Good morning, ladies and gentlemen, and welcome to Patrick Industries’ Third Quarter 2021 Earnings Conference Call. My name is Robert, and I’ll be your operator for today’s call. [Operator Instructions] Please note, this conference is being recorded. And I will now turn the call over to Ms. Julie Ann Kotowski from Investor Relations. Thank you. 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, many of which are beyond the company’s control, which could cause the actual results and events to differ materially from those described in the forward-looking statements. These factors are identified in our press releases, our Form 10-K for the year ended 2020 and in our other filings with the Securities and Exchange Commission. We undertake no obligation to update these statements to reflect circumstances or events that occur after the date the forward-looking statements are made. I would now like to turn the call over to Andy Nemeth.

Thank you, Julie Ann. Good morning, ladies and gentlemen, and thank you for joining us on the call today. Once again, we are pleased to report strong revenue and earnings growth in the quarter with sustained momentum in backlogs building across the end markets in all of our primary market platforms. Our team’s tremendous efforts, dedication and flexibility in this highly volatile supply chain and labor environment is a testament to their will to take care of our customers and their ingenuity to be able to deftly navigate difficult currents. The partnership with our customers is very real and tangible. Our sales and operations professionals have tirelessly continued to work and communicate very closely with their counterparts in our customers’ operations to absorb what is happening real time, manage changing production schedules and strive to anticipate the needs in this ever-changing dynamic environment. Layering this, our focus on investments in our culture, infrastructure and automation tools which will empower our team members to be able to do their jobs better and more efficiently and effectively create better balance and scale up and down with our customers’ needs and business models. Technology and data-driven solutions are just one of the strategic initiatives we are investing in and a primary focus of ours to enable and empower our team and our customers to collaborate, analyze opportunities and improve the quality and delivery of our products and services. This includes AI and machine learning and cloud-based solutions, which transform low-resolution decision-making and data silos into high-resolution, collaborative solutions and deliverables. Our people and our critical emphasis on human capital and what it means today for our future success remains a focal point in how we do business. Our community and team member initiatives continue to enhance our better together, better community philosophy and…

Thanks, Andy, and good morning, everyone. Our RV revenues were up $212 million or 50% in the third quarter and represented 60% of our consolidated sales. RV wholesale unit shipments were up 23%, totaling approximately 152,000 units for the quarter. We currently estimate retail unit shipments decreased between 15% and 20%, primarily as a result of low channel inventories in the same period or resulted between approximately 145,000 and 155,000 units sold. Despite the decrease in retail shipments compared to the third quarter of 2020, retail is still outpacing wholesale on a year-to-date basis and matching up with wholesale on a quarterly basis. The velocity of dealer inventory unit turns continues to indicate that wholesale shipments are not satisfying underlying consumer demand, especially when considering growing OEM backlogs and as well indicating further extension of dealer inventory replenishment cycle. Restocking to meet customer demand levels still has not happened, and our estimates indicate that dealer inventories are down slightly year-over-year on TTM retail shipments that are up 15% to 20% over the same period. On the marine side of the business, retail trends parallel the RV and also continue to outstrip wholesale shipments. The delta between wholesale and retail shipments indicates continued depletion of powerboat inventory on dealer lots and resulting in similar extension of the restocking cycle. Our marine revenues of $173 million, representing 16% of our sales and increasing as a percentage of our mix due to our organic and strategic efforts were up $80 million or 85% for the quarter. On estimated marine wholesale unit shipments that increased 15% in the same period. We estimate marine retail shipments decreased 35% to 40% in the quarter, translating into between 47,000 and 52,000 units sold, again, not due to the lack of demand, but due to lack of available…

Thanks, Jeff, and good morning, everyone. Our consolidated net sales for the third quarter increased 51% to $1.1 billion, driven by increases in all 4 primary end markets. Revenue from our leisure lifestyle markets, which are comprised of RV and marine, increased 57% with RV and marine revenues up 50% and 85%, respectively. RV content per unit increased 19% to $3,735 per unit and estimated marine content per unit increased approximately 66% to $3,166 per unit. Revenues from our housing and industrial markets increased 36% in the quarter with MH revenues up 25% versus the prior year and industrial revenues up 52% compared to the prior year. Estimated MH content per unit increased 10% to $4,961 per unit. Gross margin in the third quarter was 19.6%, increasing 50 basis points compared to the prior year. The gross margin improvement was primarily driven by the leveraging of our fixed costs with a tactical execution of our team’s operations efficiencies in production that we continue to realize as a result of our investment in processes and technologies, which maximize the effectiveness of production and delivery of our products and the contribution from margin accretive acquisitions. Warehouse and delivery expenses decreased 20 basis points as the scale of our operations benefited from an increase in the volume of activity and the associated leveraging of our fixed costs. Operating expenses were 10.8% of sales compared to 10.5% in 2020 attributed to an increase in SG&A, reflecting investments in personnel and human capital management initiatives. Operating income of $93 million increased 56% in the third quarter and operating margin of 8.8% increased 30 basis points as thoughtful strategic execution continued in the quarter. Our diluted earnings per share in the second quarter was $2.45, up 51% from $1.62 in the prior year. Our overall effective…

Thanks, Jake. As noted, visibility in our end markets is strong. Retail and wholesale demand patterns and projections continue to point towards an extension of dealer replenishment and resulting OEM production requirements well into ‘22 and likely into 2023. We have been actively focused on and investing in automation and innovation opportunities and initiatives across our platform as we plan for fiscal 2022 and beyond to enhance and drive scalability, flexibility, efficiencies and continuous improvement and balance with our team members across our platform. Additionally, ongoing supply chain initiatives, supported by our strong liquidity and investments in technology, systems and human capital will continue to provide the opportunity to serve our customers as they flex their models and work to replenish depleted dealer lots and reduce record backlogs. We continue to maintain a patient, disciplined and focused capital allocation strategy based on data and detailed models to drive long-term value for our customers, shareholders, team members, partners and the communities in which we operate. The enhancement and well-being of our 11,000 and growing team members is an essential focus of our resources as we work together to continually improve and foster our team culture. Their dedication and outstanding execution during this quarter complement our investments and their success and will drive our efforts to unlock fragmented markets with a solutions-based customer-centric model innovate and deliver quality products and reliable, dedicated, trustworthy, high-quality service. This is the end of our prepared remarks. We are now ready to take questions.

[Operator Instructions] Our first question comes from Daniel Moore with CJS Securities.

Congrats on the strong performance. Quick clarification, the 2022 outlook, let me see if I heard this right, RV wholesale up mid-single digits on retail down low to mid-single digits. Is that right?

That’s right, Dan.

And marine up mid-teens on retail that’s up maybe single digits?

That’s right. We think retail is up low to mid-single digits.

Got it. Make sure I was typing fast enough, super helpful. Let’s go back to margins, really strong in the quarter, particularly in light of the rampant inflation and supply chain challenges that everybody is seeing. Wondering if you can quantify the impact of those on gross margin and operating margin in the quarter. In other words, what might margins have looked like at a more stable or normal operating environment?

Dan. Again, this is Jake. So margins, we continue to see, as we have through this year where we -- our business has seen some pretty strong expansion of the cost of our raw materials, but our teams in the field are able to partner pretty closely with our customers to ensure that we can pass those along. And as you know, those are kind of making their way through the entire value chain and still making on to consumers. So those -- that ability to pass along those prices and include those in our product pricing have been -- continue to be successful. As we’ve talked about in the past, there’s a little bit of a 30-day lag that works well with our days of inventory to help us smooth those out. And as we’ve spoken a lot over time, we have a highly variable cost structure, and we think about it in the context of those key variable costs, which are cost of materials and then the labor itself followed by overhead. We have a lot of good opportunities to continue to manage those costs across those as production volumes ebb and flow. When I think about the gross margin, though, the one place we’ve been most focused is this quarter, and you’ll see a little bit of tightness there is coming through the we’ve seen some of the raw material pricing, which has certainly been up, but also availability at times, we’ve bought on the spot to make up for some availability from some of our distribution vendors. But in other times, we’ve seen a little bit of freight in and freight has been a pretty big headline out there, and that certainly contributed to a little bit of increased costs. But you start peeling away those kind of more episodic or current topics. I would tell you that we’d probably see a little bit of improvement in the terms of maybe 20, 30 basis points at that level.

Really helpful. And then as we think about Q4 likely to see in terms of operating margin, likely to see a little bit of a dip given typical seasonality and holiday shutdown? Or do we think that levels in Q3 are sustainable?

Yes. Good question, Dan. Again, this is Jake. We started this year with an expectation that we would improve our operating margin. I think we started at 100 basis points over fiscal year 2020. And we’ve adjusted that to 130 to 150 basis points up over that 7% number we had and we continue to stand by that. To your point, we see fourth quarter, there will be some shutdown activity. And we’ll see that in November, a little bit around Thanksgiving holiday, and we expect all of our customers and ourselves as well to take a little bit of a pause here around the Christmas and other holiday season late in December. And with that, you’ll see a little less absorption but you also see a lot of monetization of working capital, which heads towards our $300 million of operating cash flow number. But with that, it will bring down that average operating margin from 8.8% it has, but still, we feel very comfortable about that up 130 to 150 that we talking about since first quarter.

Our next question comes from Scott Stember with CL King.

Congrats on great quarter as well. Can you maybe just parse out a little bit more the expectations for retail in the recreation markets, RV versus marine. You talked about, I guess, on the RV side, availability will be one of the big limiting factors. But is there any other reason why there should be such a divergence between RV and marine for next year?

Scott, this is Andy. Thanks for the question. I think what we’re seeing when we look at kind of the calibration of inventories and the availability of inventories is we saw the marine retail very strong, RV retail very strong. The marine retail pulled the inventory through at a quicker pace with less units out there. And so a couple of months ago, we started to see marine retail decline, and that’s really a result of availability, as we mentioned. And then RV followed 2 months later. And so what we’re seeing today certainly is availability is the issue traffic at the dealers remain strong. There was a little bit -- there was actually a little bit of a COVID or a surge that we got earlier in the year from the variant and then it’s settled in, and we’re still seeing strong new buyer traffic at the lots from all of our touch points today. So our view is that, first of all, as we’ve mentioned, the inventory channel is severely depleted. And second of all, it is constraining retail right now, but we’ve not seen any degradation in traffic and interest in the retail side. So from our perspective, it’s purely inventory related today.

Got it. And then related to price increases, a lot being made of or talked about with the OEMs continuing to put price increases through and worrying about protecting backlogs as the backlog of orders continues to get pushed out more and more. What are you hearing? Do you expect any potential pushback from OEMs, if indeed they do end up having to work with dealers to protect backlog? Anything coming back to you guys?

I think our expectation right now is that the raw material market is still elevated really across the commodity space that we’re dealing with and the products that we’re dealing with. And so I’d say they’ve somewhat stabilized, but still at an elevated level. And so we’re going to continue to partner with our customers and be proactive in that partnership as we are able to manage cost and input costs we’re certainly going to share that on the upside and the downside. And so our expectation is that we’ll continue to partner again with the customer base, make sure we stay with them and help them as they continue to push through pricing and be able to pull back pricing. I think everybody would certainly be happy with commodity prices coming down to be able to continue to stimulate tremendous activity out there. So we’re going to partner either way.

Got it. And then, Jake, just one last housekeeping item. Organic sales, what was it in the quarter and just flesh out between industry and growth specific to Patrick?

Yes. Sure, Scott. Again, it’s Jake. So as we talked about, up 51% quarter-over-quarter, up 4% on a sequential basis. So that kind of 51% up quarter-over-quarter, I would tell you, the way to think about 16% to 18% of that is acquisition, so up 16% to 18% on acquisitions that didn’t show up in the third quarter of 2020. Industry growth about 19% to 20%. And we think about that net of industry and net of acquisitions, what remains about 3% of that is attributable to some market share gains and the rest come through pricing and other activities.

Our next question comes from Daniel Moore with CJS Securities.

When you talk about the new normal in terms of inventory levels, based on your outlook for retail, in terms of units, what are we looking at from your perspective that we need to restock over the next year plus in both RV and marine.

Yes, Dan, thanks. We think a lot about that and where that will take us. But in the meantime, we’re thinking a lot about what the trends look like through this year. And maybe to go back in time a little bit. As we transition through this year, I think at the start, we expected that retail would -- or rather wholesale would outpace retail. And a lot of factors to include the delta surge that Andy referenced have led to a as well as adoption of the leisure lifestyle activities on the outside, friends and family, all those wonderful things that are really transforming how people engage with us and our customers has continued to drive us this year with strong retail. So as we get through year-to-date, we’re just getting to a point where wholesale and retail hit some equivalents. I think this quarter, specifically, you think about September was a record year in wholesale shipments, record months rather than wholesale shipments of 55,000 units. And it’s where it’s finally gotten to the point where there’s a little bit of restocking activity going on. But we still think about the inventory levels, these folks out there at the retail point of sale are still 60% to 70% below where they were on a pre-pandemic basis. And there’s been a lot of talk about the units that have been taken out over time with the supply-demand imbalance, and that’s across RV and marine. We think about them very similarly when it comes to the lack of inventory that’s out there and working backwards the value chain, how to try to ameliorate that some. When we think about that, it takes us into -- through 2023 is still a pretty strong production year as evidenced in our view in some…

Dan, this is Andy. I just want to add a little bit to that. When we look at our numbers and the expectations that we’re looking at for 2021 and 2022, we include that new normal is kind of where we’re estimating at the end of 2022. And I think we’d like to see some seasonality at this point in time, give our teams a break here in Q4. So as you see some fluctuations in OEM shipments versus retail pull, the backlogs are still strong out there. People taking units. We’d like to see a little bit of seasonality to give the teams a break. And so we’re not so laser-focused on just every single month and annualizing it as much as we’ve kind of modeled out some seasonality into our plans, and it still doesn’t get us to an expectation until the end of 2022.

Excellent. And when you look at the supply chain, labor and everything else, your RV outlook would imply something in the low 50s, 52,000, 53,000 54,000 monthly shipments on average, comfortable that what you see now you and your -- the you and your OEMs can handle that.

Yes. Dan, this is Jeff. We agree with that. We kind of keep a pretty good pulse on where our production levels are through the marine and RV sectors and believe that there’s still strong activity, but it’s measured in that 48,000 to 52,000 range through the rest of the year, and then we’ll see things kind of bump up from there as we get into 2022.

Got it. And if you’ll indulge me for 1 or 2 more. Just any sense for some of the automation and AI initiatives that you’re pursuing as well as the potential benefits? Any commentary there would be interesting and helpful.

Yes. Again, Dan, this is Jake. So if you look at our CapEx that we’ve made $18 million in the quarter and about $44 million through this year. Talk with the year-to-date number, $44 million, about $30 million of that has been capacity expansion. And of that capacity expansion about $20 million to $21 million of that has been away from just an absolute physical plant where we’re buying a lot for our transport business and then improving it so that they can move efficiently around their standing up a new building and putting in ventilation, for example. So about $20-plus million of that is true machinery CapEx and expansion, increase of productivity and practically all of that has some element of heavy automation element with software and all sorts of a little bit of robotics here and there as we try to find a better way to make more with less so we can reduce waste increase our productivity, mitigate some of the difficulty in hiring folks to fill out increased production needs. So we’re really focused on it. And there’s an element of software. We’re investing in that across the enterprise, both down at the factory level from the machinery to the shop floor to the supervisor’s office, all the way back to what we call our headquarters here in Elkhart. How we think about our ability to gain and analyze information on a -- in a more sophisticated manner, whether that’s automation to the accounting advance functions or implementing as we think about that Phase I into a Phase II that includes some more robotic process automation type applications. So a lot of that going on. We expect that to continue. I think those will drive great benefits or is not only now, and we’re working hard to do more with what’s available, but also meet production schedules with our customers but also in the future as it will make us better and more nimble. And I wish you could come out and take a look at some of the work that folks are doing, particularly at our North American Forest Products business. They’ve created this kind of back to the future, I was calling it that might not even be the right thing, but you go from one facility, which is the old way of doing it heavy manual content for bow trusses, and other things, you walk across the parking lot and glittering new highly automated line. It’s got robotics, moving things around. It’s really making a difference for us, and it’s taken some of the pressure off the people out there and making us better at what we do every day. So we’re really excited about it, and it’s definitely worth the cost, returns are great. And honestly, with the increased expense to practically everything we’re seeing over the past 1.5 years from labor and materials, it really makes a lot of sense to do now and then that investment in the future.

Excellent. Last one, just a little bit of a reporting question, but amortization expense is now upwards of $60 million annually. And if you tax effect that, you get back similar to what Winnebago just reported last week, you get to an adjusted EPS number this quarter, somewhere near $3. Just wondering if that’s something you’d consider on a go-forward basis.

That’s a great question, Dan. Again, it’s Jake. And Andy and I were just speaking about this yesterday as a matter of fact. One thing we really pride ourselves in is that cash flow yield that we have on our shares and our ability to convert any measure of financial reporting from EBITDA to operating income into free cash flow. And that drives our capital allocation strategy, whether we’re returning capital to shareholders, which was $16 million this quarter or the continued investment in our business, which you can see is just under $300 million of strategic acquisitions through year-to-date. It’s a great measure for how we’re able to generate that cash flow, which is, in my experience, very nontypical for an industrial company, but we’ve been doing it for a long time. And it speaks to the nimbleness of our platform and that controllable cost element where 70% to 80% of our as measured as a percentage of revenue are manufacturing controllable and variable costs. So something we’re thinking about. More to come on that. We’re thinking a lot about that as well as everything else and that goes into these calculations and making sure people appreciate the earnings and cash flow power of our business.

[Operator Instructions] We have no further questions at this time. I’ll now turn the call back over to Ms. Julie Ann Kotowski for further remarks.

Thanks, Robert. We appreciate everyone for being on the call today and look forward to talking to you again at our fourth quarter 2021 conference call. A replay of today’s call will be archived on Patrick’s website, www.patrickind.com under For Investors. I’ll now turn the call back over to our operator.

Thank you. Ladies and gentlemen, this concludes today’s teleconference. We thank you for participating. You may now disconnect.