Good morning ladies and gentlemen and welcome to the Patrick Industries Inc. Second Quarter 2017 Earnings Conference Call. My name is Cynthia and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Following the prepared remarks, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Julie Ann Kotowski from Investor Relations. Ms. Kotowski, you may begin.

Good morning everyone and welcome to Patrick Industries' second quarter 2017 conference call. I am joined on the call today by Todd Cleveland, 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 security's 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 2016, and in our other filings with the Securities and Exchange Commission. We undertake no obligations 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, and thank you all for joining us on the call today. This morning we would like to discuss the company's second quarter and six months 2017 results and provide an update on the major markets we serve and an overall business outlook. The second quarter 2017 carried consistent momentum from the first quarter in the form of robust demand patterns in the RV, MH and marine industries and the company's revenues and operating performance in the second quarter and the first half 2017 was right in line with expectations. On the top line, our revenues increased 29% in the second quarter and 27% for the first six months over the prior year periods. On the bottom line, our net income per diluted share in the second quarter and first half of 2017 grew 15% and 22% respectively over the prior year and included the impact of the issuance over the 1.35 million shares in our first quarter equity offering. Our results are the reflection of the continued execution of our operational, tactical and strategic initiatives and plans which include the successful execution and integration of key acquisitions and the expansion initiatives over the last 18 months. Our focus on capacity planning, talent engagement, leadership, teamwork and targeted capital deployment and alignment with our disciplined capital allocation strategy. Now I'll turn the call over to Andy who will further review our markets and performance.

Thank you, Todd. Now only did we see continued market strength in the second quarter of 2017 in our primary markets, but also continued to strategically leverage the strengths of our operating and financial platform in alignment with our strategic growth initiatives. With our recent acquisition of three separate companies under the Leisure Product Enterprises umbrella in April 2017 and several marine related acquisitions prior to that, our growing presence in this market is becoming more significant representing 7% of our second quarter sales and 5% year-to-date. He marine market complements our current portfolio of products and core competencies and is a natural fit within the growing popularity of the recreational and leisure lifestyle. We also recently announced in July 2017 the acquisition of Wire Design, which complements our existing wire harness brands and capabilities with product knowledge, design and engineering expertise, high quality product lines and opportunities to increase capacity and support of our growing markets. Now let's turn to some specifics to fix on each of the industries we serve. Our sales to the RV industry represent our largest segment accounting for 69% of our 2017 sale. This industry continues its strong year-over-year improvement with the sixth consecutive quarter of double digit growth in wholesale unit shipped. Since 2010, the second quarter is traditionally represented the largest number of wholesale units shipped averaging approximately 29% of total annual shipments and wholesale shipments grew 15% in the second quarter over the prior year. Leading that growth was a tillable [ph] market, which represents approximately 88% of all unit shipped. In light with recent trends, travel trailer shipments led the way increasing 18% in Q2 2017 and comprising approximately 76% of all tillable units shipped. Fifth wheel units' shipments increased 14% in the quarter versus the prior year period marking…

Thanks Andy. Our net sales for the second quarter increased $92 million or 29% over the prior year period to $407 million, reflecting growth in all four of our primary markets, the impact of acquisitions completed in 2016 and through the first half of 2017 as well as market share, geographic and product expansion efforts. Our 2017 acquisition of Medallion Plastics in March and of Leisure Products in April contributed approximately $18 million to our second quarter 2017 consolidated sales. Our RV revenues were up 23% in the second quarter reflecting an increase in wholesale shipments of 15%. On a trailing 12-month basis, our RV content per unit increased 9% from $1,930 per unit to $2,103 per unit. On the marine side, our revenues nearly quadrupled versus the prior year and represented 7% of our second quarter 2017 sales, up from 4% in the first quarter. s : And finally, our investor revenues were up 18% in the quarter. The increased industrial revenues were driven by 1% increase in new housing starts in the second quarter, the acquisitions we completed in 2016 in the first half of 2017 and our continued focus on leveraging growth synergies across the organization, product portfolio expansion and the entrants into new markets and geographic region. Our gross margin in the second quarter was 17.6%, up 10 basis points from 2016. The gross margin was positively impacted in the quarter by the leveraging of our fixed cost on increased revenues and synergies related to acquisitions offset by the negative impact of higher labor cost as we continue to combat the tight labor market in the Midwest. Operating expenses increased to 9.3% of sales in the second quarter of 2017 compared to 8.7% in the prior year. Warehouse and delivery declined 20 basis and SG&A increased…

Thanks Josh. Overall, we remain optimistic about the expected continued industry growth and potential both throughout the remainder of 2017 and 2018 and beyond as we look ahead to leveraging our solid financial, talent and service leadership platform and strengthening our position in the markets we serve. We're focused on increasing our product offering and value propositions to our customers as we further expand our presence into all of our primary markets and continue to build on the momentum of the industries we serve. Positive demographics, strong retail trends and demand in the family oriented leisure and recreational lifestyle markets, improving consumer credit, equity markets strength and resilience and consumer confidence all play a significant role in the ongoing growth we anticipate. In addition, the strategic acquisitions we made in 2016 and thus far in 2017 both increased our scale in existing markets and further opened doors to new markets within our geographic footprint most recently within the marine arena. Our acquisition pipeline continues to be full with acquisition opportunity across all four of the primary markets we serve and we have the wherewithal and capacity to continue to grow our business and bring new, innovative product lines to our existing customer base and to customers who we have not yet reached. Our disciplined execution goals continue to be focused around driving our organizational strategic agenda and utilizing our capital allocation strategy to strategically grow our business, increase our customer awareness with the breadth of products we provide, make investments in our work force and capacity initiatives both to support and grow our businesses and brands and drive shareholder value. I'm confident in the ability of our team members to continue to execute on our strategic plan. In addition, the ongoing support we received from our customers, 6,000 plus team members, supplier, order directors, banking partners and our shareholders who are privileged to serve, have afforded us the opportunity to subscribe for our goals of providing the highest level of quality, service and shareholder value. 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 Scott Stember with C.L. King. You may begin.

Can you guys just give what the total incremental acquisition revenues were in the quarter and what the organic sales growth was?

So, for our acquisitions to play [ph] in 2017, we had $18 million revenues for the quarter. Our organic growth for the quarter was 15% including industry growth and if we back out industry growth, we had market share organic growth of 3%. So, really strong quarter for us in the topline including our organic growth

Got it, and it clearly looks like some of the de-contenting issues that we've seen over the last year and a half are starting to abate, Fifth Wheel shipments are picking back up, can we maybe just talk about your thoughts about that as we head into the second part of the year.

Yes, we've seen stronger shipments definitely on the Fifth Wheel side while the low end [indiscernible] we feel are still going to be a significant part of the market and continue to grow, but the Fifth Wheel definitely continue to rebound. So, we are pretty happy with the way things are coming together overall from a shipment standpoint.

Got it and on the operating margins, are we still thinking as of last quarter that we could be up 30 to 50 basis points by the end of the year?

Yes, we expect margin for the second half of the year on the operating line. In the quarter, we had some impacts still from the labor component that’s starting to abate significantly with investments that we've made. We probably had about 20 basis points in the quarter impact on the labor line, impacting our margins and we expect that to continue to decrease throughout the remainder of the year, but we would expect after the 20-basis points impact to labor that we're going to experience on an annualized basis this year that we could give the 30 to 50 basis points for the 2017.

So that’s including or not including the labor issues.

Not including, 30 to 50 bps, not including the labor impact that would offset that.

Okay, got it. And just one last final one and then I'll jump back in the queue. Maybe just talk about the boat side on marine side, clearly you are building up some very nice synergies there, maybe just talk about the margin profile of this business versus the RV, industrial and MH and some of the opportunities going forward. Thank you.

We're very excited about the marine space, there is a lot of similarities with what we see in the RV space related to vertical integration opportunities at the customer level for us to be able to continue to provide value and quality solutions and fully integrated solutions to the OEM. So, we're very excited about that. As it relates to the margin profile, overall, we would say that we view the margin profile as accretive to overall Patrick consolidated numbers and opportunities, so again I think that there is continued expansion opportunity there organically through acquisition and as well on the margin side.

And our next question comes from Daniel Moore with CJS Securities. You may begin.

Just wanted to touch in, drill down a little bit on your comments regarding Q3. You mentioned typical seasonal slowing in Q3 to the October timeframe as we get into new models in the RV open house. Do you still expect shipments to be up year-over-year? Just wanted to see if we can drill down on that statement a little bit.

Yes, we expect shipments to be up, there is a little bit of choppiness in Q3 related to the show season. We've also got less days in the quarter. So, we look at Q3, things do slow up a little bit, they always get units ready for the shows and so again, I think we are going to see continued strong demand, continue to improve shipment levels but we're heading into that kind of Q3 timeframe where we do see things kind of pull back just a little bit.

So, slowing growth but still positive growth year-over-year.

Yes.

Any sense for your revenue growth for the month of July?

We don’t give forward guidance on that Dan, but what I will tell you is that everything is according to plan right now as it relates to kind of Q3 on our expectations.

And on the margins in Q2, when you touched on SG&A, you gave a lot of color around labor. Anything else unusual, you’ve obviously completed some larger acquisitions, any sort of one-time items or cost that you might call out in the SG&A line in Q2?

With the acquisition of Leisure Products relatively larger on an acquisition scale for us, we did have some one-time cost related to the transaction costs associated with it and purchase accounting to the tune of about $500,000 or $0.02 of EPS in the quarter. It was actually split closer to gross margin and SG&A, so it impacted both gross margin and SG&A.

And we talked about marine, can you just spend a minute and just reminding us, you globed together the really interesting overall solution production set, tell us where exactly you are playing in marine, what your content for both looks like if you have that type of data available and is 7% a reasonable proxy or run rate for the overall percentage of revenue that is now embedded in the marine space. Thanks.

I'll comment first on that. So, our revenues for the quarter on the marine side were 7% of sales up from 4% in Q1 and a little over 2% in the prior year, but we didn’t feel the full effects of Leisure Products in the quarter. So, on a go forward basis, I think it will be still high single digits but closer to 8% to 9% on a full annualized basis. When we did the acquisition of Leisure Products, we talked about annualized revenues in the marine space of $125 million at time of acquisition, so closer to that 8% to 9%.

We expect growing contribution from the marine space as we continue to head forward. There is a lot of opportunity. We're really in the early stages of what I would call the marine model development related to again the opportunities that are there, us to be able to continue to expand our footprint. Right now, we are playing in the fiberglass, electronics dash panel kind of product space. We're also with Leisure Products, we picked up fuel tanks as well as tooling design and much more fiberglass capabilities and capacity as well as design engineering expertise for us to be able to really bring value to the marine OEMs related to again that fully integrated product line and so again, we feel like there is a lot of opportunity there. So, it's really the content for both, we haven’t accumulated that yet, we are in the process of putting that together, but our marine model is really in that early stages of development at this point.

And then lastly that feeds into, that’s obviously been a big area of focus of M&A. you’ve already essentially put the proceeds of the recent equity offering to work, what does the pipeline look like going forward? Is marine the primarily sort of the paramount in terms of likelihood for further deals and there are larger deals in the pipeline that you could execute over the next six to 12 months. That’s it, thanks.

Yes, our pipeline is full and really full in all the markets that we serve. So, we've been shifting through a number of potential acquisition both small and large through the first half of the year and obviously we've executed on a number of them. The opportunities continue to be extremely strong and we are really excited about the potential not only in the marine industry but in the other industry that we serve and I just add on top of that, probably the thing that gets me most excited is our ongoing opportunities that we have, we expanded through acquisition over the past four or five years, pretty regularly, but as you’ve seen, our organic growth and our expansions and to regional locations has improved along with the team's ability to execute on other areas of our capital allocation strategy including strategic CapEx to eliminate bottlenecks and also reduce labor cost has been put into play and those are all things that we have been preparing for really for the latter part of 2016 and through 2017 here and we are really looking forward to seeing those pieces continue to contribute along with our acquisitions.

And the next question comes from [indiscernible] with Bank of America. You may begin.

I just want to follow up on the M&A question, can you just talk about your capacity to peruse further M&A. I think that the LPE acquisition was obviously a little bigger than ones you’ve done in the past. Can you just talk about the capacity you have going forward?

We have a lot of capacity. One of the reasons that we went forward with our equity offering and the expansion of our credit facility in the first quarter was to really position ourselves to be able to take advantage of the strong pipeline that Todd had referred to and so we had a lot -- we had acquisitions in our sights kind of as we kind of moved through Q1 and Q2, certainly we've got tremendous opportunity with a full pipeline today to be able to continue to execute consistent with what we've done in the past and so we'll tell you that our view is that we've got ample dry powder to be able to continue on our strategic plan.

And then just on the gross margin outlook for the rest of the year, can you just give some color on how we should think about the labor market tightness that you’ve spoken about when we start to maybe lap that. And then the input cost outlook and some of the labor efficiency initiatives that you have.

So, we'll start to lap kind of the labor inefficiencies impact we saw in Q3, that’s when we really started to feel the impact of that last year with the strong shipments we saw in Q3 of last year. So, we're lapping that from a comp standpoint. So, we got the benefit of that and also the investments we've made in capacity and strategic CapEx to abate those the labor impacts, the tight labor markets. So, we should see the impact of that year-over-year in Q3 and Q4 as we proceed throughout the rest of the year. As far as the input cost, commodity prices have ticked up a little bit and we're seeing that, but we don’t expect material impacts on the margin line associated with it.

Just for the back half of the year with that, when you put that all together, can we expect gross margin to be up slightly?

We would on year-over-year basis.

Okay. Great. Thank you.

And our next question comes from Darren Wolfsenback with Robert W. Baird. You may begin.

Good morning. Thanks for taking my questions as well.

Good morning.

Good morning.

My first question is just related to what you're hearing from your OEM and other industry contacts in terms of dealer inventory levels and retail sell through.

This is Todd. I'll take that one. We've heard really nothing but positive coming out of the OEs. Obviously, they've continued to add facilities to take care of retail demand and just this recently, I think last week, one week before announced further expansion on their side on the motorized side. We're seeing continued facility expansion to take care of retail demand and really if you take a look at the retail pull-throughs thus far through the statistics that we have, we're right on track for exceeding past trends as it relates to retail demand as far as keeping up or exceeding in the last couple of months that of a OEM manufacturing. On top of that, I think the other delta that came into play is the Canadian market has continued to strengthen. As a result, they were down significantly last year year-over-year and their demands and retail demands has strengthened. It's a solid plus for things on the regional side.

Great. Thanks. And then just wanted to dig into your recent acquisition of Wire Design. Do you see any opportunities to get into wire harness manufacturing for other industries in addition to the marine market?

Yes. This is Todd again. We definitely do. We've got over the last of the last year and-a-half, we've assembled a group of companies that actually we have intentions of synergizing and that one in particular KRA which came in last year offers us the opportunity to definitely have the in-roads to go into other markets. Obviously we're going to be extremely supportive of the existing industries that the business is supporting currently, but we believe there are some true opportunities to expand that in the months and years ahead.

Great. Thanks for taking my questions.

Thank you.

And our next question comes from Tim Conder with Wells Fargo. You may begin.

Thank you and congratulations, gentlemen. I apologize for the horse voice here. A couple of items. Todd or Andy, whoever wants to take this. Last year, there really wasn't a pause in the September-October period. You eluded to that it could be this year, but given the ongoing strength of the market, what would you see if you want to put a probability to it? Is there the potential where there might not be again not much of a pause this year?

I think that's definitely the case. A lot depends on some of the retail numbers that come in on June and July here. We're anticipating them being strong. I think what Andy was alluding to is that from a year-over-year comp standpoint, even if you take a look at last year's numbers, they were up significantly for us. So we're anticipating those numbers to be up again this year. I think what Andy was referring to more was seasonality trends that we see Patrick's in extremely strong shipment that we see in usually Q2. Definitely think that as long as retail stays strong which we anticipate, we're definitely looking at a quarter-over-quarter gain in line with what we've seen thus far this year.

Tim, this is Andy. I'll just add a little bit more color as well. Last year, August-September shipments were up 30% plus and 20% respectively. We expect to see increased shipments. I don't know that we're going to see those type of numbers at this point. We're certainly planning and really working on capacity to be able to position ourselves well for that. But I don't think we're going to see those types of increases this year. We do expect increase year-over-year though.

Okay. Helpful, gentlemen. And then given what you're seeing at this point and then starting on the new models you've built for RV and marine, what type of general pricing increases are you able to get at this point?

Yes, Tim. This is Todd. We don't go out with just general price increases, but we have passed along price increases related to raw material cost and also labor cost. We've managed things in the partnership with the OEs both on the marine and RV side in a way that we hope it's a win-win for both of us. But we did obviously and have like we normally do adjust pricing accordingly based on raw material and labor challenges that we are faced with.

Okay. And then Todd, you alluded too that you're going to be lapping here the labor cost increases and with the [indiscernible] that you put in place with CapEx and some of the programs, how are you planning on a go-forward basis here? Any additional programs, measures to I guess get out even more in front of that and then in conjunction with that question, do you anticipate any additional new geographic manufacturing shifts coming up here looking into '18, even out in the '19 or so?

Yes. I think first of all, when you take a look at our labor situation, I think we're going to cap ongoing. As long as there's expansion, we're going to have ongoing labor challenges that we're going to have to face as a management team. I think the initiatives that we took starting back almost two years ago from a talent engagement, from a talent retention standpoint has started to take hold, obviously made it significant investments and leadership within the organization that has been important for us to guide and get our principles and values spread across the organization. On a softer side, I think that's going to be the key for us to maintain and stay ahead of the labor game. But I do think again, there's a finite number of individuals that are in these areas and we've got to create the company of choice, so to speak, so that we're getting the best talent and the talent that we need in order to be the best supplier that we can be for our customers. From an overall expansion standpoint, obviously we made some geographic expansions starting a little over a year and-a-half ago in some areas and I do think that the OEs will continue to spread their expansions into those regions. Honestly, I would be surprised if anybody opens up a new hub in the years to come, but it could happen. But I think when you look across the country and the opportunity that we have as an organization, we continue to deploy additional product lines into the regional hubs that serve not only the RV, but the marine space and the manufacturing hub into having space to alleviate some of the pressures that we're seeing here in the Midwest and obviously those are things that we have under way that we continue to undertake.

Okay. And then lastly, gentlemen, as it relates to - you talk about CapEx - along with those plans, should we anticipate CapEx as a percentage of revenue materially changing? I guess looking more over the next two to three years, I guess would be the time frame of that question?

This is Josh. No, we would not expect CapEx as the percentage of sales to materially change. We set out the year with a $50 million target. In our prepared remarks, we talked about that's our current estimate, but we are prepared to flex that by additional $4 million with the strong demands we're seeing in all of the primary markets. Right now, I would say that we're looking at $16 million to $20 million this year with the incremental $4 million specifically identified on our capacity expansions to make sure that we're best positioned to handle the strength in the markets and to kind of come back and labor component of that, too. As far as ongoing, 2018, 2019 beyond, again I wouldn't expect it to materially change as a percentage of sales and I wouldn't expect it to grow proportionally either. So you would expect it potentially to decrease slightly as we grow revenues for those years and beyond.

Okay. Thank you very much.

Thank you.

Thanks.

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

Hi, good morning.

Good morning.

Good morning.

I just wanted to just go back to the marine market again. Just wondering, it seems like the market has come off its bottom, but the market itself doesn't appear to have grown away - RVs have. And I'm just wondering, is the thought that at some point, you could see higher growth here, or is it about being able to cross-sell into other markets? I'm just wondering what the long term strategy is in the marine when it appears to be a lower growth market. Thank you.

Steve, this is Andy. As it relates to our vision into the marine market, it's been growing at single to mid-single digit rates over the last several years. We see again, continued upside potential as it relates to that. I think slow and steady growth has been our model really in all the markets that we serve and we're well-positioned to support that because we believe that we bring a nice value proposition. So as we look into the marine market today, it's highly fragmented. We think that our branding model and value proposition allows us great opportunity to continue to put together some great partnerships with the marine OEMs to be able to support them. So we see strategic growth upside potential, we see expansion opportunity potential to grow organically and then on top of that slow and steady growth in that particular space as it relates to just general industry growth. We kind of think the overall value proposition provides a nice long-term view and platform for us to continue to execute on. That's how we're thinking about it and similar to the way that we look at our other markets.

Okay. Did you say what your growth was relative to - I guess organic growth relative to the industries growth? I know you guys do a pretty good job of growing above industry rates and some of the other categories. Is that true for marine or maybe you don't have the scale yet?

This is Josh. We don't break out organic growth by industry per se. Our marine revenues quadrupled, but it was off a little based from last year. A lot of that was acquisition-driven as we're really just filling the effect of leveraging these marine acquisitions that we've acquired over the last 12 to 18 months and so when on a consolidated basis, organic revenues were up 15%. So exceeding the market weighted average for us and we would expect that trend to spill over on the marine side now that we've acquired Leisure Product and BHE and we leveraged that platform to continue to execute on that like we've done on the RV side.

Okay. All right, thank you very much.

And our next question comes from Scott Stember with C.L. King. You may begin.

I guess just a follow-up question on the tax rate going forward. I know it's probably difficult to forecast what it will be just depending on option grants and when they actually are executed. But is there a number that we could use from a modeling standpoint? 37% seems to have been the rate going in past years, but obviously so far this year we're well below that. Maybe just give us a little sneak peek into what you're thinking?

Yes, Scott. This is Josh. Obviously for the quarter, we had a lot effective tax rate with the stock comp tech benefit associated with the option that 33%. Absent that, we would have been able to slightly under 36% for the quarter and 36% in the quarter year-to-date. As in any other exercise of options to get the stock comp benefit, we would be out to anticipate 36% in the quarter for the remainder of the year.

Got it. It's all I have. Thanks.

Thanks, Scott.

Thank you.

We have no further questions at this time. I would like to return the presentation back over to Julie Ann Kotowski.

Thanks. We appreciate everyone for being on the call today and look forward to talking to you again in our third quarter 2017 conference call. A replay of today's call will be archived on Patrick's website www.patrickind.com under Investor Relations. I'll turn the call back over to our operator.

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