Ladies and gentlemen, thank you for standing by, and welcome to the Q2 2020 LCI Industries Earnings Conference Call. I would now like to hand the conference over to Victoria Sivrais. Please go ahead.

Good morning, everyone, and welcome to LCI Industries Second Quarter 2020 Conference Call. I am joined on the call today by the members of LCI’s management team, including Jason Lippert, President, CEO and Director; and Brian Hall, Executive Vice President and CFO. Management will be discussing their results in just a moment. But first, I’d 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 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 Second Quarter 2020 Earnings Call. We delivered better than expected results in the second quarter, despite suspended production at the majority of our facilities across the U.S. and Europe due to COVID-19 for the first five weeks of the quarter. As we resumed production in early May, retail demand recovered rapidly, driven by increased demand for RVs and outdoor recreational products as consumers sought safe alternatives to traditional vacations and getaways. This rebound in retail demand allowed us to deliver strong results in the second quarter, including record high revenue in the month of June and July, as well as a profitable and cashflow positive quarter. Revenues for the quarter were down 16% to $526 million compared to the prior period, driven largely by production shutdowns in the beginning of the quarter. That said, the strong recovery in retail demand in RV and Adjacent Markets in the latter half of the quarter combined with the exceptional growth in our Aftermarket and International businesses help to offset this decline. There's little doubt that RVs and boats have become the 2020 summer go-to vehicles of choice. The long-term fundamentals of the RV and boating industries remain strong and the need for consumers to find safe alternative outdoor activities and vacation options that also allow for social distancing is likely not going away anytime soon. While a recent report from AAA said 97% of American vacations will consist of a road trip this year, many people are hesitant to stop off at restaurants, hotels and even restaurants while on the road. With an RV, all of these amenities are made available in the vehicle providing both safety and convenience that consumers are looking for. The addition of current travel restrictions, along with favorable gasoline prices and…

Thank you, Jason. And good morning, everyone. Our consolidated net sales for the second quarter decreased 16% to $526 million compared to the prior year. The decrease in year-over-year net sales was driven by the impact of temporary production shutdowns in response to the COVID-19 pandemic, partially offset by strong growth in the company's Aftermarket and International markets, as well as a recovery in RV OEM retail demand. Q2 2020 sales to RV OEMs declined 38% compared to the prior year, as a result of the previously mentioned production shutdowns in April, but demand for RVs quickly accelerated, resulting in record sales months in June and July. In an effort to provide additional color during these unusual times, North American RV sales declined 99% year-over-year in the month of April while May sales declined 32% and June concluded with an increase of 17% year-over-year. Content per towable RV unit increased 4% to $3,371 and content per motorized unit decreased 4% to $2,308 compared to the prior year, excluding the impact of Furrion in 2019. The content increase in towables was driven by organic growth and new product introductions partially offset by the increased demand for entry level products, which traditionally have less content per unit. The content decrease in motorized units was the result of the continued trend of wholesale mix shifting to smaller units. Product innovation remains a critical part of our strategy as we look to further introduce leading edge products that add value for our customers and help to drive content growth targeted in the range of 3% to 5% for towable RVs. Q2 2020, sales to Adjacent markets declined 23% to $131 million compared to the prior year, primarily due to the production shutdowns in marine and other adjacent businesses at the start of the quarter.…

[Operator Instructions] And our first question comes from the line Craig Kennison with Baird. Go ahead, please, your line is open.

Hey, thanks for taking my question, Brian, starting with you, really impressive execution in a very dynamic quarter. From a margin standpoint, curious, how should we think through Q3 EBIT margin in the balance of this year, given what you're seeing on the demand side and how you've chosen to manage costs?

Hi, Craig. You know, a couple things. I think first of all, I’ll start with SG&A provided pretty good color around that within the -- within my prepared remarks. So I think that one thing to look at then would be gross margins. And so gross margins, all things considered for Q1, that's a pretty good gross margin for us. It certainly is on -- is much higher than that for June. I'm expecting that if you look at it year-over-year, we still have, we've got a lot of labor efficiencies, first and foremost. Those are, somewhere call it around an additional percentage point in gross margin. And then you have, operating leverage on our fixed costs at these kind of volume. So between the couple of those, at least, we've talked in the past about a 25%, 26% type gross margin. I think we're there and at probably the low end of the range for Q3.

That's great. Thank you. And then Jason, maybe just comment on your view of the RV market, in particular, whether you think some of this incremental demand that has come in since the pandemic, creates some sustainable growth or maybe some challenges next year as you try to comp all of it?

Well, in terms of the record demand, we're sitting in a spot where, we're limited with respect to total capacity in the industry. You know, we can't go out and build our facilities quick enough. Obviously, dealer inventories are extremely low, the OEMs are responding as quick as they can to -- to, as well as suppliers to meet the demand that we're seeing right now. So, I mean, given the post pandemic lifestyle, and limited travel and vacation options out there, put us in a position for the foreseeable future, anyway. You know, people are going to make different decisions and just feels like it's got a pretty long runway. So we're -- we're planting our feet right now, I'm trying to figure out how we add second shift, how we increase capacity where we can. We don't want to go out and buy a bunch of buildings and add capacity from a CapEx standpoint. We want to, look at some of the options that we've got right now. And then the big biggest challenges are going to be quality customer experience and sustain those things with all the flood of new buyers both on the marine and the RV side.

Great, thank you.

Thanks, Craig.

Our next question comes from the line of Kathryn Thompson with Thompson Research Group. Go ahead, please. Your line is open.

Hey, good morning. This is actually Brian on for Catherine. Thanks for taking my questions. I wanted to ask about I guess, July trends, and you said sales company wide are up over 50% and the RV segment was up 17%, I think and yeah, obviously impacted by the OEMs working through the holiday season, as you guys mentioned. Do you have any sense of what those numbers might be, on kind of like-for-like basis, excluding that holiday bump?

You know, I would look at a couple different things, Brian. You know, we're clearly talking about double digit percentage type growth from July forward. I do think that and Jason will probably add more color. But, they have, by the end of July, their run rates have continued to expand slightly into August and September. And we expect that to hold true, at least through -- through the third quarter. So, I think -- I think to try to put it in terms of, that you can use, maybe look at it in terms of daily wholesale shipments. You know, it seemed like these are levels comparable to back in 2017, the back half of that year. Those were, you know, some of the highest that our industry has ever turned in, and those seem to be pretty comparable to what we're experiencing today.

All right, that I guess was helpful. And I mentioned at the Aftermarket segment, can you guys talk about maybe specific trends in July in that segment, and how to think about margins for that segment in Q3?

Yeah, I think so for Aftermarket, I mean, as we've said, and we even talked about that a little at the end of the first quarter, you know, they -- at that point in time, we knew how they were, they performed during the month of April, gave pretty good color on that from at least an organic growth perspective during all of Q2. Pretty fantastic results when you think about up 52%, organically during the month of June. I -- that would, in a typical year, you would start to see that slow from this -- from that point forward. I think what we're certainly seeing within the CURT business and our existing Aftermarket businesses is that it’s going to run a little bit longer as the season has extended. But it should start to taper off, definitely when you get into the later months of the -- of the year. But we're still, from an organic perspective, I'd say July is up over you know, 40 plus percent.

Organic?

Yeah, organically. Yeah, so it’s still performing and performing, expected to continue you with that -- that pace during the -- during at least the third quarter. So and you know, from a margin perspective, and we've talked about CURT, which is a significant addition to our Aftermarket segment. You know, originally we talked about that margin being more comparable to our overall consolidated margins, but as you've heard me say a few times, we've certainly made tremendous progress on synergies, certainly looking at 2% to 3% of sales as opportunities and I would tell you, we're close to 2% already landed. So you know, we've progressed nicely working through the synergies and still have a little bit more to go but hopefully that gives you a little bit of color on margins there.

It does. Thank you.

Your next question from the line of Scott Stember with C.L. King & Associates. Go ahead please, your line is open.

Good morning, guys. Very nice quarter and thanks for taking my questions. Maybe just touching base again, you're kind of pinning the -- some of the growth rates in the industry to back in 2017. Obviously, there's been some, a lot of capacity that's been added. But could you maybe just talk about as we approach those levels, go through it, what your expectations are from the industry being able to handle this kind of volume? And plus, on the labor side, what you're seeing now and what you would expect to see as growth continues to accelerate?

Yeah, sure Scott. I think that you've got more capacity to access right now in the industry as a whole. You know, supply chain and labor are the bottlenecks right now. So, I think, it's going to take a little bit of time for supply chains to get up to speed. If you recall, back in April, we were telling our supply chains to almost shut down. And then say, we're coming back at 50%, 60%. And then we turned around and needed, more than 100% of pre-COVID levels, at the -- toward the end of May. So supply chains are a little stressed right now and obviously, you know, Elkhart County, when this industry gets heated up, especially the record levels we're at today, we get to a position real quick where we're out of labor. So you got those two things working against us, but this industry is, it always finds a way, with all of us being so close together and so tightly knit. You know, we'll find ways to get through some of these challenges. But I'd say, over the next couple of months the supply chains will heal up, well labor will get a little bit better, we'll all get a little bit more resourceful. Like I said in our prepared remarks, we're adding automation on a continuous basis on our end. You know, each one of those projects we do are continuous improvement projects we do frees up team members that we can allocate toward other areas. So I mean, we're trying to get creative on our end and hold job fairs and do some things where we're trying to bring people from the outside -- outside of the area into this business. Because there are a lot of areas, in surrounding counties that have industries that are not performing as well, so that'd be the quick rundown there.

Got it. And you quickly talked about automation, can you give us an update on the chassis automation project, whether it's up and running and when that will start to get your attribute to earnings?

Yeah, so you know, we started running production there a little bit earlier this year and -- and because it's such a big project, we're just working through the program debugging now. It is producing upwards of a couple hundred beams a day for us. So we need to get it to a much higher level than what it is today. But it's just one of those things where it's not a million-dollar project, obviously. Some of those smaller projects we can implement have product ranking to a smaller extent pretty quickly. But on the larger projects, they just take a little bit longer, but we're pleased with how it's progressing. And it's timely because it's going to help us add capacity in our chassis divisions in a short period of time.

Got it. That's all I have now. Thanks. Thanks, guys.

Thanks Scott

Our next question comes from the line of Fred Wightman with Wolfe Research. Go ahead please. Your line is open.

Hey, guys, good morning. Jason, you just mentioned supply chain and labor were two of the bigger bottlenecks, but some other OEMs have talked about delivery and transportation challenges. So, I just wonder if that is still an issue. And what do you think that means for reported shipments for the industry over the next few months?

Yeah, I think that's a good comment. I mean, it's certainly not one of our problem as a supplier, but it’s an industry, you know, anytime the industry ratchets up like this. Again, it's going to take a couple months for them to allocate the resources that they need to deal with this record demand. So it'll just take a -- it'll take a couple months, but they'll eventually uncover the resources needed to be able to ship the units to dealers. And dealers are certainly motivated and incentivized, because most of these are sold, to help -- help find opportunities where they can, get creative and find new ways to get these units delivered to the customers quicker.

Okay, great. And then you guys had mentioned some market share opportunities, just given capacity challenges or ramping issues at your competitor, what segments specifically do you think you could see the biggest benefit?

Well, I don't want to get caught into the segments, but there's a few big opportunities right now, in the way some of our key components or what we call our core components where suppliers have just fallen down and we've been able to pick up some pretty good market share in a short period of time. So normally, when things are busy like this, we don't, we don't rely on market share gains. And typically, we're gaining a little bit of market share here and there. But we've had some pretty significant sizable pickups over the last few months where supply chains for competition, even supplier peers and products we haven't been in, especially on the Aftermarket side, they'll call us up and say, as long as you can procure this component, we're buyers. So both Aftermarket and OEM, we've seen some pretty good movement there.

And I would add, I would add to that, you know, you just think about our total content per unit. You know, we've been guiding the 3% to 5% growth for a while and, certainly during this, this pandemic, we've seen a strong shift towards entry level product, and we're still turning in 4% year-over-year growth on a trailing 12-month basis. So I think there's an opportunity for that to continue to run here in future quarters.

Great. Thanks, guys.

Our next question comes from the line of Bret Jordan with Jefferies. Go ahead, please. Your line is open.

Good morning. This is Mark Jordan on for Bret. Just thinking about the Adjacent OEMs, it looks like the RV OEM, it seems is in really strong demand, but I'm wondering if you can talk about the current trends among the different Adjacent OEMs?

Sure. We'll start with marine. You know, on the marine side of the business, it's -- it's we're seeing just as strong and all-time record demand. We've checked a lot of our touch points there with dealers and OEMs recently and they're -- they're stretching capacity and experiencing supply chain and labor issues much like the much like the RV industry is. So you know, we're ramping up capacity and second shifts in the marine area. And then you know, Europe is a little bit slower right now to come back. They didn't -- you know the consumers didn't get all the financial help that the Americans received from the government. So a little bit slower to come back there but things, the demographics still look the same for RV and marine. We talked a little bit about the Aftermarket, you know the channels there are super strong. The CURT business that we picked up earlier in the year, I mean, you look at record outdoor demand for outdoor products, you know, they supply a lot of hitches. And if you know if you've paid attention to bicycle, the bicycle industry and everything else, outdoors, a lot of that stuff if you're going to carry it around, it needs a hitch. So you got a lot of first-time buyer of hitches for cars and SUVs and trucks. And then you look at some of the commercial businesses we're in, you look at, buses, the housing industry. They're not flat, but they're not up nearly as much as what some of the other outdoor leisure segments are for us. And then, if you look at cargo trailers which is a significant part of our business, that's significantly up, whether it's, landscape trailers or cargo trailers, clustering trailers, things like that. We're seeing those businesses up and the components that we supply to that -- that industry is doing really well for us right now, so that kind of covers most of the adjacencies here. Still there?

Great. Yep, sorry. And just thinking real quick about the CURT group. You know, I know there's strong demand for towing products but one of the things you’ve been hearing, you know, discretionary products such as the truck accessories are doing pretty well right now. Is that, you're seeing strength across both the towing products and the truck accessories business?

Yeah, truck accessories business is doing fine. Again, it's not up as much as some of our outdoor leisure areas, but it's -- it's so there's a lot a lot of products in that area that are doing well. When you look at bike racks too, I mean, CURT supplies a lot of bike racks and with bicycles in record demand, we've got a situation where we can’t keep stores full of the bike racks that we make, so.

Okay, great. Thank you very much for taking my question.

Thanks Mark.

Our next question comes from the line of Shawn Collins with Citigroup. Go ahead, please. Your line is open.

Hey, great. Thank you. Good morning, Jason and Brian. Hope you're well?

Good morning, Shawn.

Hey, I wanted to circle back and ask about labor again. You obviously talked about the constraints there and second shifts and whatnot. You know, I wasn't covering the sector in ’17, ’18 but could you compare this period of constraints and how you're dealing with it compared to the late 2017, 2018 period, please? Thank you.

Yeah, I wouldn't. I don't think we're at that point yet. We're certainly hearing of, you know, a little bit of wage pressure out there. We've put on two or three now, job fairs ourselves, of which we've been pretty successful in obtaining team members. So, we've had a lot of success in adding team members, I don't think we've seen the inflation that we were seeing back in, during that time period yet. You know, there's still time -- still time for that to occur. And I think we're watching that closely. But at this point, we haven't -- we haven't experienced the, the same level of issue that we had back then.

Okay, great that's helpful. Thank you, Brian. And just my second question if I could ask about the M&A environment. You know, you guys are obviously very experienced acquirers. This is obviously a very unique, different environment. So I'm just wondering what you're seeing in terms of M&A in terms of, communication, are you seeing less frequent dialogue because of this unique environment? Or are you possibly seeing, greater dialogue and greater opportunities because of the uncertain future kind of that people are now dealing with in the future? So any commentary on that would be helpful? Thank you.

Yeah, sure. So, you know, we had a record $575 million in acquisitions last year. So, we, we plan on, even pre-COVID we planned on spending a large majority of this year digesting the acquisitions that we made last year. That said, April and May, were obviously pretty, pretty quiet with respect to pipeline activity and acquisition conversations. But, if you -- if you, over the 65 or so we've done since I've been here, I tell you that we do, mostly how we acquire businesses is we go approach businesses that are of real interest and strategic interest to us. So, we don't wait for brokers to bring us deals, we look for strategic fits and try to go have those conversations. And, you know, we're working to -- we started to continue to do that in June after kind of being quiet for a couple months prior, but you know, there's a lot of good conversations right now and before we were just looking at purely strategic, you know, a lot of businesses outside our core RV business. But today, we got to consider capacity constraints. There's going to be product lines out there, components that our customers badly need that they're not getting from suppliers that are doing a very good job. So we'll be looking at companies from that aspect both on the marine and the RV side. So, you know, we've been quiet on RV the last couple years, you could see that activity pickup. But certainly we're, we're staying active outside of RV and continuing our diversification strategy where we're trying to get, 60% of our sales outside of RV by 2022.

Okay, great. That's helpful commentary. Appreciate it.

Sure.

Our next question comes from the line of Brandon Rolle with Northcoast Research. Go ahead, please. Your line is open.

Good morning. Thank you for taking my questions.

Brandon, how are you doing?

First, could you comment on the used inventory environment or capacity there within the RV and boat industries? And then as a follow up, I was also hoping you could comment on the potential impact of retail shows closing down or you know how minimal the impact it would be for both the RV and boat industries? I saw The Hershey RV Show is already cancelled. And you know, maybe if there's any implications for open house as well? Thank you.

Yeah, I think there's a handful of things going on with respect to the comments you just made. We’ll start with the retail shows. We don't expect much of that to happen but again, the dealers -- the dealers have more sales and they know what to do with right now. They just need to work on getting units, getting them [PDI] and getting to the customers and really ensuring that the customers, especially with a lot of the -- the record new buyers, we’re -- they're off to a good start with respect to their experience in the RV. So you know, retail shows we don't expect much out of, the open house goes, same thing. You know, that's likely, it's largely not going to happen, but we have heard that some of the bigger dealers are coming to town and having some private showings with some of the product lines at the OEMs. But what I would say is that and this is good for the industry in terms of keeping us going at a fast clip right now. We don't see a lot of the typical model year changes and product changes that we would typically see. And that slows us down a lot, because we almost have to stop for a month. That's why August is traditionally slow. We're doing a lot of model change, change over activity, prototyping and things like that getting ready for the -- the new products showing in September. So with a large part of that not happening, we're able to run August at a pretty, -- pretty good -- at a pretty good rate with high volumes. So, the bad news is open houses is going to be happening, the good news is that there's, plenty of orders out there. And we're going to use that ability to not have to stop and run prototypes every day at all of our facilities to just run more volume for the OEMs that had kind of last year's product designs.

And Brandon, the first part of your question on use, you know, from our touch points, there isn't much in the way of used products out there. So you're not. I mean, there's been such a tremendous shift towards first time buyers, so you're not getting trade-ins and, and it's basically non-existent.

Now, I think, you know, at the end of the day, you know, there's a lot of things we're not going to be able to, -- to figure out from some of the numbers and feedback coming through. But I think, you know, were we think that the retail number is going to be, over 475. We think that, you know, the registrations are going to be very clouded -- clouded for the rest of the year. Some states, have closed DMVs and people aren't getting the registrations at all. Timely, you know, I'm talking months behind when they when they actually buy the unit. So, I caution you to, kind of pay attention to, how low the inventory is out there and what the industry is running at versus what we're actually hearing back from real retail registration numbers that are coming through the DMV.

Okay, great.

Our next question comes from line of Steve O'Hara with Sidoti & Co. Go ahead, please. Your line is open.

Hi, good morning. Thanks for taking my question.

Hi, Steve.

Hi, I just I guess, I mean, you kind of touched on it in the last question but, you know, based on your expectations around retail and wholesale, can you talk about what that implies to dealer inventories in the year end? And then, do you see them being more comfortable holding more inventory kind of going into the winter than last year? You know, it’s and -- I mean, obviously dealers are pretty, I'm sure pretty bullish right now, but maybe as things start to slow down in the fall and winter, maybe they get a little -- more concerned with, you know, what the economy looks like?

Yeah, Steve, I think that well we're expecting based on the retail number that that Jason threw out and kind of what we've talked about from a wholesale perspective, I would expect us to end this year still down from an inventory perspective. You know, OEMs all remain ramped up to, try to bridge that gap that's there. So during the late fall and winter, when retail slows down, there will be some chance to build that back up. But based on capacity constraints, etc., I think in the year, it could be 35,000, 40,000 units additionally in the whole from where we started the year so. So I would say I would expect that to continue to carry into the first quarter as they try to ramp up and build inventories for next year selling season.

Okay, that’s helpful. And then just on maybe backlogs right now. Can you just talk about how far OEM backlogs are, how far they go out right now? You know, that you’re how much -- how clear -- how much clarity you have on that? But thanks.

Well, it's all anecdotal at this point in time just, you know, using our OEM touch points and what they're telling us. But, I mean, you can, we've got some brands that are out easily a few months and some that are out seven. So if you think about going into a dealership right now and ordering an RV, and they tell you that it's going to be March. I mean, that tells you how sizeable the demand level is. I mean, so, and we'll work through that and get some of those backlogs down as we all ramp up capacity. But all the suppliers need to get up to speed and get some second shifts running, get their supply chains up, get labor where it needs to be, as do the OEMs. And it's a really good position for us to be in, obviously.

Okay, and then maybe just lastly on labor. I mean, I think in, 2017, 2018 labor, really started to hit the industry hard in terms of inflation. I mean, would it be different this time, just because of job losses kind of across the board in other industries and, there should be a bigger pool available to you guys and the industry, in the regions you're in, or maybe the economy's in those areas weren’t hit as hard as New York City? So, you know, so to speak.

Yeah. So certainly this area is, you know, hard hit, because, you know, 40% of the economy is marine and RV production. So, we're, we're pulling all the labor we possibly can that's available in this area for these specific skilled industry jobs. As a component supplier, it's a little bit easier for us to work outside of the Elkhart County range. I mean, obviously, we've got you know, 40 or so facilities, 50 or so facilities outside of Elkhart County. So we can utilize some of those areas and some of those areas are in, in labor markets that have been impacted the opposite way Elkhart County has. So we're looking at all those options. And, you know, that’s -- it’s going to be helpful to us in the long run as we continue to design a capacity strategy to deal with the record demand here.

Okay, thank you very much.

Yep.

And there are no further questions at this time. I'd like to turn the call back over to Jason for some closing remarks.

Well, everybody, we appreciate everybody tuning in on this conference call. Obviously, it's exciting times for us and especially the next couple quarters look great, but it's setting us up for a fantastic 2021. We're excited to report next quarter’s earnings. See you in a quarter. Thank you.

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