Hello everyone and welcome to today’s First Quarter 2022 LCI Industries’ Earnings Conference Call. My name is Emma, and I will be coordinating your call today. [Operator Instructions] I’ll now pass the call over to Brian Hall to begin. Please go ahead Brian.

Good morning, everyone, and welcome to the LCI Industries’ first quarter 2022 conference call. I am joined on the call today by Jason Lippert, President, CEO, and Director. We will discuss the results for the quarter 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 could cause actual results and events to differ materially from those described in the forward-looking statements. These factors are discussed in our earnings release and in our Form 10-K and 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?

Thanks, Brian, and good morning, everyone, and welcome to LCI’s first quarter 2022 earnings call. On the heels of an amazing 2021 we carry forward our momentum to deliver record top line and earnings performance. Our wide range of innovative offerings, coupled with our ongoing focus to providing best-in-class customer service and experience continue to be key competitive differentiators, accelerating growth in our aftermarket, marine and adjacent businesses alongside RV. As these other businesses continue to flourish, we are reinforcing our ability to drive countercyclical growth, helping position us to deliver strong profitability over the long term. We ended the quarter with a record $1.6 billion in revenues up 64% year-over-year with strong demand across the markets we serve supporting double-digit revenue growth in each of our core markets. Our recent acquisitions added approximately $79 million in net sales for the quarter helping expand our market share. RV OEM sales increased 84% during the first quarter of 2022, compared to 2021 reaching nearly $1 billion, primarily different by strong demand for RVs. Secular megatrends driving the popularity of the outdoor lifestyle are now well established as KOA’s camping survey has recently shown that 57 million households camped in 2021. RVs have quickly become an even more attractive alternative to the skyrocketing cost of air travel and hotel lodging. The industry continues to innovate and within the explosion and popularity of peer-to-peer rentals, many new opportunities have opened up, which didn’t exist prior. According to a recent RVIA survey, 46% of new RV buyers plan to list their vehicle on rental sites like Outdoorsy, which gives RV owners an effective way to help offset the cost of ownership. The significant new trench should help further support the long-term growth of the industry, creating a new lane for our veers to come…

Thank you, Jason. Our consolidated net sales for the first quarter increased 64% to $1.6 billion compared to the prior year period driven by strong market demand coupled with operational execution. Acquisitions contributed $79 million or 8% growth to our quarterly results with organic growth contributing the balance or 56% of the improvement. While we have seen retail demand across many of our markets temper from the historical levels of 2021, April sales were up 47% to $537 million versus April of 2021. Q1 2022 sales to RV OEMs increased 84% compared to the prior year period due to strong wholesale and retail demand. And we also delivered substantial content expansion for towables and motorhomes during the quarter. Content per towable RV unit increased 40% to $4,854 while content per motorized unit increased 25% to $3,144 compared to the prior year period. Towable content growth can be attributed to organic growth of 9% in addition to the impact of price increases enacted at the start of the year. Acquired revenues contributed 6% of the year-over-year growth in towable and content per unit. We saw great performance in the marine market driven by the same trend seen in the RV OEM market and North American marine sales increased 49%. In all sales to adjacent industries grew 42% versus the prior year period supported by strong growth in marine sales, as well as building products, which grew 50% due to market share gains and an increase in manufactured housing shipments. Aftermarket segment sales increased 35%, and international sales increased 15% year-over-year as the recreation space continues to attract new customers. Gross margins were 28.2% compared to 24.2% in the prior year period supported by strong operating leverage and the impact of price realization. As we have communicated each quarter contractual pricing for…

Thank you. [Operator Instructions] Our first question today comes from Kathryn Thompson from Thompson Research Group. Please go ahead, Kathryn. Your line is now open.

Hi, thank you for taking my questions today. You had nice gross margin improvement up 400 basis points sequentially. And previously you talked about seeing 200 basis points expected from materials and pricing loan. My question is the remaining 200 basis, all efficiencies and volume, or are there other factors we should take into consideration?

Yes, definitely. Kathryn, I would tell you one volume certainly exceeded, I think our original expectations. So, we picked up some additional incremental margin there. And then our efficiencies were some of the best we’ve seen, I think, as you’ve heard in our prepared remarks. And I know we’ve talked about it offline as well, running multiple shifts for us is something that’s been new. We’ve got great teams that we’ve assembled and they executed very, very well. So, we certainly had additional operational efficiencies, that make up that difference.

Okay. And how much, if you look at the components of the gross margin upside in, roughly what were the biggest buckets in terms of the year-over-year gross margin improvement?

If you look and just to add what, to what Brian said, Kathryn, the run rate for first quarter was about 620,000 units is what we were actually running production at. So that’s where a lot of the big volume came from. But if you look at the – how that’s broken out, it’s about, 5% or so percent and volume increases and operational excellence and improvements there. The, some of the things Brian alluded to, and then a couple points in pricing improvement from some of the pricing indexes that swung in our favor for Q1.

Okay. And following up on the pricing index curve, is there more pricing to go given you’ve seen one quarter of significant margin expansion, are there – how should we think about that price cost as we look through all of 2022?

Yes. I think from an industry standpoint, it still sounds like, with other suppliers, other vendors that there’s still some pricing to give, but for us, we’ve got, as I just mentioned our, the steel index swung pretty good in our favor for the first time in five quarters. I mean, we’ve been chasing steel for five quarters, as it’s run up to, almost double the prior historical highs and turn back in our favor of this quarter. And we’ll get a quarter and a half or so of an improvement there. And then in Q3, there’s, we’re going to be giving back what we saw steel drop this quarter, because of how we do the indexes. Our customers will see those decreases in Q3, roughly it’s in aluminum still bouncing around at all time high. So, that’s still going to, I don’t know that we’ll have to give any increases for that based on what we’ve seen, because it feels like it’s at a high, but they’ll definitely be some impacts on steel, which you’ll overshadow most of the, any increases that are happening right now for us.

Okay. And final question is more on content for unit, how much of that was increased the volume versus price versus Furrion just really wanting to get to an organic number.

Yes. So it doesn’t take into account because it’s on a per unit basis, the changes in volume, but so what you ultimately end up with is acquisitions contributed about 6% of the year-over-year growth. Our organic growth was about 9% which would account for, all of our content gains as they bleed in over a 12 month period of time. So, we’re expecting, as Jason mentioned in his prepared remarks, we gained significantly during the last 24 months, locking in new business, as we had the inventories that we’re able to support the industry at record volumes. And because of that, you’re seeing that continue to bleed in. So, to show 9% organic growth year-over-year and I would expect that to continue to grow from this point forward until, it’s fully implemented in the 12 month period of time.

And just to clarify that 6% and 9%, those are referencing volume only numbers, those of the – go ahead.

Those, I mean, it’s a per the content’s a per unit basis. So the volume doesn’t, if the industry volume, as an example changes, it doesn’t impact that. But for all of the additional new business that we had, those sales would get incorporated in that organic number, any acquired revenues, we pull in the acquired revenue number and then any additional growth on top of that from the acquisition date forward gets reflected within our organic growth number.

Okay. And real quick, and then I’ll hop back in the queue, just any update on the state of supply chain versus three months ago or six months ago. Are there any categories that are better or worse? Thank you.

Yes. Thanks. I mean, it feels better today. I mean, we we’re anticipating some, a rough go with some of the freight again, with some of the headaches that we’re seeing in Asia with some of the COVID lockdowns that have really, pushed things back. But, with volume diminishing over the coming quarters that should play into our favor along with, as Brian mentioned, we’re sitting on a good amount of inventory because, up until last month we were preparing for some pretty sizable run rates and wholesale. And obviously as those things start to tail off, we’ll have some inventory there and a little bit of a cushion, so we should be sitting good. Chips are the big headache for us right now. And we’re having to make changes there and redesign and products along our electronics lineups. But other than that, things have things have been pretty decent.

Okay, great. Thank you.

Thank you. Our next question today comes from Scott Stember from MKM Partners. Please go ahead, Scott. Your line is open.

Good morning guys. And thanks for taking my questions.

Good morning.

Just following up on Kathryn’s questions about content was that towable the 6% and the 9%?

Yes.

Okay. So the remaining the – to the 40% is pricing then?

Correct.

Okay. Got it. And just, if you were looking, I guess, at the sales rates that we’re seeing so far in, or that you talked about for April the 47%, could you maybe parse that out a little bit? What’s organic versus what’s price? Is it kind maybe the same ratios that we saw in the content?

Yes, I don’t think there’d be meaningful change other than RV related volume. So, we’ve certainly seen production rates with the OEMs, slow some during the month of April, which I think was as everyone has expected. So, when you look at our year-over-year growth rate for Q1 versus the year-over-year growth rate for April the most meaningful change in that is RV production rate.

Okay. Got it.

Yes. Pricing I mean, to go back to something that Kathryn mentioned and then, you’ve brought it up as well. When you look at what materials have done and I know we’ve talked about it quite a bit in the past, knowing that, we know what our prices are going to be two quarters out given the lag on the indexes. And as we’ve stated before, January 1 was the first time that we’ve got our steel prices in line with what we had been consuming steel at. So that was in the $0.90 per pound range. And so, not a great deal of change as move into Q2 in that regard, but with the two quarter lag, as during Q1, you saw steel prices drop all the way to almost $0.50 a pound. And then it came back up to, I think, somewhere mid to low $0.60 a pound, you will see that price ultimately get reflected during the third quarter. So as it relates to second quarter, not expecting a great deal of change there from, an input cost perspective other than maybe a little bit on freight, because some of those indexes have, they do adjust it at different periods, not as consistent as what the steel indexes adjust. So there will be a little bit of give back in that regard during the second quarter, but I would think for second quarter, one of the most meaningful variables that’s changing is just the RV related production volume.

Got it. And to that point I think the first quarter, I think the rate was our in 65,000 units what are you seeing that rate from a production standpoint? What are you seeing that come down to, and then maybe just tie that into, what you’re hearing at a dealer level from an inventory standpoint where we are?

Yes, I don’t think from a dealer perspective, we’re hearing much different than what everybody else is. I know some of the recent dealer reports for April show that retail seems a little soft. A lot of that’s, partially due to some of the weather that we’ve had. I think there’s anticipation that the next few weeks that the retail will start getting a little bit better, but I’d say that our, we’re planning on a run rate as we’re planning on kind of a 525,000 unit number for the year based on all the inputs that we’re hearing both on the retail and the wholesale side with plan downtime and things like that. So obviously we’re running a little bit hotter than that, but we’ve been coming off of a high run rate, sometime in Q1 of about 620,000 units is what the wholesale run rate was running. So we’ve come off of that and, we feel we’re going to end up the year, give or take 15,000 units from 525,000. We think that that’s pretty realistic.

Okay. And then on the aftermarket, I think last quarter you had talked about, you had a lot of things that were in the R&D queue that you all holding off on, particularly for Furrion just because of the demand, just trying to keep up with that. Can you remind us again, of the opportunity for aftermarket to take another big step up just from Furrion alone?

Yes, I think, Furrion, they still most of their aftermarket, through eCommerce, and they just didn’t have the robust representation out in all the different channels, whether you’re talking about, Amazon or the big dealers, or some of the big wholesale distributors and some of the other channels that we’ve used. We sell international aftermarket. So, we’re – it takes time, but we’re continuing to plug them into every single channel that we’ve gotten, we’re having good success. And whether it’s cameras or refrigerators or hot water heaters or some of the other appliance items that they’ve got. We’re going to continue to grow their aftermarket nicely because it’s a good category, but we’re still in early stages there just getting, getting everything in the catalogs, lined up and making sure all the channel customers know exactly what we’ve got to offer.

Got it. That’s all I have. Thank you.

Thanks Scott.

Our next question today comes from Daniel Moore from CJS Securities. Please go ahead, Daniel. Your line is open.

Thank you, Jason. Thank you, Brian. Good morning. I apologize for this. I jumped off another call. Can you just repeat Brian, the expectations for gross margins, sequentially at the Q2 and a commentary you gave for the rest of the year numerically?

Okay. Yes, I think that’s a couple different variables, first of all, if you start on our input costs and the pricing that we’ve been chasing for, quite a few quarters in a row at this point, we’ve finally January 1 got us to where we’re somewhat balanced. When say balanced, I mean, our pricing to our customers is reasonably close to what our input costs were. As you are well aware, you’ve now seen steel come back down from those all time highs. Those are on a two quarter lag though, so that will be setting a lot of the stage for the back half of the year when we get to our beginning of quarter three pricing adjustments for steel. Steel ultimately I think came down to low-to-mid $0.60 a pound at the end of the first quarter. So that’ll be what’s setting our Q3 pricing. So you’ve got that variable to consider. So going from Q2, probably not that meaningfully different from an input cost perspective, other than some give backs on some of our inbound freight cost and – and lower volumes, correct. I, so to address the pricing, the input costs first, like that’s what I would expect Q2, not a significant amount of change, but back half of the year is where that pricing comes into play. What the other variable as Jason mentioned is volume. And so certainly from a volume perspective, RV being the most or RV or OEM being the most significant part of our business we are anticipating volumes to continue to decline some as Jason just mentioned, April we did see some reduced production rates from the OEMs. Some of that’s because of retail slowness that we have been experiencing for a number of months, but now I don’t…

That’s helpful. No, that those are the numbers that I had missed. And then, as we look at a little bit further, a lot of moving parts, obviously, but even running so hot and facing, so much labor and raw material headwinds, if we level off, in that 500,000, 525,000 range looking beyond 2022, you see the potential to sustain or even improve margins in a more “normal” operating environment in fiscal 2023 and beyond just talk about the puts and takes there.

Yes. So, with the 620,000 run rate, we obviously, crushed overheads and fixed cost. You know, we settle back down into 525,000 unit run rate. We can still, we still feel we can maintain a lot of those efficiencies and OpEx things we talked about earlier. We’ll still need to run some second and third shifts at 525,000. You have to remember that even though it’s coming down 525,000 would be probably a top two year for the industry. And that volume’s great. I don’t want, I want to underscore the notes that Brian mentioned earlier. We made a conscious decision in 2020 to not run out and, buy a bunch of buildings and add capacity from a building standpoint that we would need to fill up with equipment and people. So, we chose otherwise to really focus on putting resources adding second and third shifts, which really allows us a more flexible model. And we hadn’t done that in the past. So, as we settle back down to those 525,000 units or so we’re going to be sitting on roughly the same footprint we had prior to COVID, which I think really helps, our efficiencies and then saying that we’re going to, we plan on keeping some of those operational efficiencies at run rates that are higher than 500,000 units. We’ll keep some of those efficiencies, we’ll lose some of the, the pricing benefit that we had, obviously. So, we’ve been traditionally at a 10 point up margin. We feel we can be a little bit better than that. And it’s kind of where we’re at.

Perfect. Lastly is just kind of longer term trajectory of content gains. It’s been really strong recently, obviously. And just talk about, beyond Furrion once we sort of get to a little bit more normalized if we are, in an environment where maybe we’re normalizing unit growth, your ability to continue to take share of what you think kind of content growth might look like. Thanks again.

Yes. I think, just look a little bit past RV. I mean, I’ve, even though volumes have come down, I’m excited about what the, next 12 months looks like for us, because we’re going to add about $350 million in market share gains and just RV alone and just some of the stuff business we’ve closed over the last quarter or so that’ll run out through next year as we start some of this new business stuff. So that’s a pretty significant improvement in gain given that volume’s coming down and then we’ve got significant growth and marine and aftermarket and the rest of our adjacent markets. Those businesses will continue to grow nicely over the next 12 months to 18 months. Especially marine, we feel that they have a super long demand tail because they just haven’t been able to get the amount of boats out that the dealers need. And dealer inventories are very low there. So as our marine business continues to grow so should the volume on top of that. So we’ll have content gains marine innovation gains there along with volume gains as they continue to fill up dealer inventory. So, we feel really good. Adding into a lower demand time with RVs, we feel really good about the rest of our business, including some of the share gains we’ve had with RV.

Perfect. Thanks for the color again.

Thanks Dan.

Thank you. Our next question today comes from Fred Wightman from Wolfe Research. Please go ahead, Fred. Your line is open.

Hey guys. Good morning. I was hoping you could maybe just compare or contrast the environment that we’re in today, right? You did 620 in the first quarter. It seems like you’re going to expect volumes to decline for the rest of the year. Can you just contrast sort of how today looks relative to what we were seeing in 2018 and 2019, whether that’s the level of inbound volumes you’re seeing from your customers in terms of throttling down production, whether you think it’s earlier than what we saw last time, and maybe just why this time might be different?

Well, if you go back to 2018, 2019, and we struggled in 2018, because there were some pretty significant drop off probably heading to a 450,000 type unit number back then. And it feels bad right now, because we’re coming off such a high. But again if we land in that 525,000 unit run rate and that’s about what the industry’s running today. We expect that to dip a little bit. So that your balance is out to be 525,000. But, it’s 525,000, it’s a big number and our plants are still really busy at that number. We’re just cutting some overtime and cutting some shifts on our end to maintain that without really jeopardizing, the impact of our fixed costs and overhead. So…

I guess, you said differently. Is it fair to say that the OEMs are being a little bit proactive about richening down capacity versus what we saw a few years ago?

Oh, absolutely. Yes. Yes, for sure.

Perfect. Thank you.

Thank you. Our next question today comes from Ethan Huntley from Jefferies. Please go ahead, Ethan. Your line is open.

Hey, good morning. This is Ethan Huntley on for Bret Jordan. Thank you for taking our questions. Is there a way you can sort of break out the impact that inflationary pricing had on top line growth during Q1 and maybe sort of what you expect moving into the back half of the year here in terms of pricing?

I mean, that’s a difficult one, Ethan. But it’s, across so many different markets and each one of them has a different degree of steel and aluminum components. And if you look at the hitch business, which is a lot of steel components, there’s certainly a heavy weighting to price as we had to chase steel all the way from $0.25, $0.30 per pound [ph] all the way up to almost a $1 per pound, it’s probably been the most meaningful within our RV and marine components, which is why we’ve spent most of our time talking about the price as it relates to those markets. Certainly when you step back and think about all the different components that we supply to within an RV, many of which, I think, I’ve said before that, of our materials that would consume approximately 50% of them are steel and aluminum, and that’s the dominant share of that is steel. And so it’s been very meaningful for us, on a percentage basis at any given point in time. I think within the content color that we provided earlier, that’s a very good indicator of what is baked into top line growth as a percentage. So, I think, I would kind of fall back on that, which is about 56% of our sales today as RV OEM. So, and the other markets follow that somewhat similarly.

Got it. Thank you. And then maybe as a follow up here, I think you mentioned April sales were up 47% year-on-year. Is there a way you guys can sort of break out what percentage might be organic versus acquired there?

Acquired revenues shouldn’t have changed a great deal. We did have – so it’s about 7%. Yes, we acquired Girard. So we picked up a little bit there. So, we were 6% for the quarter, but April would’ve increased to about 7%.

Got it. Thank you very much for taking our questions.

Thanks.

Thank you. Our next question today comes from Brandon Rolle from D.A. Davidson. Please go ahead, Brandon. Your line is open.

Good morning. Thank you for taking my questions. First, you had mentioned some strong market share gains recently. Could you talk about some of the drivers of your market share gains and future opportunities? And then my second question would just be on the pricing environment. You were talking about additional price increases still having a flow through the retail channel. How do you feel the pricing is impacted retail demand thus far? Thank you.

Yes. So start with some of the drivers. I’d say the biggest percentage, the 80/20 of the drivers on RV market share gains over the next 12 months that we’ve secured are largely core products. You look at chassis business, window business, our Furrion business was certainly taking off that was part of our plan from the beginning when we purchased it last July has taken grow their $150 million business significantly. We felt, and as we said on prior calls, we could double that business fairly, easily given some of the competitive landscape and given some of the products that Furrion has that are innovative and right for the market. So those would be the big ones little bit of furniture. But then if you look at inflation to your second question with respect to retail sentiment and how it’s impacting consumers and buying decisions, I mean, certainly there’s impact there. There’s, if they’re not paying all cash and they’re financing a deal, then the impact maybe isn’t as significant on a smaller unit, but certainly the bigger units get a little bit more costly. So then – and we’re in for like I said, our pricing to our customers that will ultimately flow back through to the dealer, should net go down for our customers buy Q3. So that should provide some relief form. I can’t speak for all the other components and things that they buy. I think it’s a mixed bag when you look at all of our, all of our peers on the supply side and the business. But at least from our standpoint, there should be some net decreases for our customers come Q3.

Great. Thanks. Thank you. This concludes today’s Q&A session. Now, I’d like to turn the call back to Jason Lippert.

Yes. We appreciate everybody tuning in today. We’ll talk to you next quarter’s earnings call. Thanks again and have a great week. Thank you.

This concludes LCI Industries first quarter 2022 earnings conference call. Thank you all for joining. Enjoy your rest of your day. You may now disconnect your lines.