that is if you take all the other components that aren't technology base, and you take our technology platform with our technology company in Detroit that we purchased in 2013 or 2014, we're having them look at all the products that are not smart or not tech-based and saying how can we add technology to our existing products. So it's really been beneficial to have that. It's nice to have a technology company that can look at all the product lines, not only where a technology can integrate as a technology piece, but also how to make our typical mechanical products smarter.

Thank you. [Operator Instructions]. Our next question comes from Steve O'Hara from Sidoti. Please go ahead.

Hi, just curious, maybe I get first call got disconnected. I’m just curious maybe you mentioned it in terms of I guess margins directionally into 4Q, how you think about those? Do you see kind of maybe a typical seasonal decline? And then, maybe, if you mentioned it, what your organic growth was in the quarter?

Yes, hi Steve, it’s Brian. The -- so for October, I don't know if you picked up on this part. But October our sales were up 4% year-over-year. So I think that’s an important point. So when we look at the remainder of the fourth quarter, we're anticipating that right now to be our run rate year-over-year. There's still some moving pieces there. But that's kind of what we're using as a leadership team. From a margin perspective, we talked a little bit about materials and that materials is pretty steadily as we've gotten into better layers of steel, it's given us about 20 to 40 basis points each quarter and fourth quarter, I would anticipate that to add another 20 to 40 basis points for us. Seasonally, it is a low volume quarter. So we will have to absorb some fixed costs on that. But I think that directionally our year-over-year margin will continue on the track that it's been on the last couple quarters with the improvements that we’re -- we've been showing.

Okay, that's helpful. So and then maybe organic growth in the quarter?

Yes. I mean so for Q3 our acquired revenues were $18 million. So from the RV side the most significant piece we're certainly outperforming the industry there with some content growth. Even though motorhomes does show a decline in content per unit, I would tell you that's a pretty significant shift to Class C motorhomes from Class A so that why that's showing a down number year-over-year. We haven't really lost any business there of significance. So we're outperforming there in RV. Marine we certainly outperformed the industry there, added some great new customers, some great new products that we've continued to launch. And so I think that those are our biggest markets and we continue to outperform. And I think that those rates that we’re outperforming would be pretty consistent moving into the fourth quarter. Other than I do think that as I mentioned earlier that RV, I think that we will start to see some content acceleration there just from the new products at Open House and as we gain traction there.

And just to mention further I think that the fact that RVs specifically went down high-double-digit, high teens double-digits close to 20% and our growth up a few points for October and we maintained much less than what the RV has done just shows that our diversification strategy and our focus areas is really solid and working and 58% of our business being RV now and it continues to drop. It's just showing that in times like this when the RV industry goes through the cycle that the strategy really plays well for our company and our investors.

Okay, yes, that makes sense. And then should we think about how much of a headwind is Furion maybe for next year in terms of content per unit or revenue?

Yes. I mean, it's about the run rate at the time we announced it at least was $125 million. So $100 million of that was OEM. So that that as I've mentioned a couple times we will revise our content data to pull that out for since inception. So but that that certainly is going to be a step back from a content perspective.

Okay. Okay. And then I'm sorry -- go ahead.

No, go ahead.

Sorry. Just SG&A maybe I missed it up 7% was there may be higher stock-based comp in there or something that made that pick up or were there one-time cost through the acquisitions or anything like that?

No, we certainly, we've been talking $80 million to $85 million throughout the year. And we exceeded that a little bit here in the third quarter and that was due to acquired SG&A. So from the Lewmar acquisition, a couple of the smaller ones, et cetera. So that's why we were just outside of the $80 million to $85 million range. So I would expect it to continue to play out within that that same consistent with what we turned in for the third quarter.

Okay. So still in the $80 million to $85 million range?

Yes.

Thank you. I show no further questions in the queue. At this time, I'd like to turn the call over to Jason Lippert, CEO and Director for closing remarks.

Just want to say thanks to everybody for joining us on the call today and we will talk to you all at our fourth quarter call in a couple of months. Thanks.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.