Ladies and gentlemen, thank you for standing by, and welcome to the Q4 2019 LCI Industries Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there'll be a question-and-answer session. [Operator Instruction]. I would now like to hand your conference over to your speaker today, Victoria Sivrais with Clermont Partners. Please go ahead.

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

Good morning, everyone, and welcome to LCI's full-year and fourth quarter 2019 earnings call. In 2019, our team made tremendous progress in advancing our diversification strategy. We announced eight strategic acquisitions, two of which were the largest in company's history. We further expanded our product portfolio, continued to execute on innovation, and executed key operational initiatives aimed at supporting long-term margin expansion. As a result, we once again outperformed our core RV OEM markets, which experienced increased volatility due to choppy retail demand and inventory rebalancing. We ended 2019 strong as we saw return to sales growth in the fourth quarter, increasing 5% to $564 million, while the broader industry experienced a decline of 8%. Turning to the year, revenues reached 2.4 billion in 2019, which given that the industry RV shipments were down 16% in 2019, underscores how critical our strategy has been in supporting the long-term success of LCI. Our ability to increase our operating profit slightly in 2019 over 2018 even with a double-digit drop in demand in our core market again is a great testament to the strength of our leadership team and effectiveness of our long-term strategy. While our RV OEM revenue declined for the year, we mitigated the impact with substantial growth across our aftermarket, adjacent and international segments. In 2019, North American RV OEM sales represented 58% of our total revenues, down almost 6% from the prior year. We expect further expansion in our aftermarket, adjacent and international markets in 2020 as we focus on integrating our latest acquisitions into the business and capturing the related synergies, as well continuing to identify new organic growth opportunities. Pro forma net sales for 2019, adjusted to include full-year results for businesses acquired, reflect North American RV OEM net sales will be less than 50% of…

Thanks, Jason, and good morning everyone. Our consolidated net sales for the fourth quarter increased 5% to $564 million compared to the prior year. The increase in revenues reflected the impact of recent acquisitions as well as continued organic growth in the companies adjacent OEM, aftermarket and international markets partially offset by a decrease in RV wholesale shipments. Q4, 2019 sales to RV OEMs declined roughly 1% compared to the prior year as dealers completed the final stages of inventory reductions, while aftermarket segment sales grew 35% and sales to adjacent industries grew 8%. Acquired revenues were approximately $35 million for the quarter, primarily impacting adjacent OEM and aftermarket sales. During the quarter, we expanded operating margins by roughly 120 basis points from the prior year period, driven by many of the continuous improvement initiatives we've discussed on previous calls in addition to some material costs decreases. We successfully grew operating margins despite approximately $2 million, or $0.08 per diluted share of transaction-related costs incurred during the quarter. We'd also like to note that our new beam processing facility is set to begin operations during the second quarter of 2020, which we are excited about as it's the largest automation project we've undertaken to date and as expected to significantly improve both product quality and further enable the safety of our team members. Q4 2019 diluted earnings per share totaled the $1.14 compared to $0.80 per share in Q4 2018. This improvement and profitability was primarily driven by the improvements in operating margin previously mentioned, as well as the reduction in the effective tax rate for the quarter due to discreet return to provision adjustments and excess tax benefit on equity. The impact of these discrete items increased diluted earnings per share by $0.05 during the quarter. Moving on to…

[Operator Instructions] Your first question comes from the line of Katherine Thompson from Thompson Research. Your line is open.

Hey, good morning. This is actually Brian Biros on for Katherine. I wanted to start with the operating margins for the quarter. I think we're up 120 basis points. I know you called out efficiencies as well as lower material cost decreases, and I was wondering if you could break that out between the two, of those, you know, 50-50 or more efficiency of the material costs, and how you're thinking about material cost for 2020?

Hey, Brian, it’s Brian. I'd say materials performed pretty consistent with what we expected going into the quarter. So, we had expected about 20 basis points to 40 basis point improvement in materials as we've kind of come to the end of a lot of those savings, balanced out by some of the price reductions that we've given through to indexing program. So, the materials portion isn't very significant. We do think we have a little bit here in the first couple quarters, maybe something within that similar range. But on the -- on the lower side of that so, we haven't seen a whole lot of movement here as of late. So, then the balance -- the balance would be a lot of the efficiency initiatives throughout the year that we were able to capitalize on.

Got it. And then just a quick follow up, you might have touched on it earlier. I jumped on the call late, so sorry if this is already discussed, but the January up 20%, is that something you could make up by organic versus the acquired revenue, and if there's any kind of differences across your organic segments?

Yes, I mean, obviously acquisitions are pretty significant. I'd say that's somewhere, what $16 million, $17 million worth of acquired revenues. So, the balance is all organic. Certainly, Jason alluded the RV industry has performed pretty well in January. We're expecting that to continue into February. As a reminder, January was significantly down last year due to shutdowns, but then some significant weather. So, wholesale looks good there. But yes, our organic -- the other thing to remember that we'll have to keep talking about throughout the year is the Furrion revenues that we lost starting January 1. So, that ended the year at roughly $137 million I believe of sales or $135 million to $140 million somewhere in that range that went away. So, about 10% organic once you would consider the bad as well as the acquired revenues.

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

Jason, Brian, good morning. Wanted to jump over to RV. You touched on the strength you’re seeing in January and February. If retail does indeed end up flat to down 5% as you -- I think, I heard alluded to in the prepared remarks given where we are in terms of inventories, what would be your expectation for wholesale for 2020.

Dan, it's Brian. I would say right now, I mean, obviously you're dealing with a lot of ranges. So, if retail ends up being flat, that'll be one thing versus down 5%, that'd be a different story. So, I would say to balance it out. I would expect wholesale to be somewhere between 400,000 and 410,000, that's pretty flat compared to this year, but that's compared to the RVIA forecast right now, that's still a 387,000 units. So, retail ended up around 450,000 units. There's probably some dealers taking a little bit of inventory out, but I think for the most part, much of that's behind us and you should start to see them balance out the wholesale versus retail.

And Dan, I'd say one of the most significant parts of this report here this morning is that a lot of the -- a lot of the retail and wholesale estimates made were made kind of tail end of last year, and things were slowing down pretty good. But, I think the most significant part of this report, like I was going to just say is the -- the information we're getting back from our OEM customers on the RV side is it's pretty positive right now. I mean, obviously you've heard a little bit over the last 30 days about show reports and a lot of the foot traffic's up. I hear anywhere from 30% to 60% on average. A lot of the OEMs are reporting retail show sales upwards of double what they did last year. And then just talking to some of our OEM partners, our large ones over the last couple of weeks, the most pertinent color is that their rates are up and it feels like in some cases, some of our bigger customers were up, double digits in January, and we look at a kind of real time wholesale in the amount of chassis that we sell, and we supply a large portion of the chassis to the industry, which is kind of one-to-one. So, when we sell a chassis, that's pretty much a unit going into wholesale, so it looks like high-single digits going into February for maybe double digits in January. So, those are obviously positive trends that we hadn't anticipated back when we made reports in the end of Q3 and beginning of Q4.

And translating that in terms of margins, at least in the near term, are you comfortable with the capacity that you have to be able to address that or should we see kind of a nice normal incremental flow through, or are you having to add back any types of over time or any offsets kind of in the near term to that uptick?

I tell you that we're sitting pretty good. I mean, anytime we come off a year where there's been, 16% decrease in our core markets as you know, from the past, you know, when, when these types of things happen, we react pretty fast, we pair the business down and we're set up pretty good going into this year, assuming it was going to be flat to maybe down a little bit and now that it's, now that it looks like it's going to be up, at least for Q1 that obviously goes well for our margin situation, it's a lot easier to hold full path when you've, paired back versus you're in a constant growth mode and not knowing how much to add when it's going to stop. So I think we're in a really good position right now.

I just wanted to double check that's helpful. I'll sneak one more in sticking with the margin theme, you know, finish the year really strong, close to 23% on the gross margins basis. Laundry list of moving parts between input costs as you alluded to Brian, tariffs, steel price volatility, little bit of a mix shift with Curt just how should we think about directionally at least gross margin picture for 2020 as we sit here today. Thank you.

Okay. Yeah, I think that there's a couple things to look at. One would be, I think our core business is Jason was talking, we're in a pretty good position there to capitalize so we could see some margin expansion there. But I do think given the acquisitions and the integration efforts that we have ongoing, that some of that's likely to offset from a pure margin perspective, so, you know, I think for the full year, the back half is always a little bit more gray, but you know, for the, you know, I think that flattish margins for the full year is probably a reasonable expectation at this point given a lot of those, the acquisition integration efforts that we have ongoing here in the first half of the year. The other thing that I think to note is things that aren't finalized yet, like, the inventory value for occurred acquisition or they have roughly $70 million worth of inventory. There will be some step up there, that we'll see flow through our P&L as a negative, during Q1, which we will, I think, certainly quantify that and call it out when we report Q1 the other thing is, you know, the seasonality of their business, their businesses is seasonal, very similar to ours, but you know, January, February, and then November and December are their slowest months of the year. So that starts to ramp up with the peak during the summer months.

Your next question comes from the line of Scott Stemler from CLK. Your line is open.

Jason you've talked, I guess on the call when you guys announced CURT, you talked about the mobilities to I guess cross pollinate notably with the, our the core aftermarket business because of I guess distribution limitations. Can you talk with, expand on how CURT is going to help that and whether you started do that already?

Yeah, so, well, it's early, we're a month in and you know, just sitting down and having a lot of the integration and synergy meetings right now. But you know, I break the synergies down into a few buckets and what we plan on doing next quarter is giving you a little bit more color because we'll have gone through pretty thoroughly to see, you know, what's real and what looks like it might be out a little bit farther, what's attainable now and what's attainable, you know, in the next 12 months. So if we plan on giving you more color, next quarters call, because we're just sitting down by the major buckets or you know, purchasing others there's certainly some purchasing synergy. When you look at CURT's core business, it's welding, painting and fabricating -- steel fabricating. And obviously that's a huge part of our business. When you look at the chassis and fair parts business you look at the top line synergies with RV aftermarket as you've heard us say, RV aftermarket as one of the big opportunities or playgrounds CURT is in, really playing in right now and we're going to help them get there. They've got a really talented team, a huge product line, and a lot of great new innovative products that we're in the process of plugging into our dealer and wholesale distributor networks. And then you know, just if you look at the Fab welding and painting businesses, you know, there's some synergies there between, you know, how do we run those can some of their leadership handle some of our Fab stuff or vice versa and there's synergies and materials there, whether it's synergies on processes, raw materials, all that kind of stuff there's opportunity. And then finally the distribution would…

And going back to, like you guys had mentioned the amount of sales you said 135 million to 140 million, which goes away in 2020. And you've talked previously about the low margin contribution. Can you maybe just give a little more granularity as we build our model to talk about what the effect will be from losing those Furrion revenues?

Yeah, I mean we will within our investor presentation, certainly call out each of the content per unit, we've been showing it graphically, but I think we're, we had made a note to add the actual dollar amount so that you can work that into your modeling. So that'll be done on this investor presentation that goes out, we already spoke to the content per unit for the full year 2019, from a margin perspective, I think that we've talked about that that was a low margin product for us. So it will have some positive impact for us. And then from a cash perspective, we've talked about that as well, that there's $60 million to $70 million worth of inventory that will be paid for here in the first couple quarters of the year.

And Jason, just to follow-up, you talked about some of your bigger customers and sales rates being up high singles heading in January, heading up to the low doubles in February. Were we talking retail or were we talking wholesale?

Talking to wholesale and you had that flipped around, you know, low doubles in January a heading it looks like high singles on February it's early yet, but you know, we have, we have most of the production schedules out at least a month. So yeah, I mean I think, like I said, that's the most positive part of the report I think is that, you know, we had an end of the year really wondering, you know, maybe how far down we are going to be wholesale, compared to last year I don't think anybody's really struggled with the retail numbers being flat because of third best retail year at 450,000 units. So everybody would jump up and down if that stayed flat, but I think, you know, with the wholesale we're seeing the numbers jump early in the year, which has been a really good sign and we're ramping up to try to meet expectations in the customers right now. And it's not, you know, just one customer. I mean all of our customers are pretty positive right now.

Your next question comes from of Bret Jordan from Jefferies. Your line is open.

A question on the aftermarket. I guess if you took a look at it as an organic, as a category rather than including the M&A, what do you think the growth rate is in the aftermarket business? And you know, when you think about some of your technologies and remote control systems, can those be retrofitted and sort of sold into the existing RV base where you could maybe grow that aftermarket business faster?

I tell you that the aftermarket businesses encompasses a lot more products than what our, what our standard OEM business does. I mean we're working with other companies right now they have no aftermarket presence because we have such a significant one and bundling some of their products into our packages right now. The, the aftermarket customers typically, you know, already have enough suppliers where they'd like to pare it down. And we're a good choice for them. I know on the one control systems in particular, we're adding functionality to those systems to be able to bolt on some aftermarket products and in the aftermarket later this year. So those are, those are getting ready to launch, but as it stands today, the, the systems can't be, upgraded in the aftermarket without a whole lot of whole lot of service work. So we are getting ready and especially considering that we're, like I said in my prepared comments, 100,000 plus units run rate right now those are where a lot of the aftermarket bolt ons will go into now that we've got that mass in the -- on the OEM side of things, whereas, two years ago we might've had 15,000 or so units run rate. But the mass today is more meaningful and we can start bolting on to those systems versus trying to figure out how to do it with most systems in the market.

For 2019, organically in aftermarket, we grew just a little over 10%. So that's been relatively consistent and I will tell you, CURT which is essentially doubled our aftermarket business is pretty close to that expectation as well.

Okay. And then the question on marine, I think you talked about the pre softness in the pontoon category. When you look at, I guess we haven't had as much marine show data or boat show data in yet. But what's your outlook on marine growth for 2020 as an industry?

So industry-wise, I think that, it's looking maybe flattish. Again, I think we got to wait through the next couple of months to see how all the shows go and see what the activity is. But from an LCI side, I think, what we're most excited about is, one of our newest products is an electric Bimini. So if you look at all the pontoon boats in the market 98% of them are manual Bimini. So you have to manually take down your canopy or your Bimini on the pontoon. The technology we bought last year that we're already in full swing production on as of December is an electric Bimini, it's just a push button. So it's like pushing the car window button on your car versus rolling it up and down. It's -- it's close to a $800 to a $1000 content piece per boat on 50,000 plus boats. And we've had exceptionally -- exceptional reception to that from the OEM. So, we feel, we'll populate that fast. I think last year we, we might've sold the business, might've sold 2,500 Bimini's this year we're on track to do close to 15,000. So there's significant opportunity for LCI even if the market stays flat.

Okay, great. Thank you.

Your next question comes from the line of Brandon Rolle from Northcoast Research. Your line is open.

Good morning. Could you talk about of the aftermarket segment operating profit and kind of the puts and takes there behind the margin contraction?

Hey Bran, it's Brian. A lot of it just is coming with the significant growth. We've got a lot of changes there. We've had pieces that we moved around during the year, added new products to the fold, new leadership brought in CURT late in the year. So, I think really just a lot of changes. We're driving the margin down at the same time. Mix always comes into play there and certainly every time our mix shifts to the wholesale distributors, as opposed to going direct to the dealers, etcetera that can certainly have a significant impact on our margins as well. So, it's traditionally stayed within, a relatively tight range north of 10% bounces up a couple points here and there, just depending on those factors. But I do look at a long-term, we're making a lot of investments there have great opportunities with CURT to expand our footprint using their distributions footprint like Jason mentioned. So, lots of -- lots of opportunities and lots of investments have come with that.

Okay, great. And also within RV industry, are you seeing broad based strength among multiple categories like both towables and motorhomes or is it more skewed towards one side?

I think there's more skewed towards towables. I mean motorhomes, it's a small number of motorhomes is anyway, but mostly the excitement around the increase in rates had been around the towable products, which is where most of our volume is.

[Operator instructions] Your next question comes from the line of Alice Wycklendt from Baird. Your line is open.

Yeah. Good morning gentlemen. I'm just wanting to dig in a little bit more on content per unit. You mentioned a reversal of the de-contenting tread maybe between that Furrion pricing and any other key factors worth mentioning. Where would you expect content per unit to trend this year?

By 3% to 5%, I certainly think that that's reasonable. You know, we grew about 5% for the year Furrion we continued to grow that product during the year, so it actually contributed to the growth including the back half of the year. So I think absent Furrion we were roughly 3.6% growth on towables. So in that range of 3% to 5%. And we had a great showing at the open house last September we've talked a couple of different times about, you know, successes with one control and electric leveling and stabilizer system. So those are certainly all things that are contributing to what I would say is us coming back to our normal content per unit growth on the towable side. Motorhomes is a little different story. There's certainly been a more dramatic shift to class Cs and even smaller class C. And I think even, -- we always talked a lot about class Bs as well. So, um, I think some of those smaller product categories, which just don't have a lot of content opportunities for us are certainly impacting that year-over-year content number, but obviously it's a small piece of what we do and really towables is the core focus.

Yeah. Just to clarify that 3% to 5%, is that growing off of a core content for you to number kind of Ex Furrion?

Yes.

Your next question comes from the line of Steve O'Hara from Sidoti & Co. Your line is open.

Quickly on the quarter and the margins within aftermarket, were there one time, did you say what the transaction costs were in the quarter that you think are one time or may continue kind of at a higher rate than maybe a normal amortization into 1Q and what impact that had on the quarter?

Yeah, I mean a couple of different things there. One, transaction related costs, obviously having an impact on margins. I think that that was almost, I want to say from an EPS but I can't remember the EPS perspective. So it's 2 million to 3 million during the fourth quarter and almost 5 million for the full year some of that falling within the operating margins for aftermarket as well. That's certainly impacting it as well and so call that number out in my speech, as it relates to amortization, there will be a significant increase in amortization. We guided to, you know, 105 million to 110 million of depreciation and amortization for the year much of that is intangible amortization unrelated to the CURT transaction as well as Poly and Lewmar. I mean, all three of those were pretty sizable transactions for us, so that's certainly impacting our numbers and I think those are pretty good estimates at this point.

Okay. And then looking at the commentary around January, February, when you're talking about, double digits instead of just, I remember there being some issues last year in January, I think with shipments are you talking about your activity or would you, are you comparing it to kind of RVIA wholesale deliveries?

We are just comparing with our activity last year. So, there was a little bit of weather last year, actually, last few years. So, and that's one of the things that's, I think playing into the healthy, you know, retail activity we've seen at the shows. So weather it's been pretty decent in the Midwest for the most part, but when you look at our, when we say double digits in January wholesale, we're strictly looking at our shipments in our customer shipments compared to what they did last year before RBI actually report. So it's a pretty real comparison.

Okay. I think for the most part that first month comp seems to be a pretty good proxy for the quarter, would that not be the case this quarter? I mean, I know you talked about, you know, February being down or, I'm sorry, not down, but you know, less. How do you think about the full quarter versus maybe January and February?

Well, I mean, if you got to take it month-to-month, so, you know, if we're up, if we're a whole double digits and in January starting off high single digits in February we don't see that change in by March, but anything's possible. I mean, we could turn up in the second week of March and orders get cut back or they could grow. So, but you know, January is in the bag and February pretty much in the bag so you can kind of, you know, make your deduction from there.

Okay. And then just one last one. I don't think it was asked yet, but anything from China that could be an issue in terms of supply chain or anything with some of the longer shutdowns related to the coronavirus, things like that?

Yes. I give you a couple thoughts here. First we haven't, we haven't had experienced any disruptions so far, we're fairly well set with supply up through the 10th -- when everybody was supposed to come back to work and we're getting kind, you know, bits and pieces of reports on, you know, obviously it's going to be, everybody's going to be slow coming back to work there and, and we'll have more color probably next quarter, everything we've got in the pipeline, you know, we ordered a bunch before Chinese New Year, if there is any disruption, it's likely not going to be till a quarter away because we've got inventory today for the next, you know, few months. So we'll just keep you posted there. It's just, but you know, if they continue to come back to work and the factories get back to where they were before, they've let everybody come back to work it'll bode well where we haven't seen any disruption yet.

There are no further questions at this time. I'll turn the call over to Jason for closing remarks.

Well, we appreciate everybody for joining us on the call today. We look forward to talking to you next quarter. Thanks a lot. Take care.

This concludes today's conference call. You may now disconnect.