Good morning, ladies and gentlemen, and welcome to the Patrick Industries, Inc. Third Quarter 2020 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] As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Ms. Julie Ann Kotowski from Investor Relations. Ms. Kotowski, please begin.

Good morning, everyone, and welcome to Patrick Industries' Third Quarter 2020 Conference Call. I am joined on the call today by Andy Nemeth, President and CEO; and John Forbes, interim 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, including, without limitation, the disruption of business resulting from unforeseen events, such as the ongoing impact of the COVID-19 pandemic and its impact on economic conditions, capital and financial markets and our operations, 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 2019 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, everyone and thank you for joining us on the call today. Before we cover the details of our quarterly results, I want to provide an update on our successful efforts to continue to prioritize a safe and healthy workplace for our team members and customers in the COVID-19 environment, while aggressively supporting an unprecedented rise in demand in our end markets. All of our facilities are up and running and we have integrated and continue to successfully integrate safety protocols across our platform aligned with CDC, state and local guidelines and recommendations into this new normal environment as we adapt to the changing dynamics of this global pandemic. The tremendous hard work, dedication, drive and passion exhibited by our team members continues to be both humbling and inspiring as they respond to the strong demand for our products and adhere to equally demanding production schedules. These achievements have also been made possible by the mutual support and compassion we have for one another as we uphold our common team values, which continue to be an essential part of our culture. It's amazing to witness the tenacity and resiliency of our team members in today's COVID-19 environment. Our leisure lifestyle markets, which represent 74% of our revenues, continued their strong run again in the third quarter. Attracting new buyers due to the, continuation of positive lifestyle and secular trends in domestic travel and outdoor recreation activities. These trends in the RV and marine markets are also creating and stimulating a network effect that is expanding the breadth and depth of our touches in our addressable markets. Our MH and industrial platforms representing 26% of our third quarter revenues are seeing tailwinds from very tight housing market conditions, an increase in home improvement activity and the…

Thanks Andy. Our consolidated net sales for the third quarter increased 24% to $701 million, driven by increases in three of our four primary end markets. Our leisure lifestyle end markets continue to benefit from the popularity of RV and marine in the COVID-19 environment, while our industrial market benefited from a strong housing and remodeling environment. Revenue from our leisure lifestyle markets, which is comprised of RV and marine increased 34%, with RV and marine revenues up 36% and 25%, respectively. RV content per unit on a TTM basis was relatively flat at approximately $3,140 per unit and estimated marine content per unit increased approximately 16% to $1,915 per unit, including the impacts of the COVID-19 shutdown. Revenues from our housing and industrial markets increased 3% in the quarter, with MH revenues down 1% versus the prior year, and industrial revenues up 9% compared to the prior year quarter. Estimated MH content per unit increased 4% to $4,503 per unit. Gross margin in the third quarter was 19.1%, increasing 70 basis points compared to the prior year. The gross margin improvement was primarily driven by benefits of leveraging our fixed operating cost against a strong increase in revenue, but was partially offset by labor increases and inefficiencies related to overtime. Operating expenses were 10.5% of sales compared to 11.8% in 2019. Warehouse and delivery expenses decreased 60 basis points due to a lower mix of MH sales in the quarter. SG&A expenses were 5.4% of sales in the quarter, a 60 basis point decrease compared to the prior year, primarily reflecting higher sales volumes and the leveraging of our cost structure. Operating income of $60 million increased 60% in the third quarter and operating margin of 8.5% increased 190 basis points, primarily due to the increased sales volume and…

Thanks John. Our resources, liquidity and strong consistent cash flows will continue to allow us to deploy capital to further take advantage of growth and acquisition opportunities in alignment with our strategic plan. In addition, our highly variable cost structure and liquidity profile provide us the flexibility to stay ahead of changes in this dynamic macro environment, expand our infrastructure and other resources to meet customers' growing needs. And maintain the flexibility to quickly pivot on our strategic plan to adapt the changes in both demand and economic conditions. The RV, marine and housing markets are growing and changing. Our portfolio of solutions for these end markets has positioned to accommodate ongoing changes in the way consumers travel, spend time outdoors and establish the footprint of our communities. The combination of our solid operational and financial foundation, customer first performance-oriented culture and the talent, dedication and passion of our 8,000 team members will continue to position us to execute on our strategic plan as we strive to continuously exceed our customers' expectations. As we look ahead to 2021, we are excited about the opportunities and growth potential in front of us. And believe positive fundamental demographic trends and macroeconomic and secular tailwinds will lead to continued strong demand in our end markets. In addition, the ongoing support we receive from our customers, suppliers, Board of Directors and shareholders affords us the opportunity to continually strive towards our goal of increasing long-term shareholder value by serving our customers at the highest level, reinvesting in and protecting our talented and dedicated team members, dealing ethically and responsibly with our business partners and supporting our local communities. This is the end of our prepared remarks. We are now ready to take questions.

Thank you [Operator Instructions] Our first question today is coming from Brett Andress from KeyBanc Capital Markets. Your line is now live.

Hey good morning. So, a lot of investor's conversations around the state of the RV supply chain. And it sounds like you are in a position to meet demand potentially better than others. But what are you seeing across the broader supply chain? And I guess, maybe said another way, what gives you confidence the supply chain can meet a 25% to 30% increase in 4Q shipments?

Brett, this is Andy, good morning. Thanks very much for the question. Yes, I think we're in a really good spot as it relates to where we're situated today. We went into COVID with a very strong financial platform, first of all. And so, as we work through the COVID shutdowns and then the subsequent ramp up, we really pushed our teams to put themselves in a position to be able to make sure they can take care of our customers coming out of COVID. And so, they did a great job doing that. And then we aggressively went after capital expenditures early in the game to make sure that we are positioning ourselves in both Q4 and into 2021. So, we're feeling good about what we're doing from a capacity perspective. I think there is hotspots kind of across the space. But the supply base has been extremely resilient in managing and adapting to changing circumstances and run rates as it relates to the industry. So I view this as short-term, and I view the supply base really being able to position itself well to support the increased run rates that we're expecting for next year. I think as we think about it, we definitely believe we're in a great position to be able to support that. And we're planning to invest through the fourth quarter here to make sure that we're in that position to support those run-rates next year.

Got it, okay. And then a follow-up on the, I think it was 15% to 20% 4Q RV retail outlook. I mean, it's definitely an encouraging outlook. But is there anything that you're seeing in October trends that give you the confidence - for the remainder of the quarter on retail?

Trends have been very consistent, both on the retail side as it relates to our channel checks with our partners. New buyer activity still remains strong. Retail units are still sold really through November and December at this point in time. So, there's no channel refill occurring at this point, which from our perspective is a really good thing. It just extends out the cycle for the channel to be refilled back to appropriate levels into 2021 and likely into 2022. As it relates to wholesale, we've heard production increases and strong production rates to continue really through the fourth quarter and into the first quarter of 2021 at this point in time. So nothing's really changed if anything, we continue to hear, robust demand across the platform.

All right, thank you.

Thanks.

Thanks. Our next question today is coming from Daniel Moore from CJS Securities. Your line is now live.

Good morning Andy, good morning, John.

Good morning.

Good morning.

Wanted to drill down a little bit on the inventory levels, both in RV as well as marine, you talked about how many units have been stripped out. Maybe talk about where we are in terms of absolute levels, whether it's weeks of production, percentage of annual shipments today and kind of where that stands in terms of the upper and lower bounds over the last 10 years?

Sure, Dan this is Andy. In the RV industry in particular, we track the statistics there as it relates to retail wholesale and inventories. And weeks on hand have been halved from where they were back in 2014 on roughly 45% to 50% more in retail volume. Inventory turns have doubled at this point in time compared to where they were if you just baseline kind of that 2014 year. So as we look at it, inventories are extremely lean right now and are absolutely going to need to be rebuilt for the foreseeable future, similar story in the marine side of the business. I think as we watch kind of retail wholesale match up fairly closely over the last couple of years. I think, with where we're at today and the strength of retail. We're definitely seeing the same situation as it relates to inventory turns, increasing weeks on hand, decreasing and just not enough - enough inventory out there. So, we view this as very healthy, exciting, I think as we look into 2021 and 2022 and are excited about our potential to be able to take care of that.

Helpful. You mentioned despite the really strong operating leverage, some labor and overtime constraints, understandably. Any - can we quantify that margin impact in the quarter and thoughts on either lingering inefficiencies or opportunity to correct those in Q4 and 2021?

Yes Dan, this is John. Just we really feel that the labor inefficiencies in Q3 were 30 to 50 bps, and overtime, being probably the most significant component of that. Second item would be, as we ramped up just some labor efficiencies as we work to ramp up our facilities. So those two items, needless to say, we've kind of worked through the ramp-up period. So, we wouldn't expect those to continue on. We are continuing to work to add to our team to build labor. We will have some additional overtime in Q4, though.

Got it, very helpful. And then what are you hearing about, obviously, demand is robust, the OEMs regarding holiday schedules relative to Q4 last year. And are you seeing or experiencing any rising COVID cases or intermittent shutdowns either at Patrick or across the supply chain?

Right now, I would tell you that we're expecting the production schedules for the holiday season here to be improved, if you will over what they were last year. So, we would expect more days of production than what we saw last year at this point in time. And then as it relates to COVID, our team has done a fantastic job of implementing COVID protocols. We've not had any serious clusters. We've had cases for sure, but our protocols are in place. And I believe that our team again, has done a fabulous job of protecting our employees and taking care of our employees, especially while in the facility. So, no major issues at this point as it relates to COVID. The team continues to remain vigilant, and we continue to adapt to changing circumstances as it relates to COVID. But overall, we feel good about where we're at as it relates to making sure our employees are safe inside our facilities.

Perfect, and last from me. On the MH side, backlogs are through the roof for most of the OEMs but there is some significant near-term bottlenecks to production. How fast do you think they can alleviate those? And how fast do you think the MH business can grow in 2021, the industry in general if not Patrick's?

Right now, as it relates to kind of MH, we're kind of thinking low to mid single-digits up in 2021. I think certainly, the labor is the biggest issue out there today. I know that some manufacturers are looking at opportunities to increase production and throughput in that space. And - but they're dealing with the same things that we are as it relates to labor. But overall, I would tell you that again, I think everybody is focused on it. I think everybody is getting their arms around it and again, we're looking at doing anything we can from an automation perspective, not necessarily to eliminate positions but to reallocate to other areas where we do have bottlenecks. So and I think what we would expect is everybody else is doing that as well.

Perfect, I'll jump back with any follow-ups. Thanks.

Thank you.

Thank you. Our next question today is coming from Scott Stember from CL King & Associates. Your line is now live.

Good morning guys and thanks for taking my questions?

Good morning.

Good morning.

Can you maybe talk about your view for RVs for next year? I know the RVIA is looking for a nice increase in shipment activity. But that - when I look at those numbers, one can think that they're just looking at replacement demand. We're just trying to refill the coffers on the deal a lot. What are your expectations for retail? What do you think we could do, particularly if the industry is up, like you said, mid to high single-digits this year?

Our current expectation, I would tell you is that retail is going to be up low to mid-single next year. And that's going to continue to again, prolong the channel refill cycle, I think even with RVIA numbers. That being said again, the manufacturers are adding capacity - they'll be able to support that. We're doing the same thing. So the industry has proven extremely flexible and nimble when it comes to the run rates and being able to flex and move with that. And so again, I think that as we look at it, we think that the balance is really well positioned for a long run here, especially at the wholesale level, but still anticipate strong retail for next year.

And on some of the supplier issues obviously, you're faring much better than most? Could you give us any examples of any share gains that you've had because of some of your competitors not being able to fulfill demand?

Yes, I think that as we look at it really, in Q3, I would tell you that our share gains have been relatively nominal. We picked up a little bit, but we've really been focused on making sure that we're taking care of our existing customers at this point in time, given the significance of the ramp-up. I think as we look forward, we're really excited about the opportunity to capture some share as we head through Q4 and into Q1 of next year. Especially with the initiatives that we're putting in place on the capital side to be able to support that growth. So, we've really been focused again, on taking care of our existing customers because they've all ramped up extremely quickly. And we want to make sure that again, we're taking care of those who have been there with us and absolutely focused on again, driving that value proposition as we go forward with our flexible model.

Got it. And on the industrial side non-res, could you talk about how those business trends are, whether it's high-rise or hospitality? Obviously, there's some weakness there, but maybe just give us a flavor of what's going on that side?

The biggest issue we see today, really two things. One, multifamily is a little bit constrained due to some COVID protocols at least where - we're at out in the Pacific Northwest. But as it relates to high-rise commercial, the biggest issue is constraints on the number of subs that can be inside a project at any given time due to the COVID distancing protocol. So that's really what's holding things back today. But overall, we think that again longer term, those markets are going to continue to be in a good spot.

Got it, that's all I have right now. Thank you.

Thank you.

Thanks. Our next question today is coming from Craig Kennison from Baird. Your line is now live.

So good morning thanks for taking for taking my questions.

Good morning.

Good morning.

So, I'm sorry if I missed it. Did you report organic growth by category?

No, we didn't and - for the quarter Craig, organic was 2%. And just to give you the rest of the story. We feel out of the 24% sales growth in the quarter, organic was 2%, acquisition was 6 percentage points and end market industry was 16%.

So the organic net of 2% is net of industry, just FY.

Yes, that's a good important clarification. I appreciate that. And then I know that in the RV market, there has been tremendous demand for entry-level units as more people join this industry. So ASP trends have been I think, under pressure. Curious what your expectation is for content per unit, looks like it held flat. What's your outlook for content per unit maybe into next year? And then as some of these first-time buyers upgrade, do you see any upward trajectory in ASPs going forward?

Yes Craig, this is Andy. I think as we look at it, we've definitely seen smaller units, a little bit of a shift there. It was already kind of on the low end of the spectrum as it relates to size of units heading into COVID. The new buyers certainly have been attracted into that space. And so ASPs under pressure as well as it relates to kind of pricing. We've been - our markets and our commodities have been relatively stable, and we've given some pricing this year. So that's been a headwind. So as we look at kind of going forward. I think that as consumers upgrade, we certainly expect opportunities for content gains into 2021.

Great and then on the margin front, a lot of incremental revenue coming in, how should we think about your incremental margin today given your changes in your portfolio and new acquisitions? Just trying to get a feel I guess, for the incremental profitability of the business?

Hey Craig, this is John. Just a couple of things, we're - we set out on a journey to improve op margins 30 to 50 bps this year. We're on track to do that and as it relates to kind of higher sales volumes and our ability to leverage fixed costs. Absolutely, we saw that in Q3. We expect that to continue as we push forward. As we discussed, we've got some labor challenges, of course. We've got both overtime and then just some inefficiencies and staffing up challenges that do impact our margins. But all in, we expect to hit that target of 30 to 50 bps this year.

Terrific, hey thank you so much.

Thank you.

Thanks. Our next question is coming from Steve O'Hara from Sidoti. Your line is now live.

Hi, good morning.

Good morning.

Good morning, just maybe on maybe previous commentary made by some who you kind of dispute the impact of COVID on demand. And I'm just wondering, is there a way to kind of - how do you guys think about the - maybe COVID driven demand and maybe that's around the new buyers coming in versus kind of what growth might be outside of that?

Steve, this is Andy. I think that as we look at it, we think that the new buyers have certainly been on top of what was already strong fundamental demographic trends that were supporting the market. And so, certainly the need and opportunity for social distancing, but being able to get away has been a very attractive option for many consumers. And just anybody - a lot of people that we talk to just out in the public are interested in the lifestyle and the space and being able to do that. So, we believe that it's already - we believe that COVID fundamental if you will, the new buyer turn is already on top of a strong demographic trend. And we believe that's going to continue for the foreseeable future into 2021, especially with the COVID overhang that continues to exist. So if anything - we believe it's been a plus.

Okay. And then I guess just on the - your kind of revenue per industry segment. I mean is the - are there areas where it's not due to the delta between you guys and the industry is not due to acquisitions where maybe your outperforming kind of unrelated to acquisitions or underperforming due to supply constraints on your end?

I think that - we've got hotspots here and there across the platform as it relates to just some supply constraints, but nothing overly significant. And what I mean by that is that we see opportunities to be able to improve going forward. I would tell you that our operations, we would tell you are performing as expected, if not better, especially given the tremendous attention. And - work ethic that our team has put in over the last six months to really partner up together and support our customers through this process. So, I would tell you that we're - our teams are running as expected and if not better, especially with the dedication that we've seen of them.

Okay, thanks very much.

Thank you [Operator Instructions] Our next question is a follow-up from Daniel Moore from CJS Securities. Your line is now live.

Thanks again. Obviously, I guess once again, aggressively reallocating strong cash flow. Maybe just talk about rank ordering priorities as we go forward. Obviously, CapEx to ramp up is first and foremost. But we spent a lot more on acquisitions than buybacks. Stocks kind of 10% free cash flow yield or higher by my math so just curious how that - you might think about that on a go-forward basis?

Sure, Dan this is Andy. I think as we look at things right now, we've got a very strong acquisition pipeline very excited about the candidates and partners or potential partners that are in that pipeline today, which we continue to cultivate. So we're going to continue on the strategic path there. CapEx has absolutely been a priority, especially with the anticipated capacity opportunities next year. And so, we definitely have pulled that forward in Q2 or Q3, Q4 here. And probably a little bit into Q1. But overall, I think we're going to be well situated there. And as it relates to buybacks, we always stay disciplined in the market, and we always have plans in place based on our metrics and expectations and forecast and modeling and returns to be able to repurchase shares. So, I would expect us to continue as we have down the path and continue to execute on all of those, all the while continuing to support our dividend policy as well. So, the strength of our cash flows is very strong. Our liquidity position, our leverage position is in a great spot today. So, we couldn't be more excited about our opportunities that are in front of us strategically.

All right, thanks for the color. I appreciate it.

Thank you.

Thank you. We've reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

Thanks, Kevin. We appreciate everyone for being on the call today and look forward talking to you again at our fourth quarter 2020 conference call. A replay of today's call will be archived on Patrick's website, www.patrickind.com under Investor Relations. Now I'll turn the call back over to operator.

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