Good morning, ladies and gentlemen, And welcome to the Patrick Industries, Inc Second Quarter 2018 Conference Call. My name is Brandon 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. Also, please note that this conference call is being recorded. And I will now turn the call over to Julie Ann Kotowski from Investor Relations. You may begin. Ms. Kotowski, you may begin

Good morning, everyone. And welcome to Patrick Industries second quarter 2018 conference call. I am joined on the call today by Todd Cleveland, Chairman and 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 securities laws. 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 identified in our press releases, our Form 10-K for the year-ended 2017, and in our other filings with the Securities and Exchange Commission. We undertake no obligation 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, and thank you all for joining us on the call today. This morning we like to discuss the company's second quarter 2018 results and provide an update on the major market we serve. We'll then conclude by providing an update on overall business outlook. The combination of continued strong demand patterns in our markets, coupled with execution of our strategic and operational initiatives led to strong growth in both the top and bottom line in the second quarter. And our revenues and operating performance was right in line with expectations. Our second quarter 2018 revenues and net income per diluted share increased 49% and 67% respectively from the second quarter of 2017, a $605 million and $1.42 per share. Our year-to-date revenues and net income per diluted share increased 54% and 64% respectively to approximately $1.2 billion and $2.62 a share. On a trailing 12-month basis, our revenues exceeded $2 billion and our diluted earnings per share were $4.50. Our results are a reflection of the continued drive and execution of our strategic and operational growth initiatives and plans, which include the successful execution and integration of key acquisitions and expansion initiatives, a focus on capacity planning, talent engagement, leadership any targeted capital deployment in alignment with our disciplined capital allocation strategy. Our acquisition pipeline remains full potential candidates in all our primary markets we serve, and our industries are doing a fantastic job of managing demand levels as a retail environment continue to be strong. Now I'll turn the call over to Andy who will further review our primary markets and performance.

Thank you, Todd. After a strong first half of the year in all of our core markets supported by solid retail demand patterns, and continued positive demographics, we remain energized and optimistic about ongoing fundamental momentum and our ability to drive results. Equity market strength, consumer confidence improving consumer credit, and a strong jobs environment all point toward continued demand in both our leisure lifestyle and housing and industrial markets. We continue to put capital work having strategically invested more than $330 million through the first half of the year, as Josh will further describe. And we increase the size of our credit facility providing additional flexibility and dry powder. Our second quarter and first half operating results reflect organic and strategic revenue growth and penetration, synergy realization, incremental gross margin and operating margin improvement, driven and supported by leveraging our fixed costs and the margin profiles of our acquisitions. In addition the earnings per share accretion and performance. Additionally, our revenue mix which is now 65% and 35% RV and non- RV respectively, is well balanced and helping drive performance. Our leisure lifestyle markets which are comprised of RV and marine collectively represent approximately 76% of our second quarter revenues, and were up 49% for the quarter, and our housing and industrial market sales represent the other 20% of our consolidated revenue base and were up 46% in the same period. In alignment with our strategic growth plan, we completed three acquisitions in the second quarter, and seven overall from the first half of the year, many with the accretive gross and operating margin profiles as noted. And further reinvested in the business through significant stock buybacks by taking advantage of volatility in the equity markets. Additionally, we continue to invest in directed capital expenditures to support our strategic…

Thanks Andy. Our consolidated net sales for the second quarter increased 49% to $605 million from $407 million in the same quarter of 2017, reflecting both strategic and organic growth in addition to market share gains, geographic and product expansion efforts and the impact of acquisition. The seven acquisitions we completed thus far in 2018 contributed approximately $65 million of revenues in the second quarter and $78 million for the first six months. As Andy noted, revenue from our leisure lifestyle markets which is comprised of the RV and marine markets increased 49% with RV revenues up 41% and marine revenues up 137% over Q2, 2017. RV content per unit increased 26% from $2,101 to $2,639 per unit. Revenues from our housing and industrial markets increased 46% with MH revenues up 36% and industrial revenues up 58%. Our estimated MH content per unit increased 20% from $2,084 to $2,503 per unit. Our gross margin in the second quarter increased 140 basis points from 2017 to 19%. The increase in gross margin was driven by leveraging of our fixed cost on increased revenues, improved labor and operating efficiencies, synergy realization from acquisitions, and accretive incremental growth margins from our 2017 and 2018 acquisition. Operating expenses were 10.2% of sales in the second order. Warehouse and delivery expenses and SG&A increased 60 basis points, primarily due to certain acquisitions completed in 2017 and 2018 having a higher operating expense profile relative to Patrick's overall operating expense profile. Intangible asset amortization increased 30 basis points as a result of the continued acquisition activity over the prior 12 months. Operating income increased 57% to $53 million in the second quarter. For the six months, operating income increased 65% to $95 million. Operating margins in the second quarter were 8.8% compared to 8.3% in 2017,…

Thanks Josh. For the remainder of 2018 and into 2019, an anticipation of continued strong demand at all of our end markets. We're focused on driving organic growth and operating improvements in our current operations making strategic acquisitions in our core markets, and reinvesting in our business through capital expenditures, expansions and stock repurchases. The actions we've taken over the last 18 to 24 months to increase our capacity to support the strong demand expectations, implement process improvements and realign our existing facilities has contributed and expected to continue to contribute to our top and bottom line growth. In addition, the capital capacity and flexibility provided by our recent credit facility expansion provides us with an extremely strong financial foundation, and positions us to focus on the execution of our strategic plan. Also the strategic acquisitions we made in 2017 and 2018 to date have both increased our content and existing markets and driven expected returns, as well as generated synergy opportunities and additional avenues for continued organic growth. The ongoing support we received from our valued customers, 7,000 plus team members, suppliers, board of directors, banking partners and our shareholders have afforded us the opportunity to reach the goals of providing the highest level of service, delivering superior products and driving shareholder value. This is the end of our prepared remarks. We're now ready to take questions.

[Operator Instructions] Thank you. And from Baird we have Craig Kennison. Please go ahead.

Hey, good morning. Thanks for taking my questions. A lot of concern on the RV business among investors, mostly regarding shipments and the outlook there. Wonder if you could address what you think could be the cadence of shipments throughout the rest of the summer and maybe the balance of the year? I mean we know shipments will be down because they've been up in the first half, and they will likely be down in the second half. Yesterday or earlier this week, we got a June number that was off 11%. I guess I'm asking guess based on what you know about production schedules and the cadence of production, give a feel for how the rest of the year might unfold for the industry.

Craig, this is Andy. As it relates to the RV industry and wholesale as well compared to retail, I would tell you that our perspective is that retail continues to be very strong. And we continue to hear confidence and resilience out of our touch points related to a retail demand. So our expectations are that we're going to continue to see strong retail through the rest of the year, and certainly through the selling season. As it relates to wholesale, as we noted on our prepared remarks, we think the OEs have done a fantastic job of adding capacity to be able to flex their models, keep their workforce in balance. And so as it relates to kind of our shipment expectations, while June was, down there was also one less calendar day in June, and that coupled with even two call it maybe two to three last days due to this year shutdown period, which gave everybody's teams some rest. This would put Q2 really in the positive from our perspective. So as we look at it, we think things are very well calibrated. So we look at Q3, I think there's our view would be is that we would expect to see flat to mid-single digits down in Q3 on wholesale. And as we look at kind of Q4, we're thinking flat type numbers, even if it's down a little bit with the retail demand expectations. I think the balancing and the inventory concerns that have been out in the marketplace are quickly being alleviated. And so again with retail being strong, we think that the rest of the year and 2019 is positioning itself very well right now, especially with the way that the models are flexing. So from an industry perspective, again, we don't view this as disruptive at all. We think this is --its great work by the OEMs to manage the business model. We're going to flex with that and we've got as well on our side. We've got some diversification now to help offset any call it minor softness in the wholesale side of the RV business, but overall again, we do not view this in any way as an issue.

And Craig, I just add, this is Todd. That there's been a lot of talk about the OEs potentially going down to four days in the third quarter. And again I can't stress enough but like Andy said the opportunities that OEs have taken to add capacity and from a daily capacity standpoint still produce similar numbers of units in a shorter timeframe. So that's giving everybody the opportunity to kind of re-energize their workforces and align their costs more readily compared to where we were at before.

That's helpful. And then just two quick questions. One could you give us the organic growth rate for the quarter? And two, given changes in the production levels, do you still feel like you can expand margin 30 to 50 basis points on an annualized basis?

Yes, correct. This is Josh. Organic growth in the quarter was 20%; of that 2% was industry growth. So that puts us at 18% net of industry growth. And our expectations are for the back half of the year to be able to expand operating margins. That will still put it in a place to achieve a 30 to 50 basis points increase on a year-over-year basis on operating margin.

From CJS Securities we have Daniel Moore. Please go ahead.

Good morning. Thanks for taking the questions. I wanted to I guess follow up first on the operating margin question. Operating margins increase 50 bps here despite rising raw material costs pretty remarkable. What impact, if any, did increased input costs have in the quarter and what is your sort of outlook for the remainder of the year? And a quick follow up.

Dan, this is Andy. We saw commodity costs rise through most of the first half of the year. They have stabilized as we look at the back half of the year currently. And we continue to flex our material cost and our pricing and work with our customers both on the plus and on the minus side when prices go up, when prices go down. We pass both those on and that's kind of how we work, and that's our expectation, and so again we as it relates to margins we expect to maintain margin.

Got it, very helpful. With the --after a nice series of acquisitions RVs are now ticking lower to about 65% of total revenue. Is there a target in mind that you would have over the next call it three to five years? Is there a balance you'd like to see or is the M&A strategy continues to just be to be opportunistic and looking for creative opportunities regardless of where they come up?

Yes. Dan, this is Todd. I would say that we really don't have any targeted amount. Obviously, we were very aggressive in the marine space in the first half of the year. And we're seeing the dividends of that and along with their growth. I don't think there's really anything that a mandate internally to get to a certain place on the RV side. We're going to let the markets play themselves out, and obviously take advantage of --continue to take advantage of opportunistic opportunities on the acquisition side. I think that's going to be probably the main driver will be now the overall markets and how they move, and opportunities that we feel like we can take advantage of. As we've done in our past from integration synergy and a synergizing value standpoint for overall performance.

Very helpful, lastly you gave a lot of color on this already, so apologize if it's beating a dead horse, but a lot of talk about tariffs and trade. A lot of in the press, just describe from your perspective mindset state of the --in general of dealers and if we do see continued inventory destocking maybe of range or quantify what that might look like as we kind of looked forward to this September RV shows and the 2019 sales cycle. Thank you against for the color and congrats on obviously impressive numbers in the quarter.

Hey, Dan, it's Josh again. Regarding the tariffs, obviously, the aluminum is still was the one that was implemented at late Q1 and early Q2, that's worked its way through from our side here in the quarter. Regarding the other tariffs have been announced but not yet put into place, we don't expect it to have a significant impact to us if they were to come into place in the back half of the year. Our imports from China less than 10% of our total COGS. We would not expect it to have a material impact in that perspective.

And I'll just add, Dan this is Todd, from an overall dealer's standpoint I think everybody's working together to try and mitigate the cost across the board. And I think as we look to the dealer shows and things, OEs have continued to innovate look at different ways to offer the retail customers the amenities they need and working together to kind of deal with the tariff situations. That being said, I do believe that there is an impact and it's going to move through the system over the next six months to a year. And that being said, I think as we pointed out the leisure family lifestyle is something that we believe that people want to do --they're going to reach out. They want to be with their families. They want to spend time together. And so from a cost standpoint whatever that additional cost may be, we believe that when compared to other opportunities people have at least at this point in people's lives they're gravitating to the leisure lifestyle, which benefits all of us from the RV and marine space.

Great caller, Todd. Josh, appreciate it, and look forward to seeing you out in Elkhart at the September RV show.

From KeyBanc Capital Markets we have Brett Andress. Please go ahead.

Hey, good morning. If I could follow up more on your answers to Craig's initial question about the RV industry dynamics, I think in your latest presentation you estimated May retail tracking something like 13% grows on a post revision basis. So and I know you have several different touch points across the channel. I'm just curious on what level of retail sales in June and here through July that you're seeing and whether that plus 13% is sustaining itself here over the last few months?

Yes. This is Todd. I would say that based on the information that we're getting from our touch points, I would say high single, and mid double-digit numbers are kind of where we're anticipating things to come in from up year-over-year basis. It's going to be and has been a little choppy throughout the months here, but overall I would say we're still very confident where retail moving through June and July as these are peak selling months for our dealers.

Got it, understood. And then the last one can you elaborate a little bit more on the organic growth 20% versus the industry growth Delta? That spread which presumably is market share remains very similar to last quarter. So how should we think about the sustainability of that out performance into the balance of the year?

Yes, Brett, this is Josh. Yes, we had obviously two great quarters here. The first half of the year with strong organic growth, net of Industry growth, and I would say those are tough comps to continue to - as we progressed throughout the back half of the year, we would expect a momentum to continue. The organic growth is a number that includes market share gains, geographic expansions, new products and also pricing. And so with all that factored in, we would expect a momentum to continue in the back half of the year, but maybe not at quite the pace we're seeing here in the first half of the year.

From Wells Fargo securities we have Tim Conder. Please go ahead.

Thank you, gentlemen. Just I guess everybody sort of touched on this a little bit, but just to drill into it little bit more here. Andy, you alluded that and talked about how obviously the industry is making an adjustment here from the pace we've seen in 2016 and 2017. What's pacing along here probably going to come up to mid to high single digits sustainable and sound like this year could be at the very high end of that range. But as it relates to your expectations on the RV side from the beginning of the year, it sounds like you're maybe dialing that in a little bit because of these adjustments but the flip side of that you say you're still going to keep your 30 to 50 basis points margin improvement. What types of efficiencies or things are you getting? Is it less over time? Just more efficient operations and able to take your catch a breath. Just maybe go through a little bit of -- walk us through that a little bit if you would.

Sure, Tim. This is Andy. As it relates to volume level, certainly, again we've been able to add both strategic and organic content to our revenues. And even with some of the fluctuations in RV wholesale like I mentioned, we've got a nice diversification right now. All three of our other end markets are performing very well, and continue to be --we look at slow and steady growth is kind of how we build our model. And we are able to realize efficiencies on the acquisitions through synergies that we realize from an input cost perspective, from a labor perspective, as we've talked about over the last several quarters we've gotten our arms around labor. And feel very good about that and expect with some of the fluctuations here going on as Todd alluded to in the RV space that we're going to be able to continue to optimize, and really balance out our labor force and provide an optimal work environment, which will lead to more productivity. We're leveraging our fixed costs, and continuing to do that and so as we look at our overall model. We're very confident in our ability to continue to drive results, and so we feel good about those numbers, but again like I said, even with the little fluctuations that we're seeing in RVs, as pointed to mid to high single-digit growth is from our perspective is perfect. And we'll continue to execute our strategic initiatives and grow the business and drive again incremental margins.

I'll add just that Tim that we have what I believe to be some of the most dynamic industry leaders running our business units that are out there. And while we don't have any formal continuous improvement programs over the course as the end industry has kind of taken a pause allow the inventories to build off. Our leaders within the organization have done an outstanding job of taking the initiatives to take that time to look at opportunities that weren't there, and they weren't able to evaluate as closely and implement as quickly as we were trying to keep pace with double-digit growth on the RV side. So internally we're doing probably from a continuous improvement standpoint, probably more things than we've done in the last two or three as we've been able to kind of recalibrate organizations and get production levels in line with where they need to be, to keep pace and to grow with the industries we serve.

Okay, know that helpful, gentleman. And then from a cost inflation standpoint, whether you want to look at on a model year 2019 or a calendar 2019 basis to somewhat on the end units is somewhere in the 3% to 5% reasonable that what you all are able to pass through net of flexing up and down. And what the OEMs do and what consumers will see. Is that a fair assessment for the industry looking to the new models coming out here?

Tim, this is Andy. We really can't comment or speculate on what the OEs are going to do relate to end pricing. What we can say is -- what we can tell you from our perspective on the input side, again, we're going to continue to work with the OEs and with our buying power there's a lot that we can do to help manage and mitigate the cost fluctuations. We've seen that pricing as we mentioned go up in the first half, but it has stabilized in the back half at least from our perspective, but we really can't-- I can't comment or we can't comment on where the end user market is going to go.

From Bank of America Merrill Lynch we have Rafe Jadrosich. Please go ahead.

Hi, good morning. Thanks for taking my question. I was wondering if it's possible for you to quantify the opportunity you have on labor cost and lower over time as kind of production normalizes here and your efficiency improves.

Hey, Rafe, this is Josh. Yes, we're not in a position to quantify the exact cost and savings associated with a more effective, efficient operating model with the less unit production. We will say that helping offset kind of less units running through the pipeline here in Q3, the back half of Q2 and Q3 is the improvement in the overtime and the improvement of the operating efficiency as we kind of recalibrated our operating platform with our workforce. In order to mitigate any cost associated with the less unit production.

If you look at the first half of 2018 where you operate -- were you operating labor as efficiently as you can or will that improve in the back half of this year and into next year?

I would say we have gotten to a good spot in the first half of the year particularly into the second quarter, and kind of that run rate momentum will carry itself into the back half of the year. We'll expect --we expect incremental improvements as we continue to progress throughout the year, but I would say the significant improvements that we've realized over the last 12 to 18 months, were in effect for the first half of the year.

Rafe, this is Andy. I'll add just a little bit of color as well. So in the RV side of the business, yes, we'll be able to realize less overtime, more productivity. Our other three markets as we've noted are performing extremely well, and so we're also starting to see a little bit of labor inflation there, which again --I think overall we're going to tell you that we think labor is stabilized. And we've got our arms around it. I don't expect a lot of efficiency improvements overall or a lot of it. And we don't expect efficiency degradation overall as well. So I think we're going to pick up a little bit as volumes continue to flow through strategically. And we're going to leverage our fixed costs as we continue to do on the variable label labor side, again, I think it's stabilized. We may get a little bit of efficiency, but again our expectation is we want to continue to really support our workforce in a balanced work environment and healthy work environment, so that we maximize our productivity. So I think there-- yes, I think there's some upside but our view is going to be, we believe it's stabilized and we've got our arms around it okay.

And then my last question is just have you -- has there been any changes to your priorities for capital allocation between M&A, CapEx and buybacks? And then within that as you think about investing in additional capacity given that the RV spaces have decelerated. Would you -- do you think there is more opportunity to possibly accelerate share gains in some of your other non- RV categories?

So this is Andy. As it relates to capital allocation nothing's changed with regards to our strategy and deployment of capital. We're going to continue to be what I would call opportunistic, and look at all of our initiatives equally and continue to pursue each of those initiatives. As it relates to where we're going to invest in the RV business, we're excited about all of our markets today. And going to continue to be disciplined again in deploying that capital across markets that we view to be again opportunistic. And so from a capacity perspective, we've done --we as well have added capacity over the course of the last three to four to four to six quarters, and so we're well positioned to continue to support the business, but I'll tell you we will also continue to strategically invest and continue to realize optimization opportunities across our platform. There are there continued to be opportunities as we look at more efficiencies through automation and we're going to continue to look at that and invest strategically. And manage that in a very disciplined fashion lined up against our expected and anticipated returns.

From Sidoti we have Steve O'Hara. Please go ahead.

Hi, good morning. Can you just talk about based on the current business position I think you've said 55% of the revenue comes from RV now, is that kind of the prospective number going forward? And maybe where do you want that to be longer-term?

Sure, Steve. This is Andy. As Todd alluded to, we don't have a target --excuse me a target allocation that we're looking to drive to towards. We're going to continue to be opportunistic in driving the business. We've got acquisition candidates across all four of our market sectors that we're going to continue to look at, and prioritize and the strength of the acquisition pipeline continues to allow us to do that. As it relates the balance, I think what you're seeing is a nice balance, we absolutely are very bullish about the RV space and excited about the opportunities that are there. So when you look at the 65, 35 that's -- we view that as a balanced portfolio, but that may flex or move again based on our opportunistic thoughts and the way that we're thinking about it.

Okay and so I mean if you don't see any better opportunities in one area or another or you see increasing competition for deals and marine as that market maybe picks up a little bit or if you see maybe a little bit better opportunities in RV as maybe some of the growth is kind of coming off here a little bit on the wholesale side, anything there?

Again, I think we've got a very healthy acquisition pipeline today with again candidates across the spectrum. And we're going to stay disciplined regardless of competition in the space on deals. And we're going to continue to pursue and be able to prioritize multiples of remain pretty consistent. I think the long-term outlook is we look at things continues to be consistent. So we're going to continue to evaluate accordingly, but again I don't think that there's --we haven't changed anything related to our perspective on what we want to continue to do from an acquisition perspective.

Okay and then maybe just on the leverage. I mean you tell me what's your comfort level there in terms of acquisitions and paying debt down? What's your comfort level on the high and low sides in the medium and long term? Thank you.

Sure, this is Andy again. We're very comfortable with our leverage position today. It's very flexible. We are comfortable. I'm going to tell you up to 2.5x to 2.7x in the short term keeping that in the 2x to 2.25x is really a sweet spot for us, and we feel like we're putting capital to work and generating the returns off of that. So that's kind of how we think about it today.

From CJS Securities, we have a follow-up from Daniel Moore. Please go ahead.

Thank you again. I think sometimes your -- we get lost is your free cash flow generating ability and all the talk around what's going on. Obviously, the RV cycle, you raised your guidance effectively to $175 million OCF for the year. I think previously it was $150 million. How much of that was organic versus in terms of improved operations versus driven by M&A, if it's possible to quantify? And a quick follow-up.

Yes, Dan. So we went from $150 million to $175 million, probably half was organic related on improved efficiencies, really just leveraging working capital in the back half of the year. The other half was related to recent acquisition.

And at those levels and given the CapEx guidance you're looking at north of $6 a share and free cash flow. Is there anything in those numbers that's one time or difficult to recur?

No, we do not foresee that.

And from Wells Fargo Securities we have a follow-up from Tim Condor. Please go ahead.

Gentlemen just a little bit of color if you could help from a modeling perspective. What would you anticipate the cadence here maybe a little directional year-over-year in the back half on the RV component of your business in particular, just given the adjustments that are going on? And should I would think be sort of normalized out as we get to the end of calendar 2018, but any color could give us from a modeling perspective there would be helpful. Thank you.

Yes, Tim, this is Josh. So we finished Q2 at 65%. For the back half of the year, we expect RV growth to be relatively flat or slightly down after. Absent any future acquisitions, I would say would be between 62% to 65% for RV revenues as a percentage of total.

Okay, for the year or just for the back half there, Josh, maintaining it for the year on the back half.

For the back half.

We have no further questions at this time. We will now turn it back to Julie Ann Kotowski for her closing remarks.

Thanks Brandon. We appreciate everyone for being on the call today. And look forward to talking to you again at our third quarter 2018 conference call. A replay of today's call will be archived on Patrick's website www.patrickind.com under Invest Relations. And I'll turn the call back over to our operator.

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