Good morning, ladies and gentlemen, and welcome to Patrick Industries First Quarter 2023 Earnings Conference Call. My name is Karen 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. I will now turn the call over to Mr. Steve O'Hara, Vice President of Investor Relations. Mr. O'Hara, you may begin.

Good morning, everyone, and welcome to our call this morning. I'm joined on the call today by Andy Nemeth, CEO; Jeff Rodino, President; Jake Petkovich, CFO; and Matt Filer, Senior Vice President of Finance. 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 2022 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, Steve. Good morning, ladies and gentlemen, and thank you for joining us on the call today. As we begin our discussion this morning, I want to take a moment and express our sincere and unwavering appreciation for our team member's continued dedication and commitment to drive Patrick forward through these dynamic times. Their focus on our goal of providing exceptional quality and customer service is inspiring and energizing. Through our Better Together culture, the brands that make up Patrick continue to collaborate and drive best practices, while developing new and innovative product solutions in an effort to improve our performance and the value that we provide to our customers, positioning us as a leading component solutions provider to the leisure lifestyle and housing markets. Today our portfolio is more balanced across our end markets, as our first quarter results once again reflect the benefits of our focus on strategic growth and diversification. We are realizing the returns on the investments we've made in this strategy, particularly in the marine market which remained resilient through the first quarter. Highlighting this is the fact that despite a 54% decline in RV wholesale shipments in the first quarter, our consolidated net sales declined 33%. Our RV and marine revenue mix in the first quarter of 2023 was 41% and 31% of total revenues respectively, compared to 61% and 16% respectively in the first quarter of 2022. Additionally, for historical comparison purposes, this RV wholesale shipment tally represents a 21% decline versus the first quarter of 2019, or the last first quarter before the pandemic. Despite this decline in shipments we earned adjusted EBITDA of $97 million and net income of $30 million, which are 78% and 45% higher respectively than the same quarter in 2019, when our business was much more…

Thanks, Andy and good morning, everyone. As mentioned, the uncertain economic environment has impacted demand across all of our end markets with heavier emphasis on consumers more sensitive to rising interest rates. We continue to diligently flex and manage our production schedules across our business in alignment with our customer needs and remain in constant contact with these partners in all of our markets. Our RV market has experienced the most volatility as OEMs utilized their tremendous scalability to match wholesale production with balanced dealer inventory levels. RV wholesale unit shipments of 78,600 decreased by 54% or more than 93,000 units from the first quarter of 2022. We currently estimate first quarter retail registrations of approximately 84,000 units. As we head into the selling season based on our touch points we believe the dealers are utilizing incentives to work through a larger than optimal mix of 2022 model year units as they position themselves for the upcoming 2024 model year change in the back half of the year. The metrics we have outlined imply a net decrease of approximately 5,400 units to dealer inventory in the quarter. Our estimates indicate that TTM dealer inventory weeks on hand at the end of the first quarter of 2023 have remained consistent with the levels beginning in the back half of 2022 at approximately 18 weeks to 21 weeks. This is below historical pre-COVID levels of approximately 26 weeks to 30 weeks implying a potential new normal inventory level based on trends for the last four quarters. Our first quarter RV revenues decreased 55% from $821 million to $367 million and represented 41% of our consolidated total. Our RV content per unit increased 22% on a TTM basis to $5,349 per unit driven by market share gains, pricing and acquisitions. Staying with leisure…

Thanks, Jeff and good morning, everybody. Our consolidated first quarter net sales decreased 33% or $442 million to $900 million. Our end markets were all impacted at the retail level by the headwinds of a slowing economy and rising interest rates and inflation with RV OEMs addressing softer demand through a significant reduction in production. As Jeff noted, while our RV revenue declined 55%, our diversification strategy continued to resonate with our marine revenue increasing by 25% and partially offsetting the declines in other markets. Our housing revenue declined 14%. Gross margin declined 40 basis points to 21.6%, as the negative impact of the significant decline in RV and MH shipments was partially offset by the contributions of portfolio diversification, recent acquisitions and the realization of production and labor efficiencies coupled with our automation initiatives. Warehouse and delivery expenses declined $5 million to $36 million in Q1 2023 but increased 90 basis points as a percent of sales due to reverse absorption of overhead, primarily in our distribution operations. Operating expenses for the first quarter were 15.3% of sales, an increase of 530 basis points, due primarily to a 9% increase in SG&A expenses and 17% increase in amortization due to acquisitions. SG&A increased 360 basis points as a percentage of sales, reflecting our investments in human capital and recent acquisitions, which tend to generate higher gross margins, but also carry a higher SG&A mix. Excluding a $5.5 million pretax gain on sale of property included in the SG&A in first quarter of 2022, SG&A was essentially flat year-over-year. Operating income decreased $106 million, leading to a 590 basis point decrease in operating margin, primarily driven by the factors previously described. We continue to invest in several key infrastructure initiatives that are expected to bolster our ability to drive automation…

Thank you. [Operator Instructions] And we'll take our first question from Daniel Moore from CJS Securities. Please go ahead, Daniel.

Thank you. Good morning. I'll start very briefly just by saying Jake, thank you very much for all the help and best of luck on to bigger and brighter. I'm sure you'll do extremely well. I appreciate the help. Let me start with a question on content per unit continues to see really healthy growth across the board. Maybe just walk through the segments in high-level terms starting with RV and break down growth between acquisition, pricing, organic volume gains and what your expectations for growth look like going forward? Thanks.

Hi, Dan, thanks. It's Jake. And I appreciate the kind words at the outset there. Maybe -- I absolutely agree. We've seen great growth in our content per unit. As you know we've been acquisitive across generally speaking our end markets specifically in leisure lifestyle with RV and Marine, a lot of that capital allocated to strategic purposes directed towards our Marine business and has really shown with that sequential and year-over-year growth we experienced in our content per unit as well as just overall revenues for Marine. And as we've spoken about last year creating a $1 billion top line market business which we're very, very proud of. So maybe to take it back a half step and talk about the overall components of the change in our revenue on a quarter-over-quarter basis which we indicated is down over 35%. When you think about the buckets that that falls into and we usually start with the industry growth which is the most significant piece of it in most cases whether on the way up or on the way down and then highly publicized change in wholesale shipments for RV lead the way there. But aggregate across our end markets a little bit of bright spot from marine but on a net basis down 40% related to industry growth so to speak or decline in this case. Organic, still continue to see it and it resonates through our content per unit. As you know that's something we're very focused on and we've been pretty consistent in our expectation of 3% to 5% growth and have exceeded that on a number of occasions over the past couple of years. And some of that is related to our foresight to rebuild our inventory ahead of increased supply chain issues and maintaining strong…

That's great color. And you've killed a couple of birds, with one stone, which is very helpful. Just talk about how April is shaping up in terms of OEM production levels relative to March, and your expectations for the remainder of Q2. I appreciate the updated color in terms of the full year forecast, just kind of seeing how Q2 shapes into that. Thank you.

Dan, this is Jeff. As we move through March into April, production levels stayed relatively flat. We're still seeing those shutdowns as far as three-day four-day work weeks, an occasional week off here or there for an OEM. But overall, we see that kind of continuing now through the end of the second quarter as dealers are really trying to rightsize their 2022 inventory, get that through the system and really prepare for 2024 model year. So, I think we'll see some continued shutdowns in pockets as they try to keep those inventories in line.

Perfect. And last for me, I'll jump out but just in terms of margins. Still looking at 7.5% 8.5% for the year. Maybe just talk about gross margins held up pretty nicely in Q1, despite the RV shipment declines. Your outlook for Q2 for gross margins and operating income -- operating margins, kind of relative to those Q1 levels. Thanks, again.

Dan, it's Jake again. So I appreciate the question. And we still feel like, we have a lot of resiliency at that gross margin line. And despite some pretty meaningful reduction in our principal end market or at least where we have the greatest concentration in RV, as we change that mix, which is just a little bit of that balloon squeeze that we've talked about in previous calls, the gross margin profile of our Marine side of the business, which is typically great -- one of our greatest gross margin contributors, is kind of picking up where we're losing a little bit on the RV side due to some absorption and just lower levels of production against a relatively modest fixed cost base, but a fixed cost base nonetheless. In gross margin, some of the things to think about is -- we're holding in pretty well I think 40 basis points down on a quarter-over-quarter basis. And what's really helping contribute to that, is our ability to hold at the cost of materials line and rebalancing that inventory that we've been talking about and ensuring that we're kind of partnered up, with our customers on these stabilized commodities and our product pricing. A little bit at the labor side is where we've executed a lot of cost savings type activities and rebalancing our labor force to the production we encounter and expect to encounter over the near to intermediate term. So, it was a really hard slog to build up the labor force even though we were able to mitigate some of those pressures with the automation we've spent money on over the past couple of years with our larger CapEx budgets that we've spoken about. But still want to hang on to some of that labor and make…

Extremely helpful. Thanks again. Hope to you see in New York next week. And best of luck.

Sure. Thanks Dan.

Thank you. And we'll take our next question from Scott Stember from ROTH. Please go ahead Scott.

Good morning guys. Thanks for taking my questions and I echo Dan's comments, Jake it was great working with you and I wish you all the best of luck in your new opportunity.

Thanks Scott. I appreciate that.

I'm just trying to drill down to 2022 how much excess inventory there really is still out there. There's some commentary out there about dealers starting to face curtailments in May and June. So, I was just wondering through your touch points through your logistics company, what are you guys hearing from the dealers? Thank you.

Yes, it varies. Really it varies among OEMs and dealers alike as far as what type of inventory they have with regards to 2022s. We've heard varying discussions from 10% to 20% upwards of maybe even around 30%. So, really it's something that is dependent on the product line and really the dealers itself. I know they're working very hard with the OEMs to diligently get through that product. I think it slowed down the 2023 production a little bit to make sure that they're not bringing anything on the lots new so they can really focus on that 2022 product so they can really get that really in alignment to where they feel like they need to be going into the 2024 model year that's coming up in July.

Got it. And then on the organic side, obviously, being within that 3% to 5% range in this environment is very impressive. But just trying to get a sense of how much of it is coming from some of your customers' inability to work through the supply chain crisis and how much of it is just through innovation and stuff like that?

Scott, this is Andy. I think one of the things that we're really excited about especially in an environment like this is that we've been able to really work between our brands to bring solutions to our customers and grow our business organically. So, there's some price that's rolling in through the TTM numbers as it relates to our content. But the new business that we've been able to not only bring on to date because of the innovations that we've been bringing the product solutions opportunities that we've been bringing have been fabulous. And then as we look forward there's still significant opportunity out there to be able to go after organic share with our customers. And as we've kind of pivoted a little bit here as it relates to kind of our acquisitions and kind of working through the market here and being very, very balanced and disciplined we've certainly focused inward to be able to see and focus on all the opportunities that we think we have to bring more and more value to our customers. So, it's been a great transition to that. And I think it's reflected in our organic numbers which we expect to continue.

All right. And then last question on the margins. The 7.5% to 8.5% maintaining that for the full year, is there any step-down function that we should worry about in the next quarter or two? I'm just trying to figure out the ramp-up towards that number for the rest of the year.

Scott, this is Andy. I think as we look into Q2 and Q3, and we're looking at kind of a full year estimate of 7.5% to 8.5%, we would expect to see up margin lift in Q2 and Q3 and then kind of resuming back to some normalization of Q1-ish in Q4. So as we think about just the next couple of quarters, with a lot of things coming in line as it relates to commodities that we've seen stabilize. Our ability to execute on the automation initiatives that we've done, that's where we would expect to see the rise would be in Q2 and Q3. And then coming back to more normalized -- I don't want to call it normalized, but typical seasonality Q1, Q4 margin levels.

Got it. That's all I have. Thanks again guys.

Thanks Scott.

Thank you. And we'll take our next question from Noah Zatzkin from KeyBanc. Please go ahead.

Hi. Thanks for taking my questions. I think you might have touched on this a little bit as it relates to 2022s. And I know you touched on the shipment side. But in terms of RVs, what are you hearing or seeing in April in terms of retail? And any color on how March kind of shook out would be helpful, as it relates to kind of the lower industry outlook there? And then, second if you could provide any color on inventory cadence as well as target operating cash flow for the year that would be helpful. Thank you.

Yeah. Noah, I'll start. This is Jeff. On the retail side, our touch points, again, it's varying. I would say, from dealer-to-dealer and throughout the country. We're hearing the traffic remains pretty positive. Weekly, it can change, but relatively speaking positive as far as people out looking for units on the lots. But it does vary out there. And we're being very mindful of it. And really keeping a good eye on the retail to see where that shakes out. I think that really is reflected in kind of the production levels that we're seeing from the OEMs and the fact that it's really kind of flattened out between April and -- March and April. So, we'll continue to keep a pretty close eye on the retail and see where that brings us moving forward.

This is Andy. I think when you think about the 2022s, as we look at it I think the OEs are really utilizing their tremendous scalability to manage that inventory that's out in the field. And as we look at Q2, we would expect to see the OEs continue to be very disciplined in their production to make sure that they're very well positioned for the 2024 model season post-July 4th shutdown. So that's how we're thinking about it. I think Q2 is that calibration point that the OEs are utilizing again very, very aggressively as they think about their scalability. They're so good at it. That's how we think about them managing the inventory mix of 2022s that's out there. So I think as everybody is looking forward to kind of that July new model season for the 2024s.

Hey Noah, it's Jake. Let me step in on the inventory cash flow question that you had. So we spoke a lot about the inventory deliberate build overtime and then we hit an inflection point last year where we're thinking about where the normalization of the production levels are particularly in RV. And as you know, our expectation is somewhat down this year, but we had another bit of a step function down in our range of expectation for RV wholesale shipments for this year. When it comes to inventory, as you can see from December 31 to now we've taken over $40 million out of our inventory between what's showing up on the balance sheet and what we have in a category of prepaid inventory. So working hard on the monetization, a lot of it takes the form of slowing our purchases and in some cases eliminating purchases as we feel pretty good about the raw materials we have, what we have on the racks in our distribution businesses which is about 23% of our business and put us in a position where we can just continue to monetize through those products. As you look at our balance sheet, when it comes out you'll note, that as we traditionally are we're weighted towards raw materials which are true raw materials which puts us in a great spot to flex of raw materials across our various business units that serve our various end markets. There's a lot of commonality there. It gives us some great outlets, while we still see some kind of level wholesale shipments and persistent demand on the marine side and they make up for where we've seen this drop off on the RV side and on the housing side as well. When I think about the…

Thank you. Very helpful.

Thank you. And we'll take our next question from Craig Kennison from Baird. Please go ahead, Craig.

Hey, good morning. Thank you for taking my question, and Jake it's been a pleasure working with you as well. I wanted to ask about the M&A pipeline. I guess, maybe just shed any more light you can on your M&A pipeline? And then as a broader question with all of your focus on automation, do you think Patrick as a whole as an entity brings more to the table as a buyer to some of the opportunities, whereby, you can drive more synergies than maybe you could before you had some of these I think manufacturing and automation expertise -- expertise I guess?

Craig, this is Andy. I'll take this. On the M&A front, we are continually cultivating our M&A pipeline as it relates to deal flow coming from external sources I would say that that slowed down certainly with the uncertainty in the market. But we constantly are out, making sure that our pipeline has opportunity and potential in it. And I think as we look at it today we're being very disciplined. We've got a full pipeline as usual and plenty of opportunity to execute on. I think as we look at the markets, we want to make sure that we're being disciplined and opportunistic in our acquisitions as well as our deployment of capital as Jake mentioned. So we feel like we're in a good spot to be able to execute on opportunistic acquisitions that come to -- as well as the other forms of capital deployment to drive the best value and the most returns in this marketplace. So we feel good overall. We're staying disciplined. There's plenty of opportunity and we're going to continue to focus on the return model. I think as you look at where Patrick's at today, my answer to that would be without question do we bring more value as a buyer on the M&A front. Certainly there are tremendous synergies that I think we can work with potential candidates on to drive value. We're doing that today. We're working amongst our brands internally to see where we can harmonize and bring solutions to our customers without jeopardizing the independence and individuality of the brands, which have made them so special. So it's -- I feel like we're in a really good spot overall an the investments that we made in our infrastructure, in our automation, in our IT and that we're making today, I believe are positioning us very well for when the market does pivot. We believe we'll be able to take advantage of that and leverage off those investments. So overall yes the answer is I believe we have a -- we continue to drive a solid value proposition as a buyer but also as Patrick overall.

That’s great. Thank you so much.

[Operator Instructions] And next we'll go to Rafe Jadrosich from Bank of America. Please go ahead, Rafe.

Hi. Good morning. Thanks for taking my question and Jake, best of luck going forward. I wanted to just ask kind of a bigger picture question about what you're sort of hearing about financial -- potential financial stress related to tighter credit across like the value chain, both on potential opportunities you can create in terms of challenges from your competitors? And then what you're hearing about anything on the dealer side in terms of if they're having any issues?

Rafe, this is Andy. I think just in general overall, we are not seeing or hearing tremendous pressure on the financing side as it relates to the retail environment today. Retail financing is available. Certainly rates are higher but lending is available and we're not hearing that as a constraint really across our platform. We believe it's really just a matter of kind of the new normal and consumers getting used to the new normal as we kind of go forward. We look at kind of where the rate environment could land. So I think that's what we're seeing out there today as it relates to that sort of pressure. From an internal perspective, I think we're in a really, really good spot. Jake's done a fabulous job of really positioning our balance sheet and positioning our financing structure to be able to be very opportunistic as it relates to opportunities that are there. But as well, from a liquidity perspective, we're in a really good spot. So overall, I think that we feel like we've got an advantageous position with where we sit today. And there could be some financial stress out there in the markets. But the markets that we play in are very resilient, as it relates to our competitors and our customers that we've been through these cycles before. And I think that as we look at it we're going to remain opportunistic and we will take advantage of opportunities that come our way. But overall, again, we're not seeing the overall financing environment create a tremendous amount of pressure today.

Great. That's super helpful. And then just on you mentioned in the prepared remarks, spoke a little bit about the aftermarket opportunity in marine. Could you just give -- it sounds like a very interesting compelling channel for growth. Can you just give a little bit more color on the sizing opportunity and then the margins in that segment like what your initiatives are there?

Yes, Rafe, it's Jake. And I appreciate that question. And it's something we're very focused on as we think about these couple of years now of running record production levels across our end markets and ensuring that while we have great connectivity almost to the umbilical level with our OEM customers, there's a lot of vehicles out there and houses out there in the RV park, the Boat park or the manufactured housing park, I guess for lack of a better description that we want to make sure that we have great connectivity to and able to service them as well as all the benefits that the aftermarket can bring to help with cyclical pressures and otherwise. When we think about our actual aftermarket exposure, as we've spoken about in the past, we've always pegged that around $200 million plus or minus of annualized run rate revenue. And I would say, it's a little bit lower on a run rate basis today. If you think about the global aftermarket kind of complex over the past few years, it had a lot of momentum whether for us our end markets for auto or otherwise through 2022 into December 2022. A lot of speculation that was fueled by stimulus spending, folks were working from home. They had time to do their own kind of mechanic type work. The installers were busy doing the things that they do. And we invested at that time as well, and some of our more significant aftermarket investments since that time were in Sea-Dog, Wet Sounds and Rockford Fosgate, who are meaningful participants through that aftermarket channel. Aftermarket, again, categorically kind of cooled off a little bit through 2022 and now, I would say, it's normalized. And it's normalized in that just a little bit for us…

That's really helpful. And then just one more that, I want to follow-up your comments on kind of how you're managing the labor level. Obviously, we just went through a period where it was difficult to find labor. And now with the manufacturing curtailments everybody is like -- has pulled back a lot but the overall job market is generally pretty healthy. Like, how do you think about managing the labor force and not having too much turnover during this sort of downtime or a cyclical downturn relative to the eventual recovery? Just any perspective there would be helpful.

Rafe, this is Andy. I think as we look at the talent that we've got in the organization we feel really good about our core talent levels and the engagement in our culture. I think our team is very much aligned. We've got great players and some hard chargers that are fun to work with and be a part of. So our culture is about engagement and talent development and opportunities and so just from the kind of the overhead side of the business. We feel good about the foundation that's there. And then on the variable side of the business as you mentioned our team as well has done a really good job of managing the labor workforce today. We're not seeing tremendous labor issues out there. We are doing a great job of flexing our labor to make sure, we're matching up with customer demand. And again, I think as we focus and continue to focus on engagement and talent planning and opportunities in front of team members we just think there's an incredible runway that supports the talent that we've got here. So we feel overall good about where we sit from a labor position. Our team has done a great job of flexing. It's not something that we're seeing a tremendous amount of pressure on today but we remain focused on engagement with our team members.

Thanks. That's helpful.

Thank you. And we'll take our next question from Griffin Bryan from D.A. Davidson. Please go ahead.

Yeah. Thanks, guys. So just one for me. We've had some pretty negative news from marine dealers and OEMs this morning. I guess can you just kind of talk about what categories are currently holding up the best? And then maybe which ones are lagging as we head into May? And then I guess just your overall sense of where retail is currently at.

Sure. This is Andy. We -- as we look at kind of our mix across the spectrum we sell to all components of the retail environment as it relates to marine, and we've got a heavier concentration of what I'd say fiberglass, saltwater, ski and wake than we do mix of let's just call it aluminum and pontoon. And so we still see strength in the fiberglass market the saltwater market. And as well even in the freshwater market, we're seeing resilience there today too. So our mix is geared towards the -- I would say a little bit of the higher-end boats, which have remained strong and solid. To-date, we've not seen tremendous fall off on retail. We do think that there will be some softening as we talk about in our estimates and our expectations for full year market which we've built into our model. But overall I think there's balance in the mix that's out there today as we've mentioned as it relates to dealer inventories. Dealer inventories are lower than they've been historically. And we're not expecting retail to fall off of a cliff and feel pretty good about where we sit today.

[Operator Instructions] And there are no more questions at this time. I'd like to turn the call to Andy for closing remarks.

In conclusion, as we navigate these dynamic market conditions, we remain committed to our goal of providing the highest quality products and services through our Better Together values which guide us in everything we do. We will continue to strategically invest in our business driving scalability, and pursuing strategic diversification to ensure our long-term success. Our resilient business model has withstood the challenges of the past year and we remain confident in our ability to pivot and deliver value to our shareholders over the long term. We thank everyone who has joined us on the call today, and look forward to continuing to create long-term value for our stakeholders.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time and have a great day.