Good morning, ladies and gentlemen, and welcome to the Patrick Industries, Inc. Third Quarter 2018 Earnings Conference Call. My name is Michelle, and I will be your operator for today. Please note that this conference call is being recorded. I will now turn the call over to Ms. Julie Kotowski from Investor Relations. Ms. Kotowski, you may begin.

Good morning, everyone, and welcome to Patrick Industries Third 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 the 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 Ann. Good morning, everyone, and thank you for joining us on the call today. We're pleased to report another quarter of continued organic and strategic top and bottom line growth, operational performance and execution and confidence and enthusiasm related to all 4 of primary markets we serve based on strong demographics and fundamentals. Our third quarter revenues increased 41% to $575 million in light of the discipline and tactical balancing of production schedules and inventories by the RV, OEMs and dealers. This rebalancing is strategically designed to ensure that dealer inventories are well positioned to support current and expected strong retail demand expectations. Our disciplined capital location strategies and strategic initiatives, combined with our strong demand patterns in our core markets outside of RV, which now comprise approximately 40% of our revenues, also resulted in strong performance and accretion both top and bottom line. Our third quarter net income per diluted share increased 60% from the third quarter of 2017. And on a year-to-date basis, our revenues and net income per diluted share increased 49% and 63%, respectively. On a trailing 12-month basis, our revenues exceeded $2.2 billion, and our diluted earnings per share were $4.93. Now I'll turn the call over to Andy, who will further review our primary markets and performance.

Thank you, Todd. As noted, we remain energized and optimistic about the opportunities in front of us to continue to drive our business model and the fundamentals behind our market expectations in all 4 of our primary markets. Our leisure lifestyle markets, collectively RV and marine, represent 76% of our third quarter revenue and are centered around spending quality time with family, balanced connectivity and creating lifelong experiences and memories. Additionally, our housing and industrial markets, which comprise the other 24% of our consolidated revenue base, represent foundational pillars in the generational timeline. In the third quarter of 2018, we continue to diversify our core market concentration with our RV and non-RV revenue mix representing 62% and 38%, respectively. Strong demographic trends with millennials, Gen Xs, Gen Ys and baby boomers, coupled with consumer confidence and historically low interest rates, all point towards slow and steady growth in each of these markets, despite recent volatility and seasonal and capacity rebalancing. Now I'd like to provide an update and some additional color on each of the core markets we serve. Our third quarter 2018 RV revenues were up 30% over the third quarter of 2017 despite an estimated 12% decline in wholesale unit shipments. While third quarter 2018 RV wholesale shipments appropriately decreased as a result of the calibration of production in inventories that Todd noted, this decline is off of a base which was up 24% in the third quarter of 2017 and 19% in the third quarter of 2016 and still represents the second-highest third quarter shipment level in history. As you may recall, from the last few years prior to 2018, the RV dealers were short on inventory heading into the spring selling season as a result of strong double-digit retail demand, and they experienced longer-than-current lead times…

Thanks, Andy. Our consolidated net sales for the third quarter increased 41% to $575 million from $408 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 acquisitions. Our third quarter and nine months operating results reflect organic and strategic revenue growth, the execution of acquisition-related growth synergies, incremental gross and operating margin improvement that was driven and supported by leveraging our fixed costs, plant operating efficiencies, reduced plant overtime and turnover and by the accretive margin profiles of our acquisitions in addition to earnings per share accretion. The 8 acquisitions we completed thus far in 2018 contributed approximately $82 million of revenues in the third quarter and $162 million for the first nine months. Revenue from our leisure lifestyle markets, which is comprised of the RV and marine markets, increased 42% with RV revenues up 30% and marine revenues up 138% over Q3 2017. RV content per unit increased 36% from $2,123 to an estimated $2,881 per unit. Estimated marine content per unit increased 152% from $420 to $1,058 per unit. Revenues from our housing and industrial markets increased 39%, with MH revenues up 28% and industrial revenues up 53%. Our estimated MH content per unit increased 22% from $2,159 to $2,632 per unit. For the second half of 2017 and the first half of 2018, we experienced inflationary price increases in certain raw materials and commodity-based components. Over that time period, we have taken steps to address incremental costs through a combination of implementing efficiency process improvements, sourcing alternatives or less expensive material offerings and partnering with our customers and material price movements up and down. We have since seen commodity stabilize and in some cases have declined, and we'll…

Thanks, Josh. For the remainder of 2018 and into 2019, in anticipation of continuous strong fundamental demand in all our end markets, as noted, we remain focused on driving organic and strategic growth, reinvesting in the business within the confines of our disciplined capital allocation strategy. We have ample dry powder via our credit facility to execute on our strategic initiatives, which include a combination of acquisitions, capital expenditures, expansions and stock repurchases, all while maintaining an appropriate and disciplined leverage ratio. Our acquisition pipeline is full and remains strong in all our markets. The strategic acquisitions we made in 2017 and 2018 to date have both increased our content and driven expected returns as well as generated synergy opportunities and additional avenues for continued organic growth across all four of our end markets. As we enter into the fourth quarter of 2018 and look ahead to 2019, we're excited about the opportunities in our market and look forward to further strengthening our product portfolio. Our strong financial foundation and commitment of our 8,000-plus team members positions us to deliver growth, drive shareholder value and exceed our customers' expectations. This is the end of our prepared remarks. We're now ready to take questions.

[Operator Instructions]. The first question in the queue comes from Scott Stember from CL King.

Based on the information given on the acquisition revenues in the quarter, it looks like your organic sales were up around 20%, if I'm not mistaken. Could you maybe give us the RV's? Were you still organically even with the decline in shipments that you saw?

Scott, this is Josh. Based on the acquisitions given on the prepared remarks that was related to 2018 acquisitions of $160 million for the year and $80 million for the quarter, organic growth in the quarter was 7% all in. Net of industry growth, we were plus 14%. So our consolidated industry declined 7% based on our estimates for RV shipments and for manufactured housing shipments.

Got it. And what did you guys see from a September standpoint from an industry shipment basis? And what are you guys thinking -- and again this is for RVs, what are you guys thinking about the fourth quarter and tying it to your comments about the inventories coming into line.

Scott, this is Andy. As it relates to -- first of all, the third quarter, we ran some calibrations based on our industry tracking and statistics. And we're estimating just overall for the quarter that the quarter is down high double-digit. And so for the fourth quarter, right now, we're thinking that we're going to be down high single digit -- I'm sorry, low double-digit for Q3 and high single-digit for Q4.

Yes. Based on what we were tracking organically in September, Scott, we anticipate for the quarter low double-digits in RV shipments, translating over to Q4 mid- to high-single-digit decline for the quarter. And back to your original question on RV organic growth, we did have net-net of RV organic growth, net of industry growth in the quarter even with estimated shipments down low double digits.

Got it. And your margins in this environment, particularly with the organic sales in RVs coming in or shipment numbers coming in, were very impressive. Maybe just talk about your ability to build multiple products from different end markets within your facilities outside of Marine and talk about how that's helping you to limit downtime, for instance, during this inventory correction.

Scott, this is Todd. Yes, that's definitely helped. I mean, we've talked in past about how we're able to utilize both -- most of our facilities to cover at least a couple of different industries, whether it may be RV and MH or MH and industrial, in some cases RV, MH and industrial. As the industry has softened and recalibrated here in the second and third quarter, we've definitely been able to take advantage of increasing and running more efficiently with the utilization of what I call 2 to 3 industries as we go. And as we made -- as I commented in our prepared remarks, our team has done just an outstanding job of aligning the labor workforce with the demand and flexing and training our team members to be able to cross over and take care of the different industries. Even though the product is slightly different, our team has been able to adjust and do what they needed to do in order to maximize our labor efficiencies.

The next question in the queue comes from Brett Andress from KeyBanc.

So the 4Q shipments, I think you just said you're expecting down high single digits, and that's coming off of a down 30% in September, if I'm doing my math right, from what you gave us for the third quarter. So I'm just curious, what level of retail sales are you seeing here in September and October? Because running the math on the implied channel inventories, you can get to a pretty big decline there.

Brett, this is Andy. Yes, that's correct. And for September, we think that's the range, that September was down. As it relates to Q3 and Q4 on the retail side, again we're thinking -- so for wholesale, we're thinking -- I'm sorry, we're thinking low double digits or high single digits. And on the retail side, we're thinking low to mid-single-digit growth on retail so continued inventory absorption with retail outpacing wholesale in Q4.

Got it, okay. And then are you -- can you kind of maybe comment what you're seeing or what you saw in retail on your end maybe in September and October? Were you kind of in that mid-single-digit as well?

We don't have that yet, but all calibration points to that.

Okay. And then just another one here on tariffs. You mentioned that List 3 include some items that you directly source from China. I guess, what is the total exposure to List 3? And you mentioned some volatility you expect in the margins. Can you give us some more detail on the cadence of that playing out in 2019?

Yes, Brett. This is Josh. Really to highlight our total exposure, List 3 included 200 billion of items. Less than 10% of our products, we source from China. So to tell you in the whole scheme of things, it's not a significant material impact. As we progress through Q4, in the prepared remarks, we talked about taking steps and initiatives to help mitigate the costs, including bringing additional inventories on hand heading into the quarter, working with our China suppliers on sharing in some of that cost and then ultimately partnering with our customers on pricing as it progresses to the back half of Q4 and into 2019. As it progresses in 2019, if we see a step-up in tariffs as previously announced, we would take the same steps we've taken headed into Q4. We expect to mitigate as much of the impact as possible, and really the volatility on the margin is just the timing of inventories that are brought on hand, the timing of flushing through that product and the timing of partnering with our customers on the price increases. And all that kind of put together could create maybe some short-term volatility. We don't anticipate a lot, but we just put that out there just in case as we continue to work through these.

The next question in the queue comes from Dan Moore with CJS Securities.

I want to talk about marine, maybe just give us a little bit more color on EMC, number one; and number two, content up now closing in on $1,100 per unit. Remind us where do you see the total addressable market there and where do you see that content going over the next maybe 2 or 3 years.

This is Josh. I'll address the latter part there and let Andy talk about EMC. On the marine content per unit, yes, we're a little over $1,000 per unit on a TTM basis. On a pro forma basis, factoring the acquisitions we completed here in Q2 and for 2018, we're about $1,500 in content per unit. Based on the products that we have in our arsenal today, we anticipate -- we estimate about $7,500 of potential overall content per unit, so at about $1,500 a day on a pro forma basis with a $7,500 total addressable market.

Dan, this is Andy. As it relates to EMC, a relatively small acquisition but a high-quality component tower solutions provider in the southeast sector of the country, which complements our tower solutions that we've got that we recently acquired in partnership with the Marine Accessories Group in June. And so we continue to add value in those -- in that component parts market, and EMC is primarily in the tower solutions side.

Very helpful. And one another for me, just in terms of capital allocation. Stock is now trading sub 10x certainly our expectations and even really just on a trailing 12-months basis in terms of earnings. Does the scale slide a little bit more toward repurchases versus acquisitions or you just continue to be opportunistic across the spectrum of allocating capital?

Dan, this is Andy. As it relates to capital locations, we continue to be opportunistic as it relates to all facets of our capital allocation strategy, and so we're excited about the opportunities that we've got in front of us on the acquisitions front. We've got an extremely strong pipeline. The stock buybacks we've been very active in the market to date. Our board has been extremely supportive in authorizing a new stock buyback program as well. So we expect to continue to operate flexibly within that capital allocation strategy and continue to maintain a very disciplined leverage profile. So we expect to continue to do what we're doing and stay opportunistic.

The next question in the queue comes from Rafe Jadrosich from Bank of America.

You highlighted some -- I mean, obviously, you're still very positive on the long-term growth of RVs, and then you highlighted some near-term destocking issues that are pressuring the growth. Can you talk about when you would expect that to subside and will start to -- when would you expect that to foot into the dealers stocking again?

Sure, Rafe. This is Andy. As we've talked about in Q3, we've seen some inventory come out of the channel. We still expect retail to be solid. We think it's going -- we're going to go through Q4 on the wholesale side, as noted, down probably high single digits, with low to mid-single digits retail growth through Q4. And so our expectation is that the balancing is taking place, so we'll be much closer to kind of a one-for-one as we head into the 2019 year and really look forward to continued solid retail demand going into 2019. So we think we'll see a little bit more rebalancing through the fourth quarter. But overall, we're still very positive on retail.

And Rafe, I'd just add, I think the job that the industry has done to kind of rightsize and do what they've done from a recalibrating standpoint has been excellent but also just the benefits that this is going to provide the retail buyers. I mean, if you could imagine walking into your -- to buy your unit and be able to see what you want, be able to get it within 3 to 4 weeks. Compared in the past, you're waiting 6 to 12 weeks. It's just the whole like overall experience is going to be so much better for our entire industry and particularly the retail buyer.

Okay, that helps. And then you've been outpacing the RV industry growth pretty significantly this quarter as well. Have you -- can you talk about what's driving your market share gains, the sustainability of that? And just given that the industry has slowed down a lot, have you seen any changes from maybe some of smaller competitors in terms of pricing to try to get back some of that market share?

Sure, Rafe. This is Andy. As it relates to kind of competition in the space, it's still pretty disciplined. There's been some volatility related to pricing over the course of this year, but I think everybody has been working through and working diligently to try to mitigate cost impact really across the spectrum. And so again, we haven't seen anything out of the norm there other than trying to manage through price increases and the tariffs that we've had. And we've been very effective with that and partnering with our customers. As it relates to market share, I think the diversification that we've been able to create across our platform has been very successful. We bring capacity and resources to our acquisition candidates to open up opportunities for them to continue to grow organically, and we've seen solid organic growth really throughout our acquisitions as well as within our incumbent business units that we've got today. So it's really kind of across the broad spectrum, but we expect to continue to take market share on an annual basis. And our team has been very motivated and aggressive at that. And so again, it's really been a combination of a number of different things driving that market share. We've seen some pricing this year. We expect to give some pricing back as well as we've seen commodities go down in certain situations. But overall, the combined platform has generated some nice organic growth for us, and really we've opened up the acquisition side with a lot of resources.

Final question. What's your capacity for additional M&A for this year and early next year, just based on where your leverage is right now?

Yes, Rafe, this is Todd. As we've talked, I mean, our acquisition pipeline continues to be full in all of our really 4 end markets. We're really excited about what we've been able to do so far this year and what we still have on our plate to be able to digest. I would say, we're going to continue to be opportunistic, taking a look at trying to look to expand our product portfolio, along with trying to also potentially acquire products that we currently have to be able to synergize and create value for all parties. So we're again very excited by these opportunities moving into the fourth quarter here and then also looking ahead into 2019.

The next question comes from Craig Kennison from Baird.

I fell off the call for a bit, so I apologize if anything is redundant. But on the tariff topic, I think you mentioned that 10% of your cost of goods sold or less is sourced out of China. Is that correct as a percentage of cost of goods sold?

Cost of materials, Craig. This is Josh.

Cost of materials. And have you taken a look at the other 90% to understand whether there's any Chinese heritage among your suppliers that are domestic?

We have, we have. So we factored all of that in from a total supply chain impact of things we source directly and things we may source domestically that have some origination of a part or product that comes from China. So as we continue to analyze and take actions to mitigate the impact, we've taken all those things into consideration here.

That's great. And then you had mentioned, I think, 30 to 50 basis points as a margin improvement goal, still on track for that this year. Is that still a good assumption as we look ahead into 2019? Or are there factors that might cause you to change that outlook?

Yes, that's a good assumption. This is Andy.

Okay. And then lastly, on M&A, it sounds like the pipeline is full. I'm wondering, clearly, RV valuations have come in. Market valuations have come in. Have seller expectations changed in this environment? Or is it too soon to tell?

Craig, this is Todd. I would say, there's really nothing much changed at this point. We're aware of kind of the impact, the slowing and the rebalancing that's taken place in the third and fourth quarters and the impact it's going to have on the RV side of things. I think what we need to do is let some of the reality flush through, some of these potential acquisitions on the RV side, which is what we've done, particularly in the second half year. And we're still excited about the industry long term and acquisitions on the RV side. But to your point, I think there's some realization that needs to take place. And so from a multiple standpoint, I don't think we've seen the multiples necessarily decline, but we need to see some rebalancing take place from an expectation standpoint that we're hoping will happen here in the second half or first half of the Q or '19.

The next question comes from Steve O'Hara from Sidoti & Company.

I guess, when you think about wholesale shipments for 4Q or for the rest of the year maybe into the first quarter, I mean, is there a level at which your expectations change in terms of this is no longer a inventory restocking, inventory recalibration and it's more the dealers are seeing something on the demand side that is more worrying?

Steve, this is Andy. I think that as we're looking at the back half of the year, we're not seeing any signs right now that retail is peeling off a little bit. Certainly, there's a little bit of market volatility. But overall, we still see solid fundamentals on the retail side through Q3 -- or through Q4 -- through Q3 and Q4 and into Q1 and next year overall. As it relates to wholesale shipment levels, we had very strong shipment levels last year in Q4 just from a comp perspective and as well a little bit into the first part of 2018 in the first quarter. And so our expectation is that even if we're off a little bit in the single-digit range, we still think we're in a good spot from a retail fundamental perspective. And so again, I don't think we're seeing anything right now that gives us pause or caution as it relates to retail strength. We think that again, as Todd noted, I think -- we think that the OEMs have done a fabulous job of positioning themselves and bringing on capacity, optimizing their performance to be able to position and supply dealers on a much more real-time basis. And so we see the weeks on hand at a great level heading into 2019 and really position for kind of that 1:1 kind of go-forward and much more seasonal trend as we expect into '19 as we've seen over the last couple of years prior to, let's call it, 2016 and 2017, where we just continue to see double-digit quarter-over-quarter growth. So we would expect to get back to a more normalized seasonal trend in 2019 based on the OE's ability to match up wholesale demand with retail. So at this point in time, again, we do not see anything that's causing us pause from a retail fundamental perspective.

Okay. And then maybe just on the ordering patterns that maybe, I guess, we're looking for more of a reversion to the mean in terms of what ordering patterns used to be. Does the wholesale delivery -- or has the wholesale delivery timing changed given all the capacity that's been added at the OEMs? So are they able to produce more units in a faster time and then therefore you're kind of maybe the delivery schedule is pushed out a little more because they can deliver more in a faster time period?

Sure. This is Andy again. Yes, I think, again, they've really balanced things extremely well. And thus, you've seen the large -- a lot of volatility in 2018 in Q2 and Q3 related to wholesale. I think this is -- we feel like this is a couple of quarter calibration where we're really getting back to that real-time position to be able to supply the dealers very effectively. So yes, the answer is yes. We think it's in a great spot.

And then finally, maybe just on the commodity prices and the impact. Give an estimate for what you think the -- let's say, the recent and most recent tariffs and commodity prices have done to overall RV pricing and maybe what the impact might be on retail sales.

Yes, this is Todd. I would say, overall, there's a lot of factors that play into it, and I don't think we're probably equipped to comment on the overall impact. To me, that varies amongst OE and what they decide to do and particularly probably varies amongst product lines. So I'd love to be helpful, but I don't think we'd be qualified to be able to answer that.

But I mean, I guess, the question is are you factoring the commodity price to current and future tariffs, et cetera, in terms of your retail sales expectations for 4Q and going forward?

Yes, yes. When we factor those in for retail expectation, this is Josh, Steve, we've taken into consideration the impact of the increased costs on the units related to increased commodities and increased tariffs.

The next question in the queue comes from Tim Conder with Wells Fargo.

This is actually Marc Torrente on for Tim. Just 2 quick questions. In terms of the tariff and input cost, how much of the expected gross tariff impact do you think you can mitigate in total next year through your different initiatives? And then on share repurchases, how much was repurchased in Q3 versus Q4 today?

Yes, this is Josh. So we think, as we navigate through the tariffs and we leverage all the components we talked about on the tariff front that we can for the most part mitigate the majority, if not all, of the tariffs, in the short term, leveraging our inventories that we have brought on hand heading into Q4, working with our suppliers both short term and long term and then partnering with our customers with pricing over the long term and looking for alternative products. So I would say, as we head into 2019, we would -- our anticipation is that we'll be able to mitigate the majority, if not all, of the impact. And from a share repurchase standpoint, we repurchased approximately 350,000 shares in the quarter for Q3 and in the month of October, 222,000.

Okay. We have no further questions at this time, and I'll turn the call over to Ms. Julie Kotowski for further remarks.

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

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