Good morning, ladies and gentlemen, and welcome to the Patrick Industries Incorporated First Quarter 2019 Earnings Conference Call. My name is Paulette, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] Please note that this conference call is being recorded. I'll now turn the call over to Ms. Julie Ann Kotowski from Investor Relations. Ms. Kotowski, you may begin.

Good morning, everyone, and welcome to Patrick Industries first quarter 2019 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 2018 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. Calculated end market diversification and the execution of organic and strategic growth initiatives were the themes that continue to play in our favor in the first quarter as the gap between wholesale and retail shipments grew in the RV market, which represents 56% of our revenues. RV OEMs continue to aggressively rebalance inventories and limit production in efforts to drive towards inventory and retail equilibrium in the industry. Dealer sentiment at virtually all the recent shows has been positive, and retail traffic and sales are off to a solid start for the year. We have been able to continue to increase our content per unit in all markets despite incremental headwinds related to inclement weather in many parts of the country, interest rate speculation, uncertainty around tariffs and commodity cost volatility. Industry fundamentals and demographics remain strong, and we carried a higher cost structure compared to our revenues in the first quarter, primarily related to operating expenses in anticipation of expected strong retail demand in all four of our primary markets. We have strategically focused on maintaining the integrity of our business model during the RV inventory rebalancing as we expect retail demand to take hold and drive through once the new norm for inventory levels is established amongst dealers. Our revenues grew 10% for the first quarter to $608 million, and our first quarter 2019 net income was $21 million or $0.90 per diluted share, despite an estimated 27% decline in wholesale shipments in the RV industry and an estimated 10% decline in the wholesale shipments in the MH industry. Now I will turn the call over to Andy, who will further review our primary markets and overall business outlook.

Thank you, Todd. As noted, we are very pleased with our diversification efforts to drive top line, strategic, and organic growth in the first quarter in light of RV and MH industry-specific recalibration and other factors. Our diversified market penetration in both the marine and our residential and commercial industrial markets, which we have been strategically targeting has helped to offset wholesale shipment declines in the quarter in our two largest market sectors, specifically RV and MH, while our organic and synergistic growth and savings opportunities as a result of our acquisitions made over the last two years continue to be realized. With our RV market representing approximately 56% of our business, 44% of our revenues are now coming from our other three primary markets. This compares to approximately 31% a year ago. Long-term demographic and demand prospects continue to be positive in both our leisure lifestyle and housing and industrial market despite the wholesale shipment volatility over the last several quarters. I will now provide an update and some additional color on each of the core markets we serve. On the RV side of our business, our first quarter 2019 financial performance reflects the impact of continued rebalancing of retail inventories with wholesale production as dealers continue to optimize inventory levels. Our RV revenues were down $36 million or 9% against wholesale shipments that were down an estimated 27%. The gap continues to widen in the first quarter between wholesale production and retail shipments which are only down an estimated low to mid single digits after expected revisions and compares to the strongest quarter in 2018 where we saw a double digit retail growth of approximately 11%. RV OEMs have aggressively managed product levels with improved capacities and efficiencies over the past four quarters to better align with improved…

Thanks, Andy. Our consolidated net sales for the first quarter increased 10% to 608 million reflecting the impact of acquisitions, acquisition related growth synergies and market share gains. As previously noted the overall revenue improvement in the quarter was hampered by double-digit industry decline in the RV housing market which unfavorably impacted both our growth and operating margin. Revenue from our leisure lifestyle market which is comprised of the RV and marine market increased 2% with RV revenue down 9% and marine revenues almost doubling compared to Q1 2018. RV content per unit for the first quarter on a trailing 12-month basis increased 30% to an estimated $3,131 per unit. Estimated Marine content per unit increased 118% to $1,490 per unit. Revenues from our housing and industrial market increased 37% in the quarter with image revenues up 70% versus the prior year 5% to 10% decline in industry wholesale shipment unit. Image content per unit increased 42% to an estimated $3,389 per unit. On the industrial side, revenues increased 5% in the quarter and housing starts were down 10% compared to Q1 of 2018. In alignment with the wholesale shipment declines in the RV and image markets we have aggressively flexed our production schedule and workforce in the short-term in tandem with market demand levels without jeopardizing our long-term workforce needs or the ability of our plans to quickly flex our production in anticipation of improved market demand as we progress through 2019. In addition, we continue to deploy strategic and targeted capital investment to help drive operational improvement, expand manufacturing capabilities and position our business to be able to operate efficiently and capitalize all of our end markets. Over the last few quarters, we have seen commodity prices stabilize then again to decrease in late 2018. As with increase…

Thanks, Josh. As we easily look to the second quarter and beyond, we're optimistic about the opportunities to leverage operating model and resources to continue to strategically grow our business capture additional market share, execute on synergies and drive efficiencies. Our tremendous talent across the organization and our business model provide an operating platform that we can leverage off of, and effectively execute in a dynamic market environment while staying focused on our long-term strategic initiatives and driving overall shareholder value. We remain excited and optimistic about the long-term fundamental growth potential in both leisure family lifestyle and housing and industrial markets, as well as by the fundamental economic drivers and consumer migration trends supporting them. We believe the inventory rebalancing in the RV industry that has and continues to take place in conjunction with the improved efficiencies and reduce lead times from the OEM to dealers will provide better and consumer experience for those buyers who have more specific preferences related to options and sizes, and ultimately enhance and promote the already strong RV experience profile. Thus far in 2019, we have devoted our efforts and resources to fully digest and integrate the nine acquisitions we completed in 2018 can take advantage of the opportunities to drive efficiencies and synergies across the organization. Our acquisition pipeline continues to be full with candidates in all our end markets, and we will remain disciplined in our strategic thought process and valuation modeling as we navigate through the ongoing dynamic market conditions. We will continue to opportunistically deploy capital in alignment with our capital allocation strategy, and free cash flows, all while maintaining an appropriate and disciplined leverage position. I'm extremely proud of our more than 8,200 talented team members whose dedication, commitment and passion providing a premier level of customer service with a high-quality product to all our customers have allowed us to continue to drive performance and operating results and capitalize on the strong leisure lifestyle markets. They will position respond to improvement in the MH market and continue to expand our opportunities in the industrial space. This is the end of our prepared remarks. We are now ready to take questions.

Thank you. We will now begin the question and answer session. [Operator Instructions] And our first question comes from John Lovallo from Bank of America. Please go ahead.

Hey, guys. Thank you for taking my questions. The first question is on the 10% decline in manufacturer home shipments. The context of a broader housing market, where a single-family starts for down about 5%, as you said, through March, and new home sales were up, marginally call it, 1% to 2%, and the entry level seems to be performing better than most other segments of the market is a relative bright spot. So I'm just curious what you guys see as kind of the delta between the broader market and what's happening in manufactured housing?

Yes, John. This is Todd. I think we touched on the fact that weather has been a real factor here. I don't like to use that as an excuse. However, if you kind of take a look across the regions of the country, whether it's snowfall, rainfall, particularly in the Southeast, where the manufactured housing industry is extremely strong. Our contact point has just shared with us that as they try to get out and set homes and just kind of the overall tone of the buyer, they're just not in a position to set the home, and the buyers are just not coming out, knowing the fact that the homes can't be set. Based on feedback we're getting early on, as things have dried up, response come out a little bit more. We're getting indication is that, retail traffic is picking up and things are starting to move along in those industries. So, really we think that's the real delta between the two takeaway just based on the type of style and environment that the manufactured home has to be put through in order to get placed on the lots for [technical difficulty].

Okay, that's helpful. And then in terms of your industrial business, the exposure there, the residential construction, any thoughts on what percentage is exposed to kind of what you would consider to be first time or entry level housing?

John, this is Andy. We've got, I would say a better than mid-point percentage that's focused on first time buyers. We also participate in the remodel sector of the markets. So, we participate both in new construction and remodel. We've got a heavy presence on the West coast in both single-family and multi-family. So again, we've got kind of a nice presence from our perspective and the headwind that we've seen related to interest rates have been -- have definitely been a factor as well as the average selling price of new homes, new single-family homes have been an issue. We see that subsiding, and so we are optimistic about where the first time buyers are going to be able to get back into the market, especially with some of those headwinds subsiding as we move through kind of the spring and summer selling season.

Great, thanks for that. And finally, the higher priced inventory, just to be clear, is primarily in the RV and MH segment or is it across the portfolio?

This is Josh, John. It is primarily in the RV sector, relatively speaking.

Got it? Thanks, guys.

Thank you.

Our next question comes from Scott Stember from CL King. Please go ahead.

Good morning, guys.

Good morning.

Good morning.

Andy, can you maybe just circle back to your comments about inventory in equilibrium? I know it's hard to tell exactly when we're going to hit a bottom, particularly since the days on hand situation with dealers and their expectations has changed it, but it sounds like you're talking about probably towards the end of this quarter, where you would see some, things starting to lighten up and to comeback from a shipment standpoint, is that correct?

Yes, Scott. We believe with the retail selling season coming upon us and the positive feedback that we're currently getting as it relates to March and April, retail movement against the backdrop of some high double-digit declines in wholesale. We think that equilibrium point is definitely pushing, pushing sooner rather than later. Right now, we're kind of estimating, continued run rates through the second quarter on the wholesale side, but retail demand as we talked about a little bit, that's been strong. So if you look back, and you go back the past four quarters, we've seen progressively, progressive decreasing wholesale unit shipments over the last four quarters again, pretty strong retail. And so, we believe that equilibrium point is approaching us. There could be a little bit of over correction. But again -- against the backdrop of that strong retail, we think that we're getting closer to it.

All right. And just certainly back to the industrial side, can you just remind us, how much is non-housing related in the part that's not housing related, whether it's higher rates or hospitality, how are those segments doing compared to the housing markets, the housing.

Sure, so we're about 60% to 65% housing related, our commercial hospitality sectors are strong. We've got opportunities that continue to come into play in particular on the west coast, which we're very excited about. Multifamily has been strong on the housing side as well. So what we're seeing, we're seeing two things happen really, we're seeing first time buyers and we're also seeing the older generation downsized into back into multifamily, into more urban areas. So, again, we're optimistic about where that's headed. But on the commercial high-rise sector, the hospitality has been strong and we've got opportunities that continue to bubble up in those sectors.

All right, and just going back to the margin and this will be my last question then I'll get back in the queue. You guys already talked about the drag from LaSalle Bristol, your expectations there but it seems like the new thing we have to consider is the price -- the price givebacks versus what's in inventory. And maybe just remind us or just update us on what your overall expectation would be from an off-market standpoint for this year, including Bristol and excluding Bristol? Thank you.

Yes, Scott. This is Josh. So if we think about our overall operating margin target for 2019, we previously discussed operating margins been flat net of LaSalle Bristol and RV market download a mid-single digit including LaSalle Bristol, we talked about operating margin being down 50 basis points, so, then being diluted to our overall margin profile by 50 basis points. In the first quarter from what we're seeing here with the overhang from the higher cost inventory, little bit into the second quarter. And that with the decline in the RV and all Britain markets, now we're looking at operating margin to be net of LaSalle minus 50 basis points, and down a 100 basis points all in.

Got it. Thanks so much.

Our next question comes from Brett Andress from KeyBanc Capital Markets. Please go ahead.

Hey, good morning. Thanks for taking my question. First just, I guess some housekeeping. What exactly was the organic growth number in the quarter? And if you look at that spread between the organic sales and the end market declines? Can you just help us piece out the drivers of that during the quarter? What impact did price have? How much of that was new customers, new product lines, just any color there be helpful?

Yes, it's Josh. Organic revenues, net of industry growth of 40%. So another strong quarter of strong organic growth, net of industry growth, even in light of a declining commodity market and price decreases going on in the quarter. Our consolidated industry growth for backdrop working off the minus 20%, from an industry growth perspective, and so revenues were down 12% for the quarter, excluding sorry, revenues gone 12% for the quarter, all and off first the backdrop of 20% on our industry. As far as breaking out, as far as the organic growth brand market, we really don't break it out from a product versus new customers; we are seeing a lot of strength and growth on the industrial marine side with all the rain acquisitions we completed in 2018. But really, we're seeing market share growth and organic growth in all four of our market sectors.

Got it. Okay. And you touched on this in an earlier question. But you -- can you just elaborate a little more on, what you're seeing on the RV retail and throughout March and so far in April, just any sense of maybe growth rates that you're seeing from your touch points. And, I guess ultimately, where do you think weeks on hand correct to win when all of a sudden done?

Sure, Brett. This is Andy. Based on our touch point through our transport operations through our financing contacts, the customers and certainly all the other touch points as it relates to surveys and discussion points out there, what we've heard is a very strong March on the retail side. And we've heard a very strong April to this point, as it relates to retail. So we've really tried to calibrate that with all those sources. And everybody's pretty much corroborated that, so we feel pretty good about the retail side of it. From a week's on hand perspective, from our tracking and our estimates, we continue to estimate that we are currently operating at the lowest or the last couple weeks on hand that we've had in the last five years. So, we continue to see inventory turns improving. We are kind of tracking and looking for this new norm as it relates to dealer inventories, given the opportunity with the reduced lead times. So again, dealers can get units in a faster timeframe than, than they used to be able to base on the increased capacities that have been brought online at the RV OEMs and the efficiencies that have been provided. So again, really looking for this new norm, but we will tell you that we believe we're at the lowest level that we've seen in the last five years. And that number continues to decline as it relates to weeks on hand. So terms continue to improve on an overall basis. And then again, weeks on hand continues to decline from what we're seeing, and as we're tracking on a quarterly basis, as well.

And Brett, I'll just add. This is Todd, when you think about us heading into, kind of the peak selling season against the backdrop of kind of that 475,000 to 500,000 units shipment level on the retail side, and you think about the number of units on a monthly basis that are going to come out of the inventory levels over the course of March, April, May, June, July, and August. We really feel like that delta between those two is going to at some point really, really cause kind of a pain threshold that is going to result in kind of a second tap lead or replenishment.

Understood. And if I could squeeze a little more and it sounds like the OEMs continue to adjust production in the April after used to be like a mid-20% margin decline in shipments, just any help on where you think production levels are trending kind of so far into April. And how do you kind of see that year-over-year shipment trajectory playing out the next few months if we kind of get to that equilibrium that you talked about, just the cadence there?

Sure. As we moved into -- moving in here into the second quarter, run rate are very similar -- we're anticipating run rates to be very similar to that of what we saw in March. There will be some seasonality that will pick up. There's a few more days of natural production that did that occurs compared to kind of the first quarter. But overall again I think when you take a look at kind of from year-over-year comps, we still have some big numbers to hurdle over or in April and May and then the costs become a little bit more bearable when we move into June.

Understood, thank you.

Our next question comes from Dan Moore from CJS Securities. Please go ahead.

Good morning. Thanks for taking questions.

Good morning.

Let me switch gears a little bit in terms of M&A given the retrenchments in the RV base, so you have seen even more opportunities for consolidation amongst suppliers given the pullback here and if so how do you weigh those opportunities relative to the goal of continuing to create a more balanced and diverse type of players?

Sure, Dan. This is Andy. As we talked about we've got we continue to have acquisition opportunities really across all four of our platforms today. We have not seen significant deterioration in valuation expectations. Really most of the industry if not all kind of use this rebalancing situation is temporary and so there's a solid belief across the spectrum that again we are working through inventory rebalancing and not a broader issue at this point. So as we've kind of watched the volatility certainly we've been working with our valuation models but we've not seen kind of a rush to the table of suppliers looking to consolidate if anything, people have held pretty firm to their valuation expectations. And we've looked at that and we continue to model that and be very disciplined and opportunistic in the way that we think about things. With that being said, we also look back at the 16 acquisitions that we did in the last two years and that's given us an opportunity to really look at the organic opportunities that exist there whether it be expansion, new products cross-selling opportunities and those are significant, and we've really gotten very excited about those opportunities. So we feel like we can execute either on the M&A side or organically through the acquisitions that we've been able to bundle up and really continue to drive value. So from an overall perspective, we still feel good about the pipeline, we continue to actively cultivate and continue to talk to candidates. So we've got a nice stable but we want to make sure we've got a good handle on the markets, and you know that rebalancing point is we kind of look for the new norm for dealer inventories on the RV side in particular. And so we're going to continue to be very disciplined there. But overall, we would tell you that we still feel really good about the pipeline and our ability to execute in that at the right time and based on prioritization of markets and products and in customer opportunities. So nothing's really changed on the acquisition front.

Helpful, and one more on the margin front and appreciate all the color, but just in terms of Q2, how should we be thinking about given the working through those higher priced inventories, gross margins for Q2 and operating margins either relative to Q1 are on a year-over-year basis? Thanks.

Yes, we're going to continue to work through some higher priced inventory in Q2 to moderate but we'll continue to work through it in the quarter. Traditionally, Q2 has been our strongest operating margin quarter in prior years. And I would say that the relatively consistent with this year. But I would expect margins to progressively improve as we progressed throughout the year as we work through a little bit of higher priced inventory. And as our cost structure kind of balances out with improving in markets and higher revenues we progressed throughout the year. And then just as it relates to that higher priced inventory, we do pass along both price increases and price decreases and so this is really just a situation of inventory versus lower than expected wholesale production. So nothing's really changed other than some timing as it relates to that movement. It's just we've we had some momentary build up because of expectations on wholesale that will work its way through, but we're pretty aggressive and we want to make sure that we pass along price decreases to our customers as we see those commodities move. So we view that certainly a short term related to the margin you know and as it relates to the inventories that we're carrying.

Understood, got it. Appreciate it.

Our next question comes from Craig Kennison from Robert W. Baird. Please go ahead.

Good morning, thanks for taking my questions. You've addressed many of them already but Todd I think early in your prepared remarks, you mentioned carrying some higher expenses early in the period. I'm just wondering if you could add a little more color to what some of those expenses might be and how long they would continue.

Sure. What I was mostly talking about is I would say the talent that we've brought on over the course of last couple of years that has allowed us to do that to grow our business and take market share in a very dynamic environment. And I would say as we've looked at things and kind of evaluated where we're going on the long-term, from a long-term perspective we haven't taken action kind of the cut and align with current production levels. If we would see production run rate stay kind of its current levels. There were further levers that we can pull both whether it'd be operationally or in the SG&A side of things. All things that we're prepared to do. Again, we just look at things from an overall market standpoint whether it is RV MH or any of the markets we serve. We really feel like the talent and the people that we have within our organization are critical to taking us to the next level as the market recovers.

Thanks. And I apologize if I missed it. We're all trying to get after the same kind of wholesale shipment dynamic. But again it looks like March shipments were off over 25%, was your comment on April that we should see a pace like that down kind of 25% based on the kind of production days you've seen from manufacturers or because the days are different maybe it won't be so bad?

Yes, I'm glad you asked that Craig. I mean I think that that's important. No, we don't anticipate that. I mean like I said we've got some comps that were extremely high in the first quarter. So as you start lining things up, that the numbers are going to be less probably I must say in the kind of mid teens in the second quarter as it relates to declines and obviously probably a little bit stronger in April, we'd see and then obviously the number coming down as far as year-over-year percentage as you move towards the end of the second quarter on a monthly basis.

I'm sorry to be so dense here, but by coming down, you mean the declines would shrink?

Yes, correct.

As the quarter unfolds, so trends get better as the quarter unfolds. Got it, and then last question really on the marine side, but you've built more critical mass in that segment. I'm curious have as you gain scale in marine, if you're able to identify synergies more easily either revenue synergies or cost synergies, I'm sure in the RV space you probably have a well oiled machine but it may be harder to develop that in marine, but now that you've been there maybe they're coming more quickly?

Craig, this is Andy. On the marine side, without question, I wouldn't say it's necessarily scale related synergies it is much of the quality of the product platform that we've got is very, very strong. The talent that we've been able to partner with is incredibly strong, very dynamic and very deep in the industry with a lot of knowledge both at the customer level and at the operating level. And so, we've been aggressively pursuing acquisitions in that space really over the last two years. And like I said as we've pivoted a little bit focused on the organic side. Yes, without question these opportunities are there and are bubbling up at a pretty rapid pace. So we're very excited about that look. Like I said, we can continue the M&A which we expect to do. We can also pivot and make sure that we're focusing on driving synergy growth and we have seen that that produce at a pretty rapid pace. Again- not necessarily scale-related but just the value product of the platform that we've got today is extremely strong.

Great, thanks for taking my question.

Thank you.

[Operator Instructions] And our next question comes from Tim Conder from Wells Fargo. Please go ahead.

Thank you. And gentlemen, yes, you have answered a lot of questions, so thank you for the color so far. Most of the -- minor more clarification in nature, Josh, on the lease accounting change, it didn't impact net income, but was there any shift between operating expense and interest expense due to the new rule?

No, it was not.

Okay, okay. And then on the commodity cost different, as I heard you right, the majority or all of those will be kind of flush through the inventory, the higher cost commodities by the end of Q2?

Yes, that's our expectation.

Okay, okay. And then, Todd, I think you had mentioned that there is the potential maybe for a little over correction on the RV inventory side, just maybe if you could give a little more color, elaborate on your thoughts there that why that potential could materialize that you may be seeing some evidence of that or not?

Sure. So, I think given the environment that we move, we came from where the dealers demand were high, they weren't -- retail demand was high, they weren't able to get units when they wanted them. I think their view was to get as many units as they could get with retail as strong as it was, and continues to be. As things have settled out related to retail demand, it's more steady, so to speak, coupled with the fact that pricing on units has moved, interest rates have gone up, there has been some uncertainties in the -- obviously equity market environment. Some of the geopolitical things that were kind of taking place back in late '18, all I think kind of played into the minds of the feedback that we're getting from the dealers. And so, as we're watching inventories come down, I think naturally the staying of where things kind of would have been or have been, have pushed dealers to take pause and kind of step back and make sure that as they are looking into data points they are looking at all the data points, and in doing so, I think that is going to push them to bring things down to a more critical level. And then ultimately I think the other piece that I'm not sure anyone really kind of understands are taken into consideration is we're running -- I think we've been averaging over the last couple months somewhere between, let's call it, 36,000 to 40,000 units from a production standpoint per month. We're moving into it period of time where we're going to be retailing assuming that we're down low single-digits, we're going to be retailing an average of probably 55,000 to 58,000 units a month. That's taken out nearly 15% to maybe even 20% or 15,000 to 20,000 units per month that are going to be coming out. So, you couple that with potential of improved environment -- retail environment, strong seasonality our perspective would be that there is that risk. Now again, we can't speak for dealers, but the risk is what we're looking at, and potentially being prepared to be in a position to take care of the customers, and ultimately the end consumer if indeed that does happen.

Okay, okay, very hopeful, so thank you. And then lastly, Andy or Josh, whoever wants to take this, I just wanted to reaffirm did you or did not have any one-time benefits that push the Q1 tax rate to where it was a little over 22%, I know your guidance has been in that 25% to 26% range for the year?

Yes, Tim this is Josh. We did have a small benefit in the quarter of 800,000. That compares to 2.1 million in the quarter in the prior year, so $0.04 in Q1 of this year and $0.08 in Q1 of last year.

Okay, okay. Thank you, gentlemen.

We have no further questions at this time. I will now turn the call over to Ms. Julie Ann Kotowski for further remarks.

Thanks, Paulette. We appreciate everyone for being on the call today, and look forward to talking to you again in our second quarter 2019 conference call. A replay of today's call will be archived on Patrick's Web site, www.patrickind.com under Investor Relations. And I'll 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.