Thank you, everybody for your patience. We welcome you today to today's LCI Second Quarter 2022 Conference Call. My name is Drew and I'll be coordinating your call today. If you would like to ask a question during the call, please press staff followed by one on your telephone keypad. And if you change your mind, please press staff followed by two. I'm now going to hand over to Brian Hall to begin. Please go ahead.

Good morning, everyone. And welcome to the LCI Industry's Second 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 would 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.

Good morning, everyone. And welcome to LCI second quarter 2022 earnings call. Continuing on momentum from the beginning of the year, we deliver another quarter of incredible performance. Thanks to the solid competitive differentiation we have built up in our aftermarket, Europe, Marine and other adjacent industries, coupled with our culture innovation and customer experience. We are consistently finding ways to grow our value. As we continue to drive our diversification strategy forward, we are creating strong growing businesses, which greatly help mitigate the cyclicality of our RV OEM business, which we believe will generate great value for years to come. We ended the quarter with $1.5 billion in revenues, up 40% year over year with strong demand across the markets we serve to support double digit revenue growth in each of our core markets. Our recent acquisitions of Furrion, Girard, Trazcor and others added approximately $81 million in net sales for the quarter, helping expand our market share in new high growth markets. Our successful diversification initiatives continue to show fantastic results and improve our financial performance and strengthen our balance sheet, giving us the flexibility to execute on our strategic priorities and further invest in our business. RV OEM sales increased 52% during the second quarter of 2022, compared to 2021 reaching $906 million driven by elevated wholesale shipments in market share gains. The North American RV market continues to be the foundation of our success in our OEM space. Despite the impacts from a constantly evolving macro economic environment, including record inflation, the outdoor recreation spaces continue to grow as travelers recognize the advantages of camping, boating, and RVing over the experience of airline travel and hotel lodging and the soaring inflation associated with those two categories. Outdoorsy, the world's largest RV rental and outdoor experience marketplace…

Thank you, Jason. Our consolidated net sales for the second quarter increased 40% to $1.5 billion compared to the prior year period, supported by continued execution to meet strong market demand. Acquisitions contributed $81 million or 7% growth to our quarterly results, with organic growth contributing the balance or 33% of the improvement. While we have seen retail demand across many of our markets temper from the historical levels of 2021, July sales were up 5% to $368 million versus July, 2021, demonstrating positive trends, as we move into the second half of 2022, a Testament to our diversification efforts, which are helping to offset the deceleration we are experiencing in North American RV production. Q2 2022 sales to RV OEMs increase 52% compared to the prior year period, driven by strong wholesale shipments and market share gains stemming from content expansion in towables and motor homes. Content per towable RV unit increased 49% to $5,382 while content per motorized unit increased 35% to $3,569, compared to the prior year period. Towable content growth can be attributed to organic growth of 12% in addition to the impact of price increases enacted at the start of the year. Acquired revenues contributed 7% of the year over year growth in towable content per unit. We saw great performance in the marine market driven by the same trends seen in the RV OEM market, and North American Marine sales increased 44%. Content per powerboat increased 71% to $1,848 driven by market share gains and price increases. In all, sales to adjacent industries grew 37% versus the prior year period, supported by strong growth in marine sales, as well as meaningful growth in our manufactured housing business, which has remained elevated as the broader housing markets has slowed recently. Aftermarket segment sales increased 13%…

[Operator Instructions]. So our first question today, it comes from Scott Stember from AKM Members. Your line is now open, Scott.

Good morning. Thanks for taking my questions, guys. Jason, could you maybe just follow up or give a little more granularity on your comments about inventories being very falling? And could you also maybe just talk about what you're seeing right now, the level of production cuts that you're seeing from your customers on a year over year basis?

Yeah, sure. So I'll address the production cuts first. Our industry worked in the past with the little down clicks where the industry typically slams on the brakes more than they do ease into some kind of meaningful transitions. So we're always prepared for those types of things. I mean, it's just the way it is, and we just live with it in the industry. But we went from full production months to the next couple months look like 12 production days, approximately. We have visibility over the next two months. So August or September, we expect 12 days of full production on the RV side. But as we keep pounding the message, we're diversified in so many other businesses because our housing business is growing very strongly. Our marine business is growing strongly. Our aftermarket business for RV is still super strong, a 40% plus. Power sports. You look at all the other industries we're in, those are going to continue to help offset some of those down click in RV. But I say for the next couple months, it's 12 production days, maybe plus a month. The West Coast RV manufacturers seem to be running a little bit better than the Elkhart county groups. And then with respect to dealer touchpoints, I'm talking to some of the larger dealers every week. And I think May retail was obviously not so great, but June seemed to be better for everybody. And July seemed to mirror June. So to classify, the dealer retail activity is decent. And certainly, as we look to really downscale the OEM production, retail as of this minute is far outpacing what wholesale's producing. So that process has started and in the matter of months we'll be back to a healthy balance likely.

All right. Obviously, we could all appreciate the diversified business model you have, but maybe just give us a little bit more, maybe high level color of the other pieces of your business. How big they are, how strong they are? We know that marine is doing very well right now, but maybe talk about manufactured housing and a few of the other segments that we could look for where we could track in the next few months.

Yeah. So, I mean, we've been up anywhere from 35% to 70% month by month on our housing, which is if you look at the residential and manufactured housing businesses, it's a couple hundred million-ish. Our marine business what Brian [indiscernible] So call it close to $500 million there. And that's growing significantly right now. As we said, the RV or the marine inventories are significantly low right now. So the supply chains are just starting to free up enough where they're not having supply chain issues every day, and they're able to run what they'd like to run to be able to meet the dealer demand. We keep saying RV's down and it is, but the rail and the marine businesses in Europe are both doing well. Our marine business there is going to have their record quarter coming up. So marine and rail in Europe is good. And then again, you look at some of the power sport businesses, less meaningful dollars, but still part of our diversification. What am I forgetting? We talk about RV aftermarket. That's going to continue to grow at probably a 30% to 50% clip and that's $400 million piece of our business, just the RV aftermarket and marine aftermarket piece. So hopefully that's some good color. If you look at Q3 going forward, RV might be 45% or so of our business and kind of this new environment for a period. And that other 60% is going to continue to grow and help offset what we've seen on the RV side.

All right. Just last question, before I jump back. Oh, great. Thanks. Before I jump back into queue, just last question on the content side. With Furrion coming aboard and you talked about a whole bunch of stuff that's coming on, how should we look at the organic content rates going forward, particularly with this new power cord that you talked about, the antilock brakes and all this other stuff?

Hey, Scott, this is Brian. I think here in the short term, many ways, as we pointed out in our prepared remarks, year over year, our content growth of 49% year over year growth, about 12% of that is organic growth today. And we've talked in the past with that being a trailing 12-month computation, the timing of some of that new business getting layered in, that will continue to grow. I do think that that will ultimately here in the third quarter reach somewhere around 15% type year over year growth, that's all organic with the remainder being pricing and acquisitions that we've called out. In the acquisitions, we're around 7% and shouldn't change greatly in at least the short term.

Andt to add that, we're looking at close to $250 to $300 million in new business adds post the model change coming up here in September. That's all figured at more of a 400,000-ish run rate. So that's a significant amount of new business adds. Some of that's coming from Furrion, some of that's coming from some of our other newer product launches. Other is coming from just market share gains. ABS is something we're super excited about. It's going to take three to four years to really penetrate the entire industry on that, which we feel that we will. Same thing with the power cord set. Some of the new products, hot water heaters, trying to convert- that's an easier conversion for us because there's already tank heaters in every RV that we have no business on. And our goal is to take 400,000 to 500,000 RVs and put tankless hot water heaters in them. So furnaces are coming soon for us, which is another big appliance that we're selling zero of today. So you look over the course of a couple years and what we can do to get meaningful volume there, it'll continue to add up.

Great. Thanks guys.

Our next question comes from Daniel Moore from CGS Security. Your line is now open, Daniel.

Thank you. Thanks, Jason and Brian for the color, especially on the RV side. Marine obviously looks like you've still got a good runway. Maybe just give us an update where you see inventories and kind of a timetable of your best guess of when you would expect them to be more imbalanced or closer to where we are on the RV side. Do you see growth in production through the first half of 2023 at this stage? Any additional color would be great. Thanks.

Yeah, that's a great question. I think easily through the first quarter, we feel confident, especially with the Pontoon production, which is most of the- where most of our business settles in, where most of our content is on boats. Some of the big water boats and fiberglass boats, those power boats, they're retail, they're dealer inventory, seem maybe like it's going to be more toward the end of the year, but we still feel we've got a lot of runway and still a lot of content and market share taking opportunity with, especially the Pontoon business out there that's growing in a pretty nice clip.

Great. And second for me is, you've got balance sheet that's in great shape going into any kind of temporary slowdown. Maybe talk about in prior pullback slowdowns, your ability to gain share both organically and be at M&A and whether you might see more opportunity in that type of environment, and that's it for me. Thanks.

Yeah. That's another good question. We're already seeing activity and opportunity in the acquisition space because people see the writing on the wall and there's some people that had high inventories coming into this little bit of a slowdown, and if you're purely RV, that's a trouble spot for a lot of maybe smaller to midsize businesses. So there's already opportunities on the table and we're excited over the next probably 6 to 12 months to evaluate those as they come along. And there's certainly going to be opportunities like there was- this isn't like an 08-09 because we're much further along in diversification on our end, and we feel like this is going to be shorter blip because like I said earlier, the inventories are starting to right size now with wholesale production really pulling back, and retail is still being fairly decent. So there'll be opportunities for sure.

Thank you. Our next question comes from Katherine Thompson from Thompson Research Group. Your line is now open.

Hi, thanks for taking my questions today. If you look back at the history of Lippert, manufactured housing was a much bigger portion of your business and you've diversified, but given where we are with affordable housing, the landscape has obviously changed. One of the impediments historically had been around financing for manufactured housing. I guess, a couple questions related to manufactured housing specifically. First, what is the financing landscape look like today and how is it different since pre-grad recession? And then also, where are you seeing demand strength from a geographic standpoint for your manufactured housing product? Thank you.

Yeah. Hi, Kathryn. I think financing obviously has been a bumpy road over the last decade or so. So with interest rates changing upward today, I'm sure things are changing that landscape as well. I certainly not specific to the manufactured housing world, but across a lot of our markets, the financing has still been relatively, I would say, strong where you haven't seen a great deal of delinquencies, credit scores are some of the higher that we've seen in the past. So I think those are contributing a lot to all markets, including manufactured housing. And it's certainly to your point, it's still relatively small as a percentage of our total sales, but certainly something that we know a market really, really well and have great partnerships with many of the OEMs. And I think Jason mentioned for every 10,000 units, how much just did our content today, additional top line growth that gives us. And I think with what's happened, what's tightened up in the typical stick-built home market that we've seen over the last 30 days or so, certainly manufactured homes has a tremendous opportunity for the consumer to find affordable housing.

Yeah. And with the typical average mean price of a stick-built home at 400,000 plus, I mean, there's a much bigger gap between manufactured housing today than what there was with stick-built housing back 15, 20 years ago. So the real quick answer to the other question is you look at Capco, Champion, Clayton, some of the bigger players in the business, they're all adding capacity right now, probably the tune of between the three of them, more than 12 facilities. They're running out of capacity and coming to us on chassis. We're putting a chassis plan up or just finalizing the last parts of that and launch in September. So we'll actually be building chassis again in Texas. We haven't added a manufactured housing plan to our portfolio in over 20 years. So that's really a bright part of the housing business for us today. We're still building a lot of windows today and a lot of chassis for the housing businesses. And we've recently expanded in the last few year, our vinyl window product to the residential new site built homes. So we're actually selling distributors in the site built market that are building new homes that aren't manufactured housing. We're doing quite a bit of windows there and are continuing to expand that business because it's a really big market, and we're really good at building windows. And on all this stuff, chassis and windows, we've got ample capacity. All we have to do is add team members to the plants we already have. And then we're seeing a lot of this capacity being added in the Southeast in Texas and things like that. We think that that's going to continue over the next couple of years, the trend there for adding capacity in the manufactured housing side.

Okay. Helpful. In Texas, you cited in the Southeast, what is your projection? You give projections for RV in terms of shipments. Do you have a similar one for manufactured housing?

We see it going to 200- I mean, we see it getting closer to 200,000. I mean if you remember 2011, we were probably in the 48, 45,000, and it's just been slowly climbing back and we see that momentum continue. So I wouldn't be surprised to see you get over 200,000 in the next couple of years.

Okay. And just for those calling in the perspective, what was it last year?

Last year, I want to say 130-ish, maybe I think. [indiscernible] 10,000 homes that are built another 20 million in top line for us.

Okay. And then historically, those margins had been relatively better. Is that still proving to be the case today?

Still true today. Yeah.

Okay. Then just kind of being the devil's advocate, makes a lot of sense to see tapping the brakes on the RV business, but why wouldn't that eventually be the case for categories that are in the leisure area, including building?

Oh, I think it for sure will, it's just not going to happen, because they were so slow to get supply chain ramped up, and we're a little bit more careful for whatever reasons why they did that. It's just going to extend that tail into the middle of next year likely. And then we expect that inventories will get full there, but by that time, RV should be right size and we'll see RV take back off again. So we've got this nice push and pull action going between these two categories.

Okay, great. Thank you so much. I really appreciate it.

Thanks, Kathryn.

Our next question comes from Mike Swartz from Truist Securities. Your line is now open.

Hey, good morning guys. Maybe starting off with Brian, I think some of the commentary just on margins for the back half of the year. I just want to make sure I heard right. Did you say that you expect EBIT margins in the third quarter to be 6% to 7% and then kind of, I guess, improved over the course of the fourth quarter into 2023? And then I guess if that's the case, maybe just walk us through the moving pieces behind that outlook.

Yeah, hey Mike. Certainly, if you went back a quarter gauging where we thought RV production was going to land for the remainder of the year, Q2, we thought was going to be a little bit lighter than what actuals we ended up with, and we had talked about the back half of the year being somewhere around very low, double digit percent type margin. We've seen more of that get pulled forward to the front part of this year. Certainly in Q2, it didn't fall off as dramatically as what we'd originally anticipated. So you're seeing a little bit of that margin pull forward into the second quarter, and then the third and fourth quarter result in a little bit lighter margin. So I think that high single digit type margins for the back half certainly going into Q3. We're right sizing the business quickly. So a lot of the typical levers between overtime reductions and dropping down production days where necessary, depending on which market we're talking about. We're making a lot of those changes as we speak. So certainly, anticipate that Q3 declines by what I had intended to say in my remarks was that it would decline 6% to 7% from where we were in the second quarter. That's going to get you pretty close. You'd be around seven- high single digit type margins. But then as you move into the fourth quarter and beyond, obviously, we will still be executing on right sizing the business. Commodities are a bit volatile. So it's tough to gauge with a hundred percent accuracy where price increases end up with our contractual arrangements, but we certainly have seen those declining in the more recent months, but who knows where that goes and what that ultimately means for the fourth quarter and the beginning of 2023. But really, it's all about that RV volume. If I were to look at all these other markets as we've talked, they're going to continue to perform strong in the back half of the year. We don't anticipate much change from how they're running today. And it's really just about that RV production volume and where that lands in the third and fourth quarter that's causing the absorption of some of those costs here in the near term. And ultimately, it doesn't change our outlook for double digit at margins for the full year based on how it all plays out. And again, we couldn't do that without having a strong marine in aftermarket and some of our European businesses and housing businesses and other diversification.

Okay. That's helpful. And then just maybe touching on the second quarter, operating leverage came in a little stronger than, I think, most people had modeled. Some of that obviously is a factor of top line coming in stronger. But even if I look at it on a sequential basis, operating margins or leverage were pretty strong given the step down in revenue just quarter to quarter. So I guess, was there anything in the quarter that was, I guess, a tailwind was outbound freight or there anything- I guess, anything you can just call out, or is that kind of what we can think about for operating leverage going forward?

You're certainly going from the first quarter to the second quarter sequentially. We guided and actuals ended up within that range for the margin change, but I would tell you where we benefit a little bit more that we didn't, I think, guide to was this where our material input costs landed. Certainly, when you're on the tail into this, we suffer on the front side with our contractual arrangements, but then on the backside, there's a period of time where we will benefit. We were benefiting from that in the first quarter and then benefit a little bit more in the second quarter than what we'd originally anticipated, just because steel had continued to come down, aluminum has now continued to come down, freight costs have come down as well. So there's short periods of time where we will benefit from that. I wouldn't necessarily say it's something that it's always to anticipate and carry into the third and fourth quarters, but it's certainly a variable that's there and ever-changing as those markets are pretty volatile.

Okay, great. Thanks.

Our next question comes from Fred Wightman from Wolfe Research. Please go ahead.

Hey guys. Good morning. I was hoping- I don't think you gave sort of a full year industry wholesale number. Do you mind just sort of giving us the latest and greatest on what you're thinking for the full year on the RV side?

Yeah, hey Fred. It's certainly a moving target, but I think if you went back to the last quarter, we were in that 525,000 unit range. I still think that's an opportunity, but I would say more 500 or 525 and we're targeting more of the 500. Like I continued to call out in discussions, you got to really compare and contrast the first half of the year versus the back half of the year. I think wholesale shipments in the first half were 324,000 units. So pretty hefty numbers. So that should give you a good idea of what the trend looks like in the back half before anticipating more of that 500,000 unit number for the year. And retail, you know, 440 or 460, somewhere in there, which is a good, healthy balance, especially considering how light the back half of the year is loaded with wholesale. Like I said, it's going to- retail's already starting to outpace what the wholesale current demand is. So we'll be back in good shape before too long.

Great. And then on the aftermarket business, the sales growth number there slowed sequentially, and I think there was also a comment in the prepared remarks, just talking about margins being a bit below expectations. Can you just walk us through where the disconnect was and how to sort of think about that going forward?

Yeah, so half our business there is RV and marine aftermarket, and that's growing pretty significantly right now, high double digits. I mean, we were 40% year recently. The Kurt business, which is a good chunk, 40% of the other half has grown 50 plus percent over the last two years when we acquired that business. And then there was a real stark pullback here in recent months. So we've seen demand fall off on the automotive side of our aftermarket, but we are still extremely bullish on the RV and marine side. That part of our business will continue to grow nicely with good margins. So that's why the numbers look a little wonky on the aftermarket, because we kind of talk about aftermarket. It's just one big piece of the business, but really we look at it as RV-Marine is half and the automotive aftermarket is the other half.

And Fred, we don't talk about the Kurt business by itself too often, but to really understand it more- I know you understand the automotive market and what disruption they've seen through supply chain issues, et cetera. So you certainly have automobile production quite a bit off from where it was two, three years ago. So that's a contributing factor as well as used vehicle sales as well. A lot of those hitch products will get replaced on used vehicles and there just hasn't been a whole lot of activity there. So the channel's pretty full and the dealers are looking to work off a lot of that inventory that was built up over the last 12 to 18 months.

And we're the market share leader in automotive aftermarket on hitches and towing. So as soon as new vehicles pop back up, we'll see our demand pop up and sales pop up as well.

Perfect. Thanks guys.

Thank you. Our final question comes from Bret Jordan from Jefferies. Your line is now open.

Hey, good morning guys. On the 600 to 700 basis points of sequential margin decline, could you kind of carve out what you see as de-leveraging from lower volume versus the timing of some of the price benefits you've had? I think you mentioned that some of the material costs had come down as you had a higher price deal, but you'd renegotiated as of July to just sort of parse that volume versus pricing and that margin trend.

Yeah. I mean, I probably look at it today going into the third quarter and I'm roughing this out in my head right now, Bret. So I'd say it's 25% price and 75% RV volume. So the RV volume is the key driver to that. We did have a July one price decrease that went into effect that certainly reflected in the numbers that you're seeing for the report, the July number we reported, being only up 5% year over year. So I think we're back to a more normalized period right now. We benefit from these plus 50% type numbers for a while now. And we're back to more normalized year over year. So expecting that July run rate to be consistent or a good proxy for the third quarter 5% to 7%. And that's got the price adjustment piece baked into it. And from a margin perspective, I'd say, to my pony earlier, it's probably more driven by just the absorption of the fixed costs on the RV decline.

Okay, great. And then a question I think earlier there was talk of on the M&A outlook, and I guess at 1.3 times levered on a trailing 12 month, and obviously there might be some decline in the forward 12 months maybe gets you closer to your actual leverage target of 1.5. Do you think that you would be less active in the near term? Is it sort of to look at the cycle or are you thinking that you'd be looking at M&A regardless of where we go in the next six or 12 months, because it's just stable enough long term?

Yeah. Your point is- you're spot on. Leverage is lower today. We're benefiting from the high- record levels of EBITDA that we've turned in. So I would expect in the back half of the year for that leverage ratio to start to trend a little bit back up, but likely end up right around where our strategic target is at 1.5 times. So I think we'll be in a comfortable position to execute on what we need to from a strategic perspective. If the right opportunities are there, I think regardless of what's going on, I think that we have the ability to execute an M&A where we need to. I don't think we're looking to explode the balance sheet again. So we're certainly very mindful of that, but it's certainly an option for us.

Yeah. We've always said we're comfortable with little north of two times. So I would tell you that you look at our history of 70-some acquisitions in the last 20 years, our sweet spot is 20 million to 50 million. We've made a lot of great acquisitions in that neighborhood price range. There will be opportunities, and we're in a great position to take advantage of those opportunities. So, like Brian said, we're not going to go out and likely do a $300 million acquisition, but there are a lot of smaller acquisitions that we can grow and develop and plug into our distribution network of customers and our markets. We're hopeful that we get to look at those opportunities in the coming months.

The last point I would add was, regarding our own Lippert inventories, we certainly have talked in the past. We've strategically increased those to be able to support the record levels of volume. I still think there's more than a couple hundred million dollars that we can pull out of inventory so that additional cash will certainly help from that perspective as well.

Great. Thank you.

Thank you. That concludes today's Q and A session. I'll now refer you back to Jason Lippert for further remarks.

I just want to call back to a comment I made in my initial remarks, which is these little down spouts on the RV business, they never last long and remind everybody that 80% of Americans through a lot of surveys that they're going to take road trips this summer, 65 million people said that they're going to camp with their family this summer. The RV industry continues to grow and there's lots of opportunity for us and our peers in this business. So we look forward to talking to you on the next quarter's call. Thank you. Bye.

That concludes today's call. You may now disconnect your line.