Good morning, ladies and gentlemen, and welcome to the Patrick Industries, Incorporated First Quarter 2021 Earnings Conference Call. My name is Diego, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note that this conference is being recorded. And I will 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 2021 Conference Call. I am joined on the call today by Andy Nemeth, President and CEO; and Jake Petkovich, 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 2020, 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. I would now like to turn the call over to Andy Nemeth.

Thank you, Julie Ann. Good morning, ladies and gentlemen, and thank you for joining us on the call today. We kicked off our first quarter of 2021 with a continuation of the strong trends and tailwinds supporting our markets as expected. In fact, momentum accelerated both year-over-year and sequentially in our leisure lifestyle markets, which represent 75% of our first quarter revenues as the strength of both retail and wholesale shipments in the recreational vehicle and boating markets materially improved year-over-year. Demand for outdoor recreation remains solid in interest in popularity in alignment with our view of their tremendous attractiveness and potential in both the COVID and post-COVID environment. Energy remains strong, capitalizing on interest and outdoor recreation activities that provide adventure in the exploration of the Great American outdoors, the ability for families to experience this adventure together, and the inherent social distancing through the freedom of being outside. In our housing and industrial markets, which collectively represent approximately 25% of first quarter revenues, housing, repair and remodel and home improvement conditions also remain robust, with demand for housing continuing to outweigh supply the success of the evolving work-from-home model and the continued urban migration and exodus from certain concentrated regions to less dense and more attractive climate-associated regions. These trends in leisure lifestyle and housing and industrial consumer preferences and activities all provide strong tailwinds for Patrick in our primary end markets, further solidifying an already promising long-term outlook. From an operations perspective, the size, scale and flexibility of our well-positioned operating and financial platform allowed us to execute strategically and tactically during the quarter and leverage our fixed cost structure to drive increased profitability. Our fourth quarter decision to carry heavier inventories in anticipation of a strong start to the year, proved positive as those inventories were…

Thanks, Andy, and good morning, everyone. Our consolidated net sales for the first quarter increased 44% to $850 million, driven by increases in all four primary end markets. Our leisure lifestyle end markets continue to benefit from the popularity of RV and marine outdoor activities, while our industrial and MH markets benefited from consumer investment in homes and remodeling and a growing price differential between stick built and manufactured housing. Revenue from our leisure lifestyle markets, which are comprised of RV and marine, increased 60% with RV and marine revenues up 57% and 75%, respectively. RV content per unit increased 6% to approximately $3,288 per unit and estimated marine content per unit increased approximately 44% to $2,426 per unit. Revenues from our housing and industrial markets increased 11% in the quarter, with MH revenues up 8% versus the prior year and industrial revenues up 16% compared to the prior year. MH content per unit increased 3% to $4,691 per unit. Gross margin in the first quarter was 19%, increasing 40 basis points compared to the prior year. The gross margin improvement was primarily driven by benefits of leveraging our fixed costs against a strong increase in revenue but was partially offset by labor inefficiencies and overtime necessary to maintain quality standards and consistent delivery of our products to end markets. Operating expenses were 10.9% of sales compared to 11.9% in 2020, due to our leveraging fixed operating expenses as sales increased. Warehouse and delivery expenses decreased 70 basis points due to the lower mix of MH sales in the quarter. SG&A expenses were 6% of sales in the quarter, a 10 basis point decrease compared to the prior year, again, primarily reflecting the benefit of leveraging our fixed cost against increased sales. Operating income of $68 million increased 74% in…

Thanks, Jake. As discussed, our teams have been actively working with our customers during this incredibly dynamic period to support their needs. And in our proactive inventory management and investment in our infrastructure have afforded us the opportunity to move with our customers and partnering their growth across all end markets this quarter. We will continue to position ourselves in alignment with our customers' demand and remain flexible and nimble in our end markets as we execute our disciplined capital allocation and growth strategy. As always, the health and safety of our over 8,800 team members will continue to remain paramount in our efforts and priorities. And their inspiring dedication and outstanding performance during this quarter have energized and strengthened our commitment to strive for the highest level of internal and external customer service. Additionally, we remain committed to serving our communities, stakeholders and partners in driving overall shareholder value. Our focus on human capital management initiatives has resulted in energy, ideas and solutions for our customers and team members. The importance of our people and their talent is both tangible and inspiring. As our incredible market serves such a vital purpose of balance and enjoyment in the well-being and recreation of families and individuals as they pursue and explore the outdoors and invest in their homes, the dedication of our people is visible and evident as our team members give shape and meaning to the solutions and products we deliver to our customers. Our financial versatility, breadth, and depth of our resources, strong liquidity and balance sheet strength afford us the opportunity to pursue strategic acquisitions and key capital investments to expand the portfolio of brands we offer our customers to further drive capacity, efficiency, inter brand synergies, and continuous improvement initiatives. As we look ahead to the remainder of 2021, we believe the scale and capacity of our infrastructure position us to match up with the cadence of growth in leisure lifestyle and our housing and industrial markets. Our team members, core values and humble culture represent the center of who we are and our relationships with our suppliers, Board of Directors and shareholders continue to crystallize our efforts in creating long-term shareholder value and in always driving towards our goal of striving to serve our customers at the highest level. By investing in and protecting our talented and dedicated team members, dealing ethically and responsibly with our business partners in supporting our local communities, we believe our contributions will continue to enhance our overall brand and thriving end markets. This is the end of our prepared remarks. We are now ready to take questions.

[Operator Instructions] Our first question comes from Brett Andress with KeyBanc Capital Markets.

So thinking about the updated wholesale outlook for RVs, we've seen monthly shipment numbers kind of ramp from the 40,000 into the 50s and now I think the mid-50s here in March. And so how are you thinking about April and May here with the information you have? I mean do you think the industry kind of shoots up into the 60,000 plus? Or are there just too many constraints holding the industry back in the near term?

Brett, this is Andy. I think that there's opportunity for that type of number. I think there are some constraints over the next couple of months as we look at kind of the supply chain. That being said, the manufacturers have done a fantastic job of adapting and flexing towards -- or to the supply environment. And so we've really worked hard. Our teams have worked hard to make sure that we're matching up with production needs. And so as we look at it, I think, there's some constraints just in various places, but certainly nothing that's gating from our perspective, to continue to see strong production levels at the OE level. So our view is that the OEMs are very, very good at flexing. And the supply chain as well is very, very good at flexing. And we would expect a consistent cadence really through the next couple of months that will be very positive and continue to support the flow-through to the retail channel.

Got it. Okay. And then just curious what you're seeing with Indiana Transport, maybe first, just the financial profile of that business in this environment. But also, any insights you're seeing from that business as it relates to retail here in April, how quickly delivered units are getting sold? It just still seems like a very heavy presale market.

Certainly, both on the -- we've got two transport companies today, and they've done a phenomenal job, and they're performing extremely, extremely well. We continue to grab share. I'd also say that they're very, very efficient at managing their driver pool. As it relates to inventories that we're carrying at each of those particular operations, they are at lows right now. And so, units are moving just as fast as they come on the lots and going right through the dealers. And then the channel checks that the dealers are indicating that units are flowing just as fast to the retail consumer. So it's moving very, very quickly and very efficiently through those operations, and we're seeing, again, no real signs today of any headwinds out there.

Our next question comes from Daniel Moore with CJS Securities.

Perfect. Andy and Jake, given just what we've seen in terms of rising raw material costs, obviously, you don't have a ton of steel, but others are going up. Just what are your expectations for margins in Q2 relative to what we saw in Q1?

Sure, Dan. This is Andy. We've definitely seen commodity costs really across the platform go up. We're definitely in an inflationary environment. Our teams have worked very hard to mitigate the impact of those commodity costs as it relates to be our customers. And so our expectation would be is that we won't see any material degradation as we work with our customers, both on the upside and on the downside when materials are flowing upwards or downwards. And so we really partner with our customers through that process, have continued to do so, and we'll do everything that we can to mitigate the impact on them, but we're working very hard. But that being said, we are definitely seeing commodity costs continue to rise and have seen it in Q1 in this environment.

Helpful. And then SG&A, is Q1 a kind of reasonable run rate to think about anything unusually good or bad in there?

Nothing unusual either way, no anomalies. We're a high variable cost component. And so I would expect our SG&A to stay pretty consistent.

Perfect. One last one. You mentioned the growing -- or maybe it was Jake, mentioned the growing price differential between stick built and MH. Can you just give us your thoughts on what's driving that? Is it a more efficient operating model for MH? Is it the ability to pass on rising raw material prices? It's a little better? Just maybe any thoughts on that would be helpful.

Sure, Dan. It's all of the above, but also there's an embedded kind of infrastructure of the stick built, that's probably a little more mature than where they're putting in some of the manufactured housing. So what you end up with the supply and demand paradigm is driving a lot of buyers still to the stick built just because there's a little more inventory. We've talked about in previous calls, and you can see it that there's a little bit of capacity constraints on the MH side. So that drives people who are looking for homes into the more of the stick built or the lot ability to do that. There's a lot more builders out there that can help satisfy that demand. And then when you get with the supply demand of the -- driven by the migration patterns, you see it from just the household formation and everything else. It's pushing a little more pricing on that side as well. So I would say, input costs are certainly impacting everybody out there and supply chain availability for all the folks, whether they're building MH units or stick built, are still seeing that inflationary pressure as well. So it's creating a delta. But I would tell you, there's -- while there's strong demand, I think, across both categories, there's just a little more availability out there on the stick built side, and that's driving a lot of people that way while there -- rather than waiting maybe for an MH house.

Our next question comes from Scott Stember with CL King & Associates.

Jake, did you give what the organic sales growth was, whether it's Patrick-specific on top of what the industry is doing?

No, I did not, but I'm happy to provide that. So we're up 44% just at the top line. 6% is -- we're up 6% net of industry on the organic side. About 28% is up on industry growth and the rest of the balance of that is coming from some acquisitions we made beginning in second quarter last year.

Okay. That's perfect. And then on the supply chain side, I know that you guys have been doing a great job of dealing with this. But are there any specific areas, whether it's fiberglass or anything else that's given you guys any headaches right now that we need to be aware of?

Nothing significant, Scott. I mean it's really kind of in a number of areas, is what I would say. And from week-to-week, things can change pretty quickly, but our teams have really done a great job of staying on top of things, working with each other, working with our like brands to make sure that we mix and match to be able to keep a constant supply chain going internally to our customers. So I expect it to continue. But again, I expect us to continue to manage that very actively and continue to work to match up with production needs. But it's really in a number of different areas. We're seeing it. So I think it's -- like I said, I think, it's going to continue to be a challenge, but it's something that, I believe, our teams are doing a fantastic job of working through.

And keep in mind, Scott, we -- as Andy mentioned in his initial comments, we started the year in a great spot to give us the -- both the stock that we need and the velocity to drive us through periods of this kind of supply chain tightness. And we spoke a lot about it in the fourth quarter, that proactive inventory build, and it's really helped us out as we come into a point where some folks are starting to falter a little bit, and we're coming from a running start into the first quarter that's helped us carry us through and put us in a position to take share as well.

Okay. Very helpful. And then last question on labor, specifically in the Elkhart area, how is that going in labor, any inflation on that front that we need to think about?

Sure, Scott. This is Andy. Labor continues to be very, very tight in the area. Again, I think, the teams have done a great job of working through kind of some labor headwinds as it relates to efficiencies. We're working a lot of overtime, certainly. But our teams have done a great job of managing that. We're definitely focused on maintaining a balance with our team members and making sure that they've got some balance, especially in this environment as we look forward. But overall, I think, that it's going to continue to be tight. And some of the things, certainly on the automation front that we're working on, we're very excited about to be able to continue to offset some of the labor constraints that we're seeing out there. And so again, it's a tight market for sure, but we're doing a good job of managing through it.

[Operator Instructions] Our next question comes from Steve O'Hara with Sidoti.

On the -- I think, about 2Q here, obviously -- like obviously, you've ramped up from January into February -- I'm sorry, January to March. And then -- I mean, so it sounds like you can something like 50,000 to maybe be 55,000 unit range is the right way to think about 2Q on a monthly basis. Is that kind of -- does that make sense on the RV side?

I think that definitely makes sense, Steve. I think, again, there's just a little bit of constraint here or there as it relates to some of the materials that are out there. But overall, again, the manufacturers have proven that they can manage through that and operate at that type of cadence. So I think that's definitely an opportunity to achieve out there.

Okay. And then just on the -- maybe the margin performance is really solid in the quarter. Let's say, it was an easy comp, but doesn't look like it given the [indiscernible] change. But how do you think about kind of a normalized operating margin and kind of -- should we be thinking 3 to 5 or 30 to 50 basis points over kind of last year? Or is there a better kind of starting number to think about maybe a normalized number for 2020?

Yes, Steve, I appreciate the question. It's something we certainly put a lot of thought into. And you can see the margin expansion that we've been able to drive both the gross margin and the operating profit lines here as we come through first quarter. Good leverageability of our fixed costs. And as Andy has mentioned today and in the past, we have a pretty significant variable cost component to what we do and that's helped drive that. Some of the input costs, we talked a little bit about labor today. We talked a little bit about raw material today and our ability to manage those. So I would tell you, as we think through the remainder of 2021, we're thinking backwards at that 30 to 50 and maybe moving that upwards to thinking about 80 to 100 basis points of margin expansion versus last year for the full year.

Okay. Great. That helps. And maybe just on the [indiscernible] market, you noted that inventories are extremely low there as well. Do you have a sense for that industry's ability to flex up to the same extent that the RV industry has performed? Is there any further constraints there? Or are there the issues that they face, maybe the RV industry does in terms of their ability to kind of meet that demand or, let's say, inventory shortfall?

Steve, this is Andy. There's similar constraints, if you will, as it relates to the material supply that's there today, but they're also very, very resilient on the OE level -- at the OE level in the marine side and would expect them to continue to flex as well. And we're continuing to partner with those customers and our customers to make sure that we're doing everything that we can to match up in a similar fashion as we are in the RV industry. So I don't see any reason why they can't. I think, again, it's just going to be a little bit choppy here on the material side for a couple of months. And so, I don't expect that to go away in the near term, but everybody is managing through it as best as they can right now and doing a great job of managing through it. So I don't see anything -- any reason why they wouldn't be able to.

And we have no further questions at this time. I'll now turn the call back over to Ms. Julie Ann Kotowski for further remarks.

Thanks, Diego. We appreciate everyone for being on the call today and look forward to talking to you again at our second quarter 2021 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 participating, and you may now disconnect.