Good morning or good afternoon, all, and welcome to the LCI Industries Q2 2023 Earnings Call. My name is Adam, and I'll be your operator for today. [Operator Instructions]. I will now hand the floor over to Lillian Etzkorn to begin. So Lillian, please go ahead when you are ready.

Good morning, everyone, and welcome to the LCI Industries' Second Quarter 2023 Conference Call. I am joined on the call today by Jason Lippert, President and CEO; and Kip Emenhiser, VP of Finance and Treasurer. We will discuss the results for the quarter in just a minute. 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 that the forward-looking statements are made, except as required by law. With that, I would like to turn the call over to Jason.

Thank you, Lillian. Good morning, everyone, and welcome to LCI's Second Quarter 2023 Earnings Call. We delivered solid results in the second quarter, highlighted by continued content growth and sequential margin expansion as we navigate a challenging RV operating environment. Revenues were $1 billion, down 34% compared to the prior year, but up $41 million sequentially. Net sales from acquisitions completed in '23 and '22 contributed approximately $17 million for the quarter. While revenues are down compared to the record highs we reached in 2022, our results are still $386 million above the second quarter of 2019. We continue to benefit from strength in our aftermarket, international, marine transportation and housing businesses, which made up a combined 64% of overall revenue this quarter, partially offsetting the impact from the significant year-over-year drop in RV wholesale unit shipments. The North American RV being only 36% of our revenues this quarter, our diversified revenues are greatly helping make a difference in our results during the challenging RV environment. Coupled with our steadfast commitment to driving long-term operational improvements throughout our business while continuing to move forward with our diversification strategy, we believe we will continue our trajectory of sustained profitable growth. Pursuing and capitalizing on operational efficiencies remains a top priority. With the flexibility we've added to our manufacturing footprint, we're able to quickly adjust capacity to match changes in demand while supporting areas in our business that are running strong. Our executive and plant leadership teams have been hard at work driving new cost savings initiatives, driving new sourcing initiatives and implementing hundreds of continuous improvement projects around the business to diversify and improve our overall cost structure. We've been successful in rightsizing our overall cost structure, reducing general and administrative expenses while also significantly bringing down inventories to drive enhanced…

Thank you, Jason. Our consolidated net sales for the quarter decreased 34% to $1 billion compared to the prior year period, primarily impacted by the reduction in North American RV production and decreased selling prices, which are indexed to select commodities, partially offset by acquisitions. For the month of July, sales were down 20% to $295 million versus July of '22, primarily due to the decline in wholesale RV shipments. And as Jason noted, we are continuing to see the benefit from operational improvements that we have made to our business while also capturing continued tailwinds from our long-term diversification strategy. While sales in North American RV OEMs declined 57%, sales in our adjacent markets, aftermarket and international businesses only declined 4%. This significantly reduced the impact of the year-over-year decline in the RV industry production. The decline in Q2 2023 sales to North American RV OEM was again driven by a decrease in wholesale shipments, partially offset by content expansion in towables and motorhomes. Content per towable RV unit increased 2% to $5,487 while content per motorized units increased 6% to $3,750 compared to the prior year period. Towable content growth can be attributed to organic market share gains of 7% while acquired revenues contributed 5% of the year-over-year growth, partially offset by the sales price reductions contractually tied to commodity prices. Sales to the adjacent industries declined 6% versus the prior year. Sales were positively impacted by acquisitions and pricing adjustments to our transportation product and were offset by lower sales in North American marine OEM and manufactured housing. Marine content per power boat decreased 17% to $1,457, primarily due to price decreases associated with year-over-year declining input costs and changes in product mix. Q2 2023 sales to the aftermarket decreased 2% compared to the prior year period,…

[Operator Instructions]. Our first question today comes from Kathryn Thompson from Thompson Research Group.

This is really more about the balance of going into the Elkhart open house and where inventories in the field right now. Have you seen -- we've sort of seen this early this year, but are you seeing dealers scratch out orders to a degree before the open house and are maybe running a little bit leaner in hopes of waiting placing orders for new units? Or do you feel that inventory right now really reflects current demand? And just really kind of understanding how you think about inventories going into that show.

Thanks, Kathryn. I think that it's more the latter of what you just said. I think that, obviously, dealers can -- they get to a point where their inventories are so low where they need to order and need to stay stocked up. Dealer inventories have obviously decelerated the destocking, but still -- they're still destocked. I mean the way we've looked at it is from Q1 2020 when we felt inventories were fairly normalized, we're about 85,000 used, almost 100,000 used less today in this quarter than what we were back then. So it feels -- and again, I'm just giving you our feeling, yards are empty here. The shipyards at the OEMs are pretty empty. You go back just 12 months ago, they were chock-full. But the orders have picked up. It feels like 10% or so for August or September, like they need units because the last handful of months have obviously been -- we've been pretty starved for orders. So it feels like they need some of those units to get through open house, and then we're anticipating continue to stock up as Camping World said in their recent release that they were going to continue to stack through the next 6 months and gain inventory. So that's what it feels like.

Okay. And that ties into cash generation. You previously said that inventory -- obviously, inventory and cash go hand-in-hand, especially if you have inventory buildup. But with lower inventory and the debt reduction are key bogeys that you're focused on. From here, what is your outlook on inventory to cash conversion and uses?

Kathryn, it's Lillian. So as you noted, we've done some significant reductions in our inventory. Year-to-date, we've reduced it by about $200 million. We are going to look to continue to reduce inventory through the second half of the year, probably not at that type of pace, but we are going to still continue to rightsize our inventories as we move forward. We've had very strong cash generation in the first half of the year. Expect that we're going to continue to be generating cash as we move into this next half. So the company has been positioned very solidly and very focused on cash generation, and that's going to be something that we will continue to be working towards the balance of the year.

And it feels like with -- if volume stays up as we kind of see the trend for August or September, what we have immediate visibility for, obviously, we can reduce inventory to quicker clip than what we have in the last couple of months. But July was obviously a little slow. Again, if August, September, rest of the year pick up, we can move inventory out and generate more cash. So...

Okay. And then final question, can you touch on any of your updated automation efforts? Just where you are...

Yes.

And given low production rates, seeing this as an opportunity to speed up some of those initiatives.

Yes. We've obviously squeezed CapEx this year for obvious reasons, but we had quite a few projects flowing into the year that were carryovers from 2022. Probably most notable is our glass automation that we're doing for windshields, which will be a new product line for us, for towable and motorized RVs. Especially in the towables, the windshields have really ticked up over the last few years. You see probably about 30% of the towables now with windshields on the front, where they didn't have anything in prior years. So we've got automation for those two lines. I'd say we've probably got 40-or-so million of automation and one building for glass now. Half of that is online. The other half is coming online over the next 6 to 8 months. So -- and we've got other projects that we've got in the back burner warming up for '24 as soon as cash improves.

The next question comes from Frederick Wightman from Wolfe Research.

I just wanted to follow up on the comment about 3Q being similar to 2Q. I wasn't sure if that was a comment in terms of total dollar performance, so sales, EBITDA earnings. Was that a comment on year-over-year performance? What exactly did you mean by that?

Fred, it's Lillian. Yes, what I was referencing with that, really, is comparability to the second quarter of this year's performance, both from the top line perspective and the overall earnings for the business.

Okay. Perfect. And then did you guys -- I apologize if I missed it. Did you give an updated retail number for '23?

I don't know if we did or not, but we feel the retail for this year is going to be somewhere in the 375. And we feel 375 to 400 for '24, that's kind of what we're throwing out. I think that's in line with some of the other public companies that have stated their forecasts.

Okay. Great. And then just lastly, I think last quarter, you said, from an inventory mix perspective, model year '22 was like 35%. Do you have an updated number for that sort of where it stands today?

Can you repeat that again, Fred?

The -- just the mix of model year '22, because I think, last quarter, you said it was around 35%?

Yes. Yes. So it feels, in doing all the dealer touches and talking to all the OEMs, that it's around -- it's nearing the 10% mark. Some dealers have 15% that we've touched and others are in the 5% -- 3% to 5% range. So it's definitely declining pretty good. And with respect to the performance, I just want to be clear that while we're challenged in the times recently with lower volumes, we feel very confident. As we've stated in past years that this is a double-digit OI business. And we will get back there, but there's some choppiness in just volume and getting through some of our inventory challenges and things like that over the next couple of quarters. Just wanted to be clear about that.

The next question comes from Mike Swartz from Truist Securities.

Just maybe for Lillian, a question. I think previously, you said you anticipated mid- to high single-digit operating margins for the full year. I think you're implying kind of mid-single digit again for the third quarter. So do you have an update there? It seems like it would be probably at the lower end of the range, but I don't want to put words in your mouth.

Yes. No, I think that's probably fair. So as we're seeing how the cadence for volumes coming through and as we're seeing the RV business cadencing and what-have-you through the balance of the year, it probably is more at that mid-single digit for this year. And as Jason just commented just immediately previously, we do still see this business on a longer-term basis being a double-digit OI business. It's just taking a little bit of time as we get into more normalized operating patterns for the industry to get there.

Got you. Okay. And then just a point of clarification. I think you said your kind of visibility into August and September RV production looks better than past months. I'm guessing you're talking about maybe June and July. Was that on a year-over-year basis? Or was that absolute production levels? I just want to clarify that.

Well, I think one of the things that we want, we want a lot of the investors understand specifically is the ramp down that we've seen over the last -- you go back to April of 2022, just over a year ago, we were on a run rate of 725,000 units as an industry. That was what -- if you annualize the monthly production in April, that's what we were kind of shooting toward. And if you look to 1 year later in April '23, we're running at a $260,000 run rate. So the deceleration of the business is a lot greater than what it might have looked at from the outside saying, "Hey, we finished '22 at a 500,000-unit wholesale and '23 looking at a 300,000-plus unit wholesale." So the difference is a lot greater. But yes, I think that what we have visibility on today, August and September being up, we should get into better comps, obviously, significantly better comps as we get closer to first quarter. But right now, all we have visibility on is August and September. And it feels like 10% over what we saw in May, June and July, which had several weeks of downtime in all three of those months, more than normal for those months. So I hope that answers your question. If not, we can keep trying.

Okay. No, that's helpful.

Okay.

The next question is from Bret Jordan from Jefferies.

On the prior topic, I guess, you'd said Q3 is similar to Q2, but it sounds like most of Q3 is going to be running better than Q2. Or is that just better year-over-year? I'm trying to reconcile the August and September being up versus the second quarter.

Yes. I think we've got some puts and takes with our diversified businesses that might be where some of the clarity needs to be. But if you look at August in Europe, they take the entire month down, where, if you look at Q2, we had a pretty robust quarter for Europe. So you got to look at all the different industries and segments independently. But for the RV segment, I think, is what we're speaking to, as we see orders at least for August and September, not knowing what October is going to be yet. And still, there's -- we can't be certain that they don't come back after open house or even in the next few weeks and say, "Hey, we need to take a week down in September." So just telling you what we see today.

Okay. And then what's your outlook...

Yes. Maybe building on that a little...

Sorry, go ahead.

Bret, just to expand a little bit on that from a sequential perspective as we look at some of the other industries, I think it is important to note that Europe, generally speaking, is lighter from a seasonality perspective for Q3 because of the shutdowns that we have in the various countries. The other area that we're seeing softness, as expected, is in the marine side of the business, but that was down a little bit sequentially in the second quarter. And as we progress through into the third quarter, that's also going to be down again sequentially. So again, to the point that everything kind of the puts and takes, we are seeing strength in certain areas. Clearly, some of these adjacent markets are being puts and takes with the RV.

Okay. And what's the second half impact from commodities, I mean, what you can see in price deals that you have now?

Yes. We've got -- I mean, again, lots of positives and negatives there. We have some commodity pricing going down. We have some that are going up. We have commodity indexes, where some of our pricing to customers is going up, some of it is going down. So again, overall, I think that it's a pretty net neutral result. We'll know more about Q4 next quarter, but that's kind of where we're at. Makes sense?

Okay. And then one last question. The outlook on sort of content as the OEs, the manufacturers are rolling out the '24s, is there a bias to sort of try to get consumer prices lower, on average, moving content down? Or is it sort of trying to make them more appealing by moving content up? Is there any shift there?

Yes. I mean, definitely, the shift is to -- as you've heard maybe from some of the other public calls, there's a real push to get pricing down as pricing crept up over the last couple of years. And some of that's coming through decontenting, some of that's coming through just pure discounting. When I look at our products, I've said this in the past, but I think it's helpful to repeat it that when a unit's taken a slide out or axles or a chassis, there's not really much that changes from a content standpoint on that because they need those products, windows, awnings. You can't really build units without those. They're decontenting largely on product -- a lot of products that we don't sell. So when I think about our products and decontenting, the only time we get a little pinched is when the market tends to go from high-end units to entry-level units or bigger travel trailers to smaller travel trailers and the market shifts that way, which we're seeing a little bit of, especially when you look at big Class A motorhomes and diesel motorhomes. Those are certainly taking the biggest hit, but again, it's a small overall part of the entire market. So I hope that's helpful.

The next question comes from Scott Stember from ROTH MKM.

Can we get -- go back to the content conversation. It sounds like you won't be as impacted by decontenting. So looking out to 2024, factoring everything in, where do you see organic content growing? I know you've been in the 3% to 5% range as a goal, right? But do we still stay there?

Yes. I think if you peel out inflation and those pressures, certainly, we -- our goal is to continue to add bells and whistles and features to existing products and then continue to come out with new product lineups. And we've been doing that for the better part of 20 years and been pretty successful. I'd also add that we haven't lost market share during this time. So it's another strength we've got as we tend to continue to keep our market share pretty level or grow it over time. So given all that, I think that, that's still a fairly safe assumption, again, netting out any kind of inflationary issues and things like that.

All right. And then looking at the marine side, getting a little bit softer than the previous quarters, but could you maybe just flesh that out pontoon versus more expensive types of boats?

Yes. I think that obviously -- we sell a lot into the pontoons, but we sell a lot of windshields to all the bigger boats as well. So we have some decent content there. But I think because, over the last couple of years, they just -- as you all know, they haven't ramped -- the marine business hasn't ramped up as high and as fast and to the levels that RV did compared to where they were. We feel that this cycle is going to be relatively short-lived. Most of the OEM customers we talk to are talking first quarter to get some of the inventory flushed out. But I don't feel that the dealers have the same type of problem or the size of the problem with marine inventory that the RV dealers had with the RV inventory, especially on the towable side.

All right. And then last question on the aftermarket. You talked about your customer call centers having tremendous increases of inbound calls. Can you maybe talk about where is that coming from? Is that related to repair work, break/fix or -- and what are you hearing from dealers as far as warranty and things like that?

Yes. Yes, sure. That's a great question. Yes, 180,000 calls and communications in each of the last 2 months. So if you look over the last 10 or so years that we've really had our call center running and running full tilt, and we really rarely had a quarter that had less service impact and calls in the prior quarter. So we put more RVs out there, we're going to get more calls. We put more content out there, we're going to get more calls. I think the other thing that leads to more calls and opportunities is the fact that I think we're servicing better than anybody else in the industry. So we tend to get calls when maybe other people's lines are busy. We're monitoring every single call, how quickly we answer, how much we're putting toward sales on each of those calls, their sales efforts, obviously, in each of those calls, even if it comes in for repair. But to answer to your question on repairs, it's -- my guess would be 65%, 70% of the calls come in for service repairs, warranty, things like that. The rest are, "Hey, I'm thinking about getting this or that product from my RV, where do I get it? How do I get it? How do I get it installed?" And then we've got service to handle all of those things. So in our best estimation, the calls into our service center are going to continue to grow over time, especially as we put more RVs and more content out there, which is good for our aftermarket and one of the reasons why it's growing like it has.

[Operator Instructions]. The next question is from Daniel Moore from CJS Securities.

Covered a lot of ground already, but maybe just one or two quick ones. The decontenting discussion, maybe if we take that over to marine, content was down, I think I heard 17%. What was the split between price and mix? And do you anticipate mix being maybe a little bit more of a headwind, at least, near term if customers are looking for kind of lower price point, lower amenity models?

Well, they're looking for some of those exact numbers. I'll say a couple of things. One is we just started measuring marine content within the last year. So some of those numbers might just be fuzzy because we're starting -- just starting to measure it. Certainly, some of that's inflationary because we have given some decreases. But I would tell you that just when we look at the pontoon market and Forest River had their dealer show just the other day, I mean, the pontoon boats feel like they're as expensive as they've ever been in terms of what dealers are looking to buy. You don't see very many of the entry-level $30,000 pontoons anymore like it used to. I mean there's a lot of pontoons that are in the $70,000 to $100,000 range, lots of bells and whistles and features. And if you look at electric Biminis, you look at some of the power arches, obviously, they're putting more windshields on pontoons today, which they didn't do in the past. And seating packages that we do a lot of are getting more expenses. So I'd say that that's probably the best color we can give you there, and maybe the color will become more clear in future quarters as we get more time under our belt reporting the content.

Fair enough. That's helpful. Maybe 1A and 1B on capital allocation, CapEx, as you mentioned, tightening the belt a little bit. Are there projects that you deem as less necessary? Or maybe just sort of pushing things out to fiscal '24 when things get a little bit clearer?

Yes. I'd say that we're just pushing them out. I mean all the projects that we've got on the block right now we feel are important. We wouldn't put them on. We'd deprioritize them. Some of those projects are automation projects. So those usually take priority because we're improving our labor and quality and safety, all while putting these CapEx in place. So when we look at last year at $130-ish million in CapEx, and this year at $65 million, we're just trying to put the most important projects. $65-ish million in CapEx this year is what we look to be at. We're just trying to prioritize the most important ones we can do in that range.

Makes sense. And lastly, I appreciate the color, Lillian. You mentioned your leverage target 1.5x again. Would you want to get back down 90% to 100% all the way there or all the way there before you kind of start looking at M&A again? Or if you made meaningful progress, would you start to consider smaller tuck-ins along the way?

Yes. No, I think it's -- I think what I would want to see is that we're making meaningful progress. We're always going to be looking for opportunities from an M&A perspective, to the extent that it makes sense for the business and it's strategically aligned with our objectives. So if the right opportunity came forward and we were making meaningful progress, then I'd be comfortable doing that. I'd say, for right now, as we've stated, really focused on making sure that the balance sheet is very strong in its fortress, basically, but always willing to entertain opportunities as long as we're making that progress.

The next question comes from Craig Kennison from Baird.

It's been a good call. I had -- I think I have a decent handle on stocking trends in the RV channel and then in the marine channel. Wondering if there's any color you can shed or any light you can shed on any stocking trends in your aftermarket channel?

Yes. It's really difficult, Craig, to answer that question in a way that's going to provide you any kind of better color than maybe what you already have. But I would say that the trends typically follow the retail unit trend. So when the dealers are challenged a little bit, they're typically holding back on those inventories. But there's also the factor that you have with -- when retail slows down and people are moving more used product, they're tending to use a little bit more of aftermarket parts to upgrade and things like that, and obviously, we sell a lot of those. So -- all I can tell you is that our -- if you look at our quarter, we're 2% down, which is a lot better than obviously what the market is doing. But I think a lot of that, as we continue to just put more content into the channels, the aftermarket channels, our automotive side is a factor to that. That's been bumping up a little bit recently. It was a little bit challenged in past quarters. And then you've got the marine channel as well. So you've kind of got three channels in aftermarket when you look at that number versus just our RV OEM, which is strictly RV. Is that helpful?

It is. And then just an unrelated question, hopped on a little late, but did you offer any commentary on your appetite for acquisitions in this environment?

Yes. I think we're obviously staying super diligent on the capital expenditure side. And we're just -- we're looking at companies. We've got a pipeline. We're pushing some of those out right now for obvious reasons. But I don't anticipate -- when we get back to 2024, I mean, M&A is still an important part of our growth strategy. And we're still going to continue to look at acquisitions as actively as we have in the past. It might look a little bit different as we look more to marine and aftermarket and a little bit less in RV, but it just depends on what presents itself, but we're going to stay active. More tuck-ins likely that are smaller, like we've announced this year. We announced two smaller deals. So if those types of things come along, obviously, those would be easier to consider.

The next question is from Brandon Rollé from D.A. Davidson. Brandon Rollé: I just had a quick one on the labor situation in Elkhart. Could you comment on the availability and maybe competition for labor as the industry starts to ramp up production?

Yes, sure. And I'll start by saying it's a little bit of a mystery to me. We are having, obviously, one of the biggest downturns in RV the industry has ever seen. This community is pretty heavily reliant on that industry and different than '08, '09. I mean -- and I've talked to a lot of people recently. I haven't heard a lot of people screaming and complaining that they can't find work. So there's a lot of people, obviously, that have done really well. The RV workforce, probably, they are comfortable staying for a period at this kind of 4-day work week level. But unlike the last big dip we had, I just -- we're just not hearing about a lot of people having trouble finding jobs. I think the other industries in the area are finally getting some of the labor that they need and a lot of those businesses are doing okay. As you know, this industry or the economy in general is still growing a little bit. There's -- the RV industry is struggling right now and has for the last 12 months, but it's good to know that people are -- seem to be sticking around. So long answer to the question, but hopefully, that's helpful.

We have no further questions, so I'll turn the call back to Jason for concluding remarks.

Yes. I just want to thank everybody for joining the call. Obviously, it's been a year of dealing with some of the RV challenges, but it feels like we're starting to see some of the light at the end of the tunnel. And we look forward to updating you on that over the next couple of quarters. So thanks for joining the call.

This concludes today's call. Thank you very much for your attendance. You may now disconnect your lines.