Andy Nemeth - Chief Executive Officer Jeff Rodino - President Jake Petkovich - Chief Financial Officer Steve O'Hara - Vice President, Investor Relations

Good morning ladies and gentlemen. Welcome to Patrick Industries, Third Quarter 2022 Earnings Conference Call. My name is Kevin 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, this conference is being recorded. It’s now my please to turn the call over to Mr. Steve O'Hara, Vice President, Investor Relations. Mr. O'Hara, you may begin.

Good morning, everyone, and welcome to our call this morning. I am joined on the call today by Andy Nemeth, CEO; Jeff Rodino, President; 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 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 release, our Form 10-K for the year ended 2021 and in our 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, Steve. Good morning ladies and gentlemen, and thank you for joining us on the call today. I’d like to begin my remarks by welcoming Steve O'Hara, our new VP of Investor Relations who joined us in September. He brings over 15 years of experience as sell side analysts, including previous coverage of Patrick and our end markets. We're pleased to have Steve on the Patrick team as we continue driving and communicating our long term strategy to create shareholder value. Julie Ann Kotowski, former Director of Investor Relations has moved into a new role as Senior Director of Philanthropy and Stakeholder Engagement, where she will continue to be involved in shareholder services and remains a valued member of our leadership team. On behalf of the entire Patrick family, we would like to offer our thoughts and prayers to those impacted by the devastation caused by hurricane Ian. We have several operations, team members and friends located in the region and are extremely saddened by the loss of life and destruction. We wish our impacted team members, their families and others affected by this storm a swift recovery. As we have in the past, we stand ready to bring our expertise, resources and products to assist in the recovery from this event and will partner with our breadth of customers across our key industries to help provide solutions, assistance and relief. Moving to the third quarter results, I want to thank our team members for their continued efforts and dedication as we work within our better-together culture to drive improved performance despite ongoing recalibration in the RV industry. We achieved year-over-year growth in revenue, gross profit and net income despite a 40% decline in RV wholesale production from both the 2021 third quarter and sequentially from the second quarter…

Thanks Andy, and good morning everyone. As we outlined expectations last quarter, we saw lower demand from RV OEMs in Q3, but we are able to generate positive revenue growth and more stable margins in the quarter due to our efforts to build a stronger and more diverse portfolio of businesses. This would not have been possible without outstanding contributions of the entire Patrick team to meet customer demand. Third quarter RV revenues decrease 17% to $524 million, representing 47% of the consolidated sales. RV wholesale unit shipments of 91,800 decreased 40% as the industry recalibrates inventory levels and retail wholesale velocity and demand slows from last year and the first half of this year's record basis. Our RV content per unit increased 36% on a TTM basis to $5,071 per unit, driven by market share gains, pricing and acquisitions. While commodity pricing remained elevated during the quarter, we are beginning to experience price normalization in several commodities, and pass along savings to our customers where applicable. As changes occur, we will continue to evaluate adjustments to pricing and partnership with our OEM customers. RV retail unit shipments were estimated to have decreased by approximately 20% during the quarter, totaling approximately 119,000 units and implying a net reduction of approximately 27,000 units from dealer inventory in the quarter. Our estimates indicate that TTM dealer inventory weeks-on-hand at the end of the third quarter are at an approximately 18 to 20 weeks. This is down approximately two weeks from the 20 to 22 weeks from our estimates at the end of the second quarter of 2022 and below historical pre-COVID levels of approximately 26 to 30 weeks. Our marine revenues representing 24% of our consolidated sales increased 57% to $271 million, driven by acquisitions, market share gains and pricing. Marine wholesale…

Thanks, Jeff, and good morning everybody. Q3 net sales increased 5% to $1.1 billion, a strong performance in our marine and housing businesses alongside solid industry shipments were partially offset by an anticipated reduction in RV OEM production. We also benefited from market share gains driven by product differentiation, our ability to scale and leverage our platform to better allocate resources and serve our customers over the past 24 months and the acquisitions we have made to enhance and diversify our product portfolio. Gross margin increased 170 basis points to 21.3%, driven primarily by contributions of recent acquisitions, the diversification of our portfolio, the realization of production and labor efficiencies and automation initiatives. Operating income remained relatively flat despite a 50 basis point decrease in operating margin, driven principally by the revenue impact of a 40% decline in RV OEM unit production in the quarter. Additionally, we have continued to invest in our infrastructure, software initiatives and human capital and IT to further strengthen and solidify our foundation in alignment with our strategic plan. Amortization expense increased due to acquisitions completed in the past year. We believe these initiatives will proactively allow us to deliver a better customer experience, take advantage of opportunities that present themselves in any economic environment and continue to position us to drive long term value. Net income grew 2% to $59 million or $2.43 per diluted share. Adjusting for the impact of the accounting treatment for our convertible notes effective in 2022, our adjusted diluted net income per share was $2.63. Our overall effective tax rate was 24.1% in the third quarter compared to 26.3% in the prior year. We expect our overall effective tax rate for 2022 to be approximately 25.5% to 26.5%. Looking to cash flows, we generated approximately $156 million in operating…

Thank you. [Operator Instructions]. Our first question today is coming from Scott Stember with MKM Partners. Your line is now live.

Good morning guys and thanks for taking my questions, and congratulations Steve.

Thank you, Scott. Good morning.

Yeah, coming out of open house, can you maybe talk about where RV production stands right now? I know that there were still some 2022 models that had to move and pricing on ‘23 models could have dampened some of the order activity. So could you just give us an idea of maybe sequentially or year-over-year what the RV production levels look like right now as you see them?

Yes Scott. This is Jeff. Production levels, you know they’ve been - the OEMs have really monitored what they've been doing over the last several months and we see them kind of normalizing from where they were in September. We still see the shutdowns of a week or a day here or there, really to manage where they are at versus the retail that's going on out there. We feel comfortable as they continue to manage and monitor those on a daily and weekly basis and we're adjusting to those production levels as needed.

Okay, got it. And can you give what the organic sales breakout was in the quarter, Jake?

Happy to Scott, its Jake. I’ll give you the rundown. So you know we're up 5% on a quarter-over-quarter basis. I’ll give you the components. So down 21% or so percent on industry volume. As you know that's led mostly by the reduction in RV, both quarter-over-quarter and sequentially, both coming in pretty meaningfully down on this normalization we've been talking about. From an organic perspective we're up 18% and the acquisition contribution is up 8% that gets you to the net 5%.

Okay. And the plus 18%, is most of that pricing or is there some other unit component in there.

13% to 14% of that is pricing.

Okay, I got it.

All right, and then just a bigger picture question for next year. I know you guys gave some outlooks for the different industries, but mainly on MH and industrial. Could you maybe just talk about what you're seeing right now heading into next year? I guess industrial in particular, you talk about housing, but how are some of the other markets holding up and how do you think that they will fare next year?

Hey Scott, this is Andy. As we think about housing, you know as we're looking at MH right now, MH is strong, the backlogs are solid. We think that there's runway for MH to continue. We do think that there will be some headwinds as it relates to inflation, but again the channel feels like it's in a good spot from a refill perspective and so we're pretty confident in the MH side. On the housing side what we're seeing is a mix shift between multi-family. There's been very strong demand for multi-family you know over the course of the last quarter or two and the single family is down. You know we're seeing certainly some price sensitivity as it relates to the increasing rates that are out there, but we think that there's tremendous demand on the multifamily side. So from an industrial perspective for us, we match up pretty well with an even split between single family and multi-family. So we expect to kind of manage through that very well as we look at our industrial business for the next year.

And remodeling, how is that looking?

In remodel for sure, we expect to continue to be pretty resilient.

Okay. Alright, that's all I have for now. Thank you.

Thanks.

Thank you. Your next question is coming from Daniel Moore from CJS Securities. Your line is now live.

Good morning. Thanks for taking the questions. Just starting with, you know given the updated outlook for wholesale and retail for the remainder of this year, do you expect to be dealers to continue to be rebalancing inventories kind of through the first half of ’23? Do you think that process generally works its way by year end. Any update there?

Dan, this is Andy. I think as we look at the balance of the year for 2022 and we're watching what's taking place, the RV manufacturers have been very disciplined in managing production and really have been aggressive in pulling back production to make sure that they stay aligned with retail. When we look at the inventory that's out there today in the channel, you know we absolutely believe we're at discounted levels from where it's historically run. What we see today is a mix change kind of happening out in the marketplace as it relates to dealers fine tuning their mix balance that they prefer going into next year, and so as we look at things, we're anticipating and I think what we see, at least in our OE partners and I’m certainly don't want to speak for them, but what we're watching is we think that there's rebalancing of the mix as we take place through the back part of the year with very disciplined production, pullbacks, which we think is very, very rational and then kind of positioning for a strong kind of fiscal 2023 as it relates to one-to-one retail and wholesale. So mix shift for the balance of the rest of the year, disciplined production and then in anticipation of kind of where 2023 rolls out as it relates to retail pull through.

Helpful. And just how do we think - how should we think about you know either gross margins and operating margins, you know in Q4 as well as into HI ‘23 relative to the quarter we just saw given some of the production level expectations.

Dan, it's Jake and I appreciate the question. Maybe to start with the full year, we still think that on a year-over-year basis, ‘22 versus ’21, we’re up operating margin for example 130 to 150 basis points. So a lot of that follows the theme we've been speaking about for about 18 months here and the impact of both our investments in automation and other production efficiency initiatives which have been meaningful, and Jeff highlighted a few of those here this morning as well. But also the complexion of the acquisitions that we've made over time and their contribution as we continue to into the higher fabrication, higher value added products, which are really contributing as well. So with the two of those, we think about the first quarter over first quarter. Of course production will drive a lot of that as we think about absorption and other impacts. Jeff spoke a little bit about pricing and our intent to hold that as best we can, but we still expect to be up on a quarter-over-quarter basis any way you look at it and really realize these improvements. And one thing we've spoken a lot about is, you know a great comparable as the folks like to point to is 2019 as kind of a normal year, pre-COVID so to speak. We think about the investments we've made in the portfolio over that time and the results that we have seen, that are really resonating through those margins and what we expect to see in the future. And if you just take a couple of seconds to think about over since beginning of 2019 to now we've put about $1 billion into acquisitions, about $840 million of revenue has come along with those at the time of acquisition, which we've grown about 40% to $1.2 billion contribution from those years of acquisitions. It's really resonating in the strategic diversification which speaks to the portfolio concept that we've been – that we've really benefited from this month and it's really shown through as we've seen that 40% decline in RV, but only a net 21% down volume as I spoke about in the previous questions that came through. We think about some of the core pieces of our acquisition filters or criteria, and one of those is that margin accretion, and if you still think about that basket of acquisitions that I'm speaking to, we think of those collectively having about a 27% gross margin profile, a 13% to 15% operating margin profile. Still very accretive to what we're doing and we expect to see that on top of these efficiencies and the CapEx we spent really resonate through and be buoyant to our profitability as we move forward.

Sorry about that. I was on mute. Thank you very much. I appreciate the color and maybe one more, and I’ll jump back in queue. But just in terms of, yeah you mentioned pricing, if you could provide a little bit more color, you'd be opportunistic or giving back some of those pricing as raw materials come back down, just as it relates to margins, let's say over the next couple of quarters, do you expect a little bit of a benefit and a lag between commodity pricing and when you give those back or is it more real time? That's it for me. Thanks.

Yes Dan, this is Jeff. We are working with our customers on a regular basis to manage the pricing as it goes down, as we see commodities go down. Really in the third quarter we did – we were able to give back some pricing. We also in some cases held pricing when we saw commodities continue to rise a little bit through the third quarter. So we're being very flexible with our customers as pricing goes down the same way we were when they were with us when pricing went up. So we see there is definitely some decline in the commodities coming down the road and we will continue to work with customers, kind of more of in a real-time basis as we see those opportunities arise.

Thank you again.

Thank you. [Operator Instructions]. Our next question today is coming from Rafe Jadrosich from Bank of America. Your line is now live.

Hi, its Rafe. Good morning. Thanks for taking my question.

Good morning Rafe.

I wanted to follow up on the pricing and content per unit comments on RV. You've driven really impressive growth over the last year. Can you just talk about the outlook there, the remainder of this year and how sticky is some of the content per unit gains? Like where do you see additional opportunity there?

Yeah Rafe, this is Andy. I think as we look at content, you know as Jeff talked a little bit about it, we're seeing from a from a supply chain constraint perspective on the RV side of the business. For sure you know we feel like we're in a great position today. We've been able to leverage our brands and really be able to put ourselves in a position to not have any supply chain constraints and also we're seeing some commodities come down and so we're certainly going to partner and give back that pricing in line with our customers, the same way we did on the way up. I think the other side of it is that you know our scalability and flexibility and then the ability to leverage brands over the course of the last, not only quarter, but really the last 18 months when supply chain has been so significant, you know we’ve picked up between $125 million and $150 million in additional analyzed business in the RV side of the business. And so there's a combination of both pricing and market share organic gains that we've been able to deliver as a result of our profile, and so you know again we expect to give back pricing and alignment and partnership with our customers the same way we did going up. But we've also had some stickiness as it relates to the market share gains that we've been able. A real tribute to our team you know and the tremendous efforts that they exhibited across the platform to work with each other and really mitigate as much as possible the supply chain constraints that were out there, and we're in a great position today as it relates to being able to take care of our customers.

And then as we look at your resi exposure on the industrial side, how do we think about the lag between housing starts and when that might start to impact your business? I think another way to ask would be, are you more starts leverage or completions leverage when you look at the categories that you're selling?

Yeah Rafe, this is Andy again. We're more completions indexed if you will. Our products generally go in at the end of the completion of the unit, and so you know we have generally a six to nine month lag that we see between housing starts and where it actually starts to hit. Like I said, the difference though is going to be on the multifamily mix change and we look at that and so we do think there's some resilience there on multi-family that will help offset some of that.

Got it. Thank you. And then just on the M&A side, are you seeing, given the end markets have slowed down here and with the tougher macro and financing environment, have you seen multiple come down at all? And how are you, handling your approach to M&A in this environment?

Yeah, this is Andy again. We have seen multiples come down. We're also seeing activity right now, especially as we're looking at some volatility in the marketplace, and so you know I think as Jake mentioned, from a liquidity perspective, from a leverage perspective, we're in an incredibly strong position to be able to take advantage of these opportunities as they come about. And so we're excited about you know going into whatever this uncertainty is from position of strength, you know really being able to evaluate our capital allocation and deploy capital strategically and appropriately. But from an acquisition pipeline perspective, we continue to cultivate acquisitions, both organically and have deal flow coming to us. So we feel pretty good about where things are at. Multiples have definitely come down and we're in a great position to execute.

Great, thank you.

Thank you. [Operator Instructions]. We reached the end of our question-and-answer session. I’ll turn the floor back over for any further or closing comments.

I want to conclude our call today by recognizing the outstanding contributions of the Patrick team that make our achievements possible. I'm proud of what we have accomplished by adhering to our better together values and customer first philosophy. We will continue to strategically invest in our platform, automation and innovation, driving scalability and positioning ourselves for strength with a diversified and resilient business. Thank you for your dedication to our mission, and thank you to our shareholders for joining us this morning. I believe our strategy will create long term value and thank you for your interest and support.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day! We thank you for your participation today.