Good morning ladies and gentlemen and welcome to the Patrick Industries Inc. Fourth Quarter 2016 Earnings Conference Call. My name is Silvia and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Following the prepared remarks we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Julie Ann Kotowski from Investor Relations. Ms. Kotowski, you may begin.

Good morning everyone and welcome to Patrick Industries' first quarter 2016 conference call. I am joined on the call today by Todd Cleveland, CEO; Andy Nemeth, President; and Josh Boone, CFO. Certain statements made in today's conference call regarding Patrick Industries and its operations may be considered forward-looking statements under the security's laws. There are a number of factors, many of which that are beyond the company's control, which could cause actual results and events to differ materially from those described in the forward-looking statement. These factors are identified in our press releases, our Form 10-K for the year ended 2015, and in our other filings with the Securities and Exchange Commission. We undertake no obligations to update these statements to reflect circumstances or events that occur after the date the forward-looking statements are made, except as required by law. I would now like to turn the call over to Todd Cleveland.

Thank you, Julie Ann, and thank you all for joining us on the call today. This morning we would like to discuss the company's fourth quarter and full year 2016 results and provide an update on the major markets we serve. I will then conclude by providing an update on our overall business outlook. Our revenues for the fourth quarter and full year 2016 were in line with the continued strong demand patterns of the RV industry and our operating results were solid as we reported increased profitability and cash flows. Our revenues for 2016 exceeded the $1.2 billion mark, a year-over-year increase of 33% and our net income per diluted share was $3.64, representing a 34% increase from 2015. These improvements on top and bottom-line were fueled by the acquisition growth, including the successful integration of eight companies acquired in 2016, strong industry performance in all three of the end markets, increased penetration into the industries we serve, focus by our team on ensuring that our customers are always a top priority, and are provided with the highest quality service. Additionally, we focused heavily in the third and fourth quarters on adding capacity to support our OEM partners at the expense of certain short-term inefficiencies as they continue to position themselves for expected growing consumer demand. We invested over $15 million on strategic capital expenditures including $9 million in the third and fourth quarters on facility and equipment upgrades as well as expansions in geographic regions of the country to be able to continue to emphasize our value proposition for our customer base. I'm extremely proud of our team members who worked tirelessly and with a tremendous amount of passion, energy, and drive to support each other in the aligned effort -- with expectations at the highest level. Now, I'll turn the call over to Andy and further review the markets and performance.

Thank you, Todd. Our fourth quarter results are a reflection of incredibly strong RV seasonal demand patterns, including a post-election surge in consumer confidence and wholesale shipment levels, and our continued 2016 efforts to strategically invest in capacity, talent planning and retention, and certain overhead to support the growing demand and expectations in 2017 in all three primary markets we serve. The RV industry experienced its fourth consecutive quarter of double-digit growth and its strongest on record with November and December shipments increasing 27% and 18% respectively over 2015 and highest level of annual shipments in more than 40 years. Additionally, the industry saw its seventh consecutive year of growth in wholesale and retail units shipped and sold with continued optimism, positive retail trends, and no signs of slowing down as we head into 2017 where initial reports indicated that January dealer shows have seen strong attendance levels. The MH industry also continues to show signs of an organic tailwind and was able to provide support and look to as a resource for those displaced by the effects of Hurricane Matthew and the flooding in Louisiana in 2016. Wholesale shipments finished 2016 up 15% compared to prior year, including the strongest December since 2005 and its best fourth quarter since 2007. Our industrial revenues continue to improve driven by non-residential construction spending as well as increasing 40% in the quarter and 44% for the full year despite a choppy residential housing market. Focusing on more specific market statistics, indicators and trends, the RV sector of our business represents our primary market, comprising 75% of our annual sales. Our RV sales grew 29% in the quarter, off of a 19% increase in industry-wide wholesale shipments. On an annual basis, our RV sales were up 32%, with industry shipments 15% higher than…

Thanks Andy. Our net sales for the fourth quarter increased $75 million or 30% over the prior year period to $324 million, continuing of double-digit revenue growth in every quarter this year and outpacing our respective markets. On an annual basis, our sales exceeded $1.2 billion, increasing by 33% compared to 2015 or $302 million. Revenue growth was driven by acquisition-related sales, including $92 million contribution from 2016 acquisitions for the full year, geographic and product expansion efforts, and as well as growth in our three markets. Our RV revenues were up 29% in the fourth quarter, reflecting robust wholesale shipments of 19%. For the full year, RV sales were up 32% on a shipment increase of 15% and our RV content per unit increased 15% from $1,845 per unit in 2015 to $2,126 per unit in 2016. Our MH revenues increased 28% for the quarter, on unit shipment improvements of 15%. On an annual basis, our MH sales were up 26%, with unit shipments improving by 15%. And our MH content per unit increased 8% from $1,825 per unit in 2015 to $1,966 per unit in 2016. And finally, our industrial revenues were up 40% in the quarter and 44% annually. While the residential housing market has grown at a slower pace, up a modest 5% for 2016, we are continuing to expand into new commercial markets introducing new product lines via acquisitions and new product development and penetrating adjacent markets and new geographic regions. The acquisitions we completed in 2016 and 2015 coupled with our continued focus on leveraging growth synergies across the organization, expanding our product portfolio, and entering new markets and geographic regions have enabled us to continue to outperform our market and drive content growth. Our gross margin in the fourth quarter was 16.4%, down…

Thanks Josh. As we've discussed, 2016 was a very successful year for the company. Overall, we're very pleased with our operating and financial achievements in 2016 and remain optimistic about our continued growth in 2017 and our emphasis on consistently improving our performance and align with our core values. We plan to continue our focus on growth and expansion in all three of the end markets we serve and to aggressively gain market share and increase our presence to grow our business by capitalizing on our core strengths and increasing customer awareness for the breadth of the products we provide. The acquisitions we completed over the last few years, coupled with our efforts to expand into prime geographic regions and our initiatives to increase efficiency and capacity are expected to increasingly contribute to our earnings on a go-forward basis. In 2017, we will continue to evaluate acquisitions that are in line with our strategic growth plan and expect to further target markets in line with our current portfolio to allow us to continue to cultivate the Patrick brand and our product offerings. It goes without saying that we could not have achieved our many successes over the years if it weren't for the ongoing support we received from all of our business partners, including our customers, suppliers, banking partners, Board of Directors, and shareholders who are privileged to serve. In addition, it is of the extreme loyalty, dedication, strength, and abilities of our talented 4,800-plus team members that allows us to continue to execute on a strategic plan. As this partnership with all of you, it has afforded us the opportunity to always serve our customers at the highest level and provide a quality service and shareholder value for the years to come. This is the end of our prepared remarks. Thank you for your time today. We're now ready to take questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Daniel Moore from CJS Securities.

Good morning.

Good morning Dan.

Good morning Dan.

I wanted to start just focus a little bit on gross margins, Josh as you mentioned at in the prepared remarks, a couple -- pointed out a couple of things kind of the unseasonably strong shipments healthcare cost. Is it possible to quantify in rough terms the impact of each of those on the gross margins in Q4? And more broadly where we stand from here? What are your expectations for your gross margins being up, down in 2017?

Yes, this is Josh, Dan. So, regarding the health insurance cost, it ran a little high for the year and in Q4, we really felt the effects of that, impacted EPS to the tune of $0.04 in the quarter and about 30 basis points of operating margins in the quarter. As far as the labor efficiencies, we talked about that in late Q3, deploying our strategic CapEx that was in full effect in the quarter. And for the quarter, we felt effects of that still with the strong seasonal shipments to the tune of about 40 basis points of operating margins or $0.05 of EPS. Going forward, for 2017, we do expect gross margin expansion and operating margin expansion and we expect to feel the effects and alleviate those capacity strains and labor inefficiencies that we talked about in our prepared remarks.

Got it. Very helpful. One of the other things you talked about, theme for a while has been de-contenting, fifth wheel seem to be making a bit of a comeback. What are your expectations for content growth in 2017 on an organic basis?

So, I'll start first here on that. So, for the quarter, we did feel the effects of the fifth wheels from a content standpoint. Our organic growth was 16% for the quarter net of acquisitions and if we net-out industry growth, we're plus 2% to 3% for the quarter. So, we really gained traction in the back half the year. If you recall, in the first half the year, we were down 7% to 8% net of industry growth from a constant standpoint and we significantly gain ground here in the last six months of the year to the tune of plus 2% to 3% and really feeling effects of the fifth wheels from that standpoint.

Very good. And then lastly for now at least the tax rate, you called out in detail that the changes on a backward looking basis for 2017, what should we be thinking about tax rate in light of those changes?

I would expect 2017 to be about 36% to 36.5% effective tax rate.

Got it. I'll jump back in queue. Thank you.

Our next question comes from Scott Stember from C.L. King.

Good morning guys.

Good morning Scott.

Good morning Scott.

Could you talk about the acquisition pipeline as we stand right now, obviously, that's been even nice growth in the past, maybe just talk about the specific industries that you're looking at? Are we still looking at some adjacent markets such as boating and other -- what Marine market or is the focus still on RV?

Scott, this is Andy. The acquisition pipeline is still very strong. We look at opportunities in really all three market sectors and adjacent markets. So, certainly in the RV space, we think there's plenty of opportunity and as we have opportunities in the pipeline today, adjacent markets, Marine, certainly with our acquisition of BH in August was a great platform for us to be able to continue to execute in that space. We developed and partnered with some -- the guys at BH who have phenomenal relationships in that space. So, I think there's a lot of opportunity for us to continue to drive value. So, we see that as an opportunity. The industrial markets as well have some opportunity. But today, overall, the pipeline, we would consider to be very strong.

Okay. And you guys gave [ph] number of $21 million of the acquisition contribution, was that for the full company for the quarter, $21 million?

No. Scott, this is Josh. We talked about $92 million of 2016 contribution acquisitions in revenue for the year.

Do you have a number for the fourth quarter?

Yes, it was $37 million for 2016 acquisitions. Sigma Wire and KRA, Scott, were $21 million annualized.

Okay. Got it. And maybe just going back to margins, maybe just talk about on the labor front, a couple years ago we saw a [Indiscernible] of qualified workers and across the industry we saw -- everybody had some issues with training people, maybe just talk about how this stacks out versus the last time? And you talked about I guess some of the sweetening pay packages and benefits, maybe some of the things that you guys are doing along those lines? Thanks.

Sure. Scott, this is Andy again. As it relates to the capacity and labor, we talked in our last earnings call related to adding capacity to be able to support increasing demand on the OEM side and we did that. We focused heavily on that in Q3 and in Q4 from an equipment perspective, from a facility perspective. On the labor side, we really started to dive into that in Q3. I think when we talked earlier on the other call, with shipments in August and September that were up 32% and 21% respectively. Those are very, very strong month as we kind of headed into the show season. Then we saw little bit of a low in October where shipments were up 15%. So, we kind of caught our breath as it relates to labor. But we're still implementing some labor efficiency and talent planning initiatives. And then November and December with the strength that we saw there with shipments up 27% and 18%, we were in the process of implementing those talent planning and retention initiatives, which included some wage increases, which included a lot of work inside the plants to make sure that we were talking to our employees and making sure that we were taking care of them and making sure that we were understanding the working environment, so that we can plan for the additional capacity expansion going into 2017. So, a lot of moving parts in Q3 and then in Q4, related to labor that we've been addressing over the course of the last -- really quarter and quarter and a half.

And Scott this is Todd. I just want echo kind of what Andy said related to labor. I mean I think of -- when I look over the last couple of years, to me this is one of the most exciting opportunities we have to really streamline things and improve things. So, the things that we did from an employee retention and kind of initiatives that we put in place starting in the third quarter, I really feel like we're starting to take hold and have traction and really looking forward to seeing the team continue that through 2017.

Got it. And just last question. I know you guys don't give guidance as far as timing within quarters and so forth, but I'm assuming a more normalized production level going forward and that shipments are more modest, when would you expect to start to see the benefits from these labors that you're putting in place right now from a margin and EPS standpoint?

Scott, we'll expect to see labor efficiencies come through above the line in the gross profit line.

No, I was referring to when -- the timing, are we talking midyear?

When?

Yes, when. So, just give a sense of the model appropriately for the next few quarters?

Sure. So, we expect to start seeing this continue to improve throughout the course of the first half of the year. So, I would say Q1 and Q2 both will continually see improvement on that side of the business.

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

Thank you, Scott.

Our next question comes from Stephen O'Hara, Sidoti & Company.

Hi, good morning.

Good morning.

Hi Steve.

Can you just talk about the -- and I know you mentioned you had added capacity, but I mean warehouse and delivery was up significantly, was that part of the capacity and maybe what else is driving that? Was that delivery costs or anything like that that creeped up?

Yes, Steve this is Josh. Warehouse and delivery was up a little bit year-over-year, but it's in line with our trended rate of warehouse and delivery kind of with the mix of our businesses and acquisitions. We expect it to kind of stay on a constant basis from there, but really no significant moving parts from there from the warehouse and delivery, more just kind of acquisition-related and it's been within our trend rates for the last two quarters.

Okay. And then just going back to the labor. Could you just maybe talk about is it higher -- you're trying to get the turnover lower or just kind of -- it's just getting tougher and tougher to find labor? And maybe what -- how you've done on improving your turnover rates and maybe where you think you can get to on that?

Steve this is Andy. It's absolutely in the turnover area that we're focused on primarily. We want to make sure that we're able to retain high quality employees and so that's absolutely been the focus.

Okay. And -- so I mean assuming there's no significant drop-off in the operating cash flow, it would seem like you'd have a decent amount of free cash flow. Can you just talk about your maybe desired uses for that in the 2017 or maybe just conceptually how you think about it? Thank you.

Sure. This is Andy again. We stay disciplined to our capital allocation strategy to utilize our -- both our cash flow and our leverage position to continue to grow the business and so we want to remain flexible and opportunistic in all components of that particular strategy whether it be acquisition, whether it be capital expenditures, expansions, stock repurchases. So, we're focused on making sure that we can stay opportunistic and in all those initiatives and maintain enough flexibility with our cash flows to be able to do each and every one of those at the same time. So, we're very focused on -- again, I would say growing our topline, continuing to drive synergy value between our businesses and cross-selling opportunities and as well investing in the business to make sure that we're keeping up on the capacity perspective. So, as we've talked about we're committed to investing in capacity improvements to be able to support the growth that we're expecting the industry and so that's taken -- I'd say that's raised up on the priority list, but certainly today, I'd tell you that as we look at capital allocation, acquisitions, stock repurchases, CapEx, all are great opportunities for us and then the expansion efforts as well are tremendous opportunity that we continue to focus on, especially given our brand portfolio.

Okay. All right. Thank you very much.

[Operator Instructions] And we have Daniel Moore from CJS Securities.

Thank you again. Just wanted -- I was writing really fast, so I wanted to make sure I heard a couple things. Cash flow from operations, $97 million for the year, is that correct?

That's correct Dan.

So, you generated well north of $5 a share in free cash. Was there significant benefit, we'll see it in K, but significant working capital benefits in Q4 and just talk about your outlook for operating cash flow for next year as well?

Yes. So, it started with the topline of course on net income line, but there were -- we did leverage our working capital pretty significantly in the quarter relative -- or in the year relative to our sales. So, that was a big driver on the $97 million. And as far as 2017, we would expect to still generate strong operating cash flows and free cash flows for the year in the tune of that $90 million to $100 million range.

Perfect. Appreciate it. I had one other -- I guess it was just in the area of CapEx, the $15 million spent this year and $16 million next year, maybe just give a little bit more detail on whether its specific, whether its footprint capacity, is there any machinery automation things that you can do to help alleviate labor -- just a little bit more detail on where that's going? Appreciate it.

Sure. Dan this is Andy. The majority of the CapEx is going towards working sales within the manufacturing plants to alleviate bottlenecks and to further automate our processes. So, we're heavily focused on the equipment side within the plant. It's not as much footprint, it is much throughput and being able to capitalize on -- again being able to further automate to soften the impacts of the extremely tight labor market here in Elkhart.

Perfect. Thanks again.

We have no further questions at this time. I would like to return the presentation back over to Julie Ann Kotowski.

Thanks, Silvia. We appreciate everyone for being in the call today and look forward to talking to you again at our first quarter 2017 conference call. A replay of today's call will be archived on Patrick's website, www.patricksind.com under Investor Relations. I'll now turn the call back to our operator.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. And you may now disconnect.