Good morning, ladies and gentlemen, and welcome to Patrick Industries' Fourth Quarter 2022 Earnings Conference Call. My name is Latanya, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. [Operator Instructions] Please note that this conference is being recorded. And 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; 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 2021 and then 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 reflect on another year of record operating results and financial performance in 2022, we want to, first and foremost, recognize our team's incredible dedication and tireless commitment to manage our business and serve our customers in-light of some of the most dynamic market conditions across each of our end markets in recent memory. Fiscal 2022 was the tale of two halves, as we'll talk about, and we see the third and fourth quarters and full-year 2022 is proof that our plan to build a stronger and more diversified company is working and driving margin and operating resilience. In the first half of 2022, demand trends across all end markets were solid, although economic headwinds were building. In the second half, we began to see these trends shift in the RV industry with a significant decline in RV production as the OEMs pulled back in recognition of balanced dealer inventories. Our RV OEM customers further evidenced their tremendous scalability, reducing output by 48% versus the prior six-month period to address slowing retail demand. During the same period, we continue to drive [content] [ph] and our marine and housing businesses remained resilient, bolstering our margins while we scaled our RV business in alignment with our revenues. It was the second half of the year that we believe proof tested the Patrick model and the strategies we've been executing over the last several years, namely the strategic diversification of our portfolio and intentional and opportunistic capital allocation strategy and investments in automation and infrastructure while maintaining a strong balance sheet. The strength and success of the Patrick model can be demonstrated by comparing 2022 to 2017, where shipments in 2017 were 505,000 units.…

Thanks, Andy, and good morning, everyone. In general, there are a few overarching themes to our leisure lifestyle and housing end markets. Rising interest rates continue to prevail as economically sensitive consumers are being impacted. Alternatively, general unemployment remains low and higher-end products across markets are proving resilient. Inventories across our end markets are either in balance with estimated new normal levels or not sufficient to meet demand and therefore, providing runway for the long-term. We believe that the end consumer of our products will ultimately recalibrate to new norms and continue to invest in leisure lifestyle and housing markets. As expected, conditions in the RV industry continued to soften from third quarter into the fourth quarter as OEMs scale their businesses. Our fourth quarter RV revenues decreased 39% to 411 million, representing 43% of consolidated sales. RV wholesale unit shipments of approximately 78,000 decreased 47% as OEMs continue to adjust output in an effort to better manage dealer inventories in alignment with the estimated reduced new normal levels. The drop in shipments was driven by an estimated 23% decline in RV retail demand in the quarter, which not only faced challenging macroeconomic headwinds, but also a tough comparison to a record-breaking RV market in the fourth quarter of 2021. From a dealer inventory perspective, the metrics we have outlined imply a net increase of approximately 7,900 units in the quarter, our estimates indicate that TTM dealer inventory weeks on hand at the end of the fourth quarter were approximately 19 weeks to 21 weeks, up slightly from 18 weeks to 20 weeks from our estimates at the end of the third quarter and below historical pre-COVID levels of approximately 26 weeks to 30 weeks. The long-term prognosis for the RV industry is favorable supported by consumer interest in the…

Thanks, Jeff, and good morning everyone. Our consolidated net sales for the fourth quarter decreased 17% to $952 million, driven by a 39% decrease in RV revenue and partially offset by a 35% increase in Marine revenue. For the full-year, net sales increased 20% to $4.9 billion, driven by growth in all end markets. Our combined RV and Marine revenue increased 18% to $3.6 billion for the fiscal year. Full-year Marine revenue increased 56% to $1 billion, while RV revenue increased 8% to $2.6 billion. RV content per unit increased 31% to $5,257, and we increased Marine content per unit by 45% to $5,281 for the full-year 2022. We've gained market share as a result of our team's incredible dedication and flexibility by helping our customers manage supply chain difficulties and bring innovative products to the market. In our housing business, which is comprised of our MH and industrial end markets, our revenue remained flat at $285 million for the fourth quarter and increased 24% to $1.3 billion for the year. MH revenue for the fourth quarter grew 3% to $155 million and 29% to $705 million for the year. MH content per unit grew 21% to $6,243 for the fiscal year. Our industrial revenue increased 18% for the full-year and fell 2% for the fourth quarter as housing starts decreased 3% for the full-year and 16% for the fourth quarter. Gross margin in the fourth quarter increased 130 basis points from the fourth quarter of 2021 to 21.1% resulting from the realization of our production efficiency initiatives and synergies, the contribution from our acquisitions and the flexibility of our highly variable cost base in response to the planned production reduction in our RV-focused businesses. Gross margin for the year increased by 210 basis points to 21.7%. Warehouse and delivery…

Thank you. [Operator Instructions] Our first question comes from Scott Stember with ROTH MKM Partners. Please proceed.

Good morning guys, and thanks for taking my questions.

Good morning, Scott.

In December, some of the OEMs started to shutter production for some of their brands on the RV side, of course, and it's the reports that, that's continuing to today. What are you hearing from the OEMs, and what are you looking for, for a production environment for the first quarter?

Yes, Scott, this is Jeff. So, I don't – I'll say this. I don't know that they've shuttered brands because that's a little bit different than actually slowing production and taking, kind of days and weeks off. We continue to see that through the holiday shutdown, some may be a little bit longer extended than we've seen in the past. However, the manufacturers are starting to come back online and have over the last several weeks. I will tell you that we still see the three-day weeks and the occasional week off, but ultimately, we're seeing, kind of a similar activity that we saw pre-holiday production levels.

Got it. And then if I heard you correct, in talking about your expectations for wholesale and retail, I guess, retail 360 plus in wholesale in that 325 to 350. That's the first time that a lot of us are hearing that there'll be a divergence between wholesale and retail this year. Can you maybe talk about what's going on as far as inventory, if you still feel that there's far too much inventory, particularly lower-priced units for 2022 in the channel?

Scott, this is Jake. Inventory still feels pretty healthy as measured by total units, weeks on hand, some of those additional measures that we've used and talked about in days past, but it still feels like there's a – at least from an anecdotal perspective and our connectivity with the dealer networks that there's a desire to, kind of continue to rebalance the types of units they have from maybe the lower end travel trailers to the higher end fifth wheels and motorized where there's a little more velocity these days. But also as they think about clearing out some of the 2022 models, which we also heard a little bit at the Tampa show that they may be a little heavier on the 2022 models than they'd like to be at this time of the year. But also, generally speaking, thinking about, continuing to work on that retail-driven, kind of philosophy and how we use the analytics to build our model out, which is what leads us to that 325 to 350. And we think about where retail has been, and we use that as, kind of the starting place, and if you think about this from second half 2021 to second half 2022 or fourth quarter to fourth quarter, we're down about 20%, and that kind of guides where we are for at least the very base of building the models that we use for these analytics. Then we start to work in and holding our constant weeks on-hand. And as Jeff mentioned in his remarks, said that 19 weeks to 21 weeks, we think that's where people are generally comfortable and where that rebalancing activity will take place. And we use that plus the visibility that we have from our boots on the ground and operational perspective…

Got it. And then last question on pricing, inputs, logistics are all improving. Could you talk about how much of that you put back or given back to the OEMs?

Yes. That's a great point, Scott. And we've seen that through the year. As you can see, the major commodity indices have stabilized for us after some pretty significant periods of run-up. And everything from the price of the commodities, the availability of the commodities and the speed with which we can obtain them have all kind of normalized. It's a little bit of a mixed bag depending on which of our end markets, but ultimately, you can say that we're starting to in third and fourth quarter pass through some of these pricing decreases that we're seeing. We're certainly keeping an eye on our inventory levels, which we're decisively engaged in our working capital initiatives, as we've spoken about in the past couple of quarters, and ensuring that we're partnering up with our OEM customers as they execute on the discipline of their production levels.

Got it. That’s all I have guys. Thank you.

Thanks, Scott.

Our next question comes from Mike Swartz with Truist Securities. Please proceed.

Hey guys, good morning. Maybe Jake, can you help us think about just in the quarter, the organic growth or contribution from M&A and then maybe pricing and share just some of the moving parts to the revenue decline in the quarter.

Sure, Mike. This is Jake. Happy to do so. So, as you've seen and we've stated, we're down 17% revenue quarter-over-quarter for fourth quarter, and there as we transition our third and the fourth quarter, we still continue to see some of the benefits of our strategic diversification initiatives. If you think back to fourth – rather third quarter where we were down, I think the RV market was down 40% sequentially and year-over-year, but as a business, we were up 5% from a consolidated perspective. Consolidated this quarter, down 17%, led by an industry reading that's down 31%, led by RV as the major component of that reduction. Organic growth, up 1%, pricing is up 8%, and that's happened, kind of throughout the year and it varies by our end market, but the first half of the year is the only place we saw some action on RV pricing. And as we mentioned here in the last question, we – this third and fourth quarter, we've been giving back some as we start to see that mitigation and the run-up in commodities. And from an acquisition perspective, up 5%. So, down 17% for the company, down 31% on industry, up 1% on organic, update 8% on pricing, up 5% on acquisitions.

Okay. Great. That's helpful. And then just a question. I think you had mentioned 2023 is going to be more of a year of improving cash flow and working through some of the higher inventory levels you maintain in the past year or two. Is there any way to think about maybe where you're targeting inventory levels to be by the end of the year, i.e., how much cash we should generate from that liquidation over the course of the next 12 months or so?

Yes, Mike. Happy to answer that. This is Jake again. So, I'd back up a little bit to our third quarter discussion where we turned in an inventory number on our balance sheet of about $734 million. And as you can see, over the past quarter, we've been able to work on that pretty effectively getting down into the $666 million area. We continue to work on that and expect to see some pretty positive returns as we transition through 2023. You also can see that, as we mentioned today, $412 million of operating cash flow, but as you think about the outlook that I provided here in my remarks, the prepared remarks, that is, we have an expectation of some softness across the majority of our end markets here. So, while we'll see net income come down, we expect to see that enhanced margin profile we have really delivered some good free cash flow conversion. We continue to work on that working capital. I think from a combined basis on those two primary factors, we expect to be about $400 million in operating cash flow for the full-year 2023.

Okay. So, earnings down year-over-year for cash flow working – operating cash flow fairly steady is the way to read that, I guess?

Yes, pretty flat, made up as we lose some net income just in dollars basis, but we see the benefit of the margin shift as we wait. You can see where the impact on our end markets are heavily weighted towards RV, we [weighed back] [ph] towards our – the marine businesses. And as we spoke in this typically enjoy a little bit higher margin, as well as a higher free cash flow conversion. So, we'll see – as we lose net income, we'll still see some pretty good monetization and conversion there. The rest will come from that working capital monetization as we get down to targets that are better aligned with the production activity that's out there for the year.

Got you. And then just one final one for me. Just on thinking about incremental margins. I mean I didn't do the math offhand with your comments on your margin expectations for the year. But I guess how should we think about incremental margin this year maybe relative to historic? And then how to think about that going forward in a lot of the automation, the efficiency initiatives that you've undertaken, has that incremental margin math changed pretty significantly?

Yes. Thanks, Mike. It's Jake again. And I would tell you it's a theme we've certainly spent a lot of time, and we, as a group on this call, have spoken about over the last couple of quarters some of the primary contributors to our margin expansion, which has been significant this year, has been a couple of things and it's the pricing, but certainly to be sure, as well as some absorption that we've seen on the higher production levels. But where we've spoken a lot in the last few quarters about the durability of that margin and where that comes from. And that's – we still believe in that 100 basis points to 125 basis points of durable improvements, structural improvements to our business, [50 to 75-plus basis points] [ph] of that is coming from the acquisitions, which are smaller in their addition to the revenue, but certainly bring an outsized margin profile to us. And we think that contribution is the durability of that new product, higher value-added, higher fabrication. And certainly, as you know, weighted towards the marine side of the business. The rest comes – of that 100 basis points to 125 basis points really comes from efficiency, automation, and human capital initiatives that we've engaged upon. And we see that as we think back a little bit in time, to your point about some previous readings, Andy mentioned a few of those in his initial remarks where we had some comparison between 2017 and 2022, but as you think about – maybe you go back in time and you can go way back to the great recession, but not a great comparable for our company is that was – I think we were $200 million, $300 million company at the time with a very…

Okay. That’s great. Thanks a lot for the color.

Our next question comes from Daniel Moore with CJS Securities. Please proceed.

Good morning. Thanks for all the color, taking the questions. Maybe start with, kind of near term at…

Good morning.

Good morning. Start with the, kind of near-term outlook, from a content perspective, should we think about that being maybe a little bit lower given mix and some correction in raw material input costs in the near-term or can you hold that – the gains that you've had over the course of 2022 to pretty steady here near term?

Well, mix, when we think about mix, Dan, we expect our mix next year as you think about where we see the impact on our end markets being a little more severe and continue with the RV market versus Marine markets. So, I would tell you, we expect to maintain a lot of the content from the Marine perspective. The model year turnover happens at the midyear, and that's where you'd most likely see any change in pricing that's probably the greatest influence to what content per unit would be for marine. But again, you wouldn't get a full-year impact of that. But at the same time, we feel pretty good about our value proposition to our Marine customers. The RV side, probably the greatest risk of content certainly comes from pricing, as Jeff mentioned, and I mentioned in our comments here today. We expect to continue to gain share there. And really, we've seen the benefits as we've spoken about in quarters past of leveraging our scale and availability to drive that market share gains that we've had. But certainly, pricing could be a toggle for us as something that could really be the primary influence of any reduction that we'd see from a content perspective. But overall, we expect to take share. And as I mentioned in my comments about our liquidity is our ability to be nimble when others maybe cannot be quite so much.

Very helpful, Jake. And then just thinking about lower wholesale productions, combined with, kind of expectations for shipments being a bit back-end loaded, how should we think about overall revenue and gross margin for Q1 relative to Q4 and operating margin-wise, likely to start out, kind of at the lower-end of the range, maybe even a little below before taking back higher? Just thinking about the cadence? Any help there would be great.

Dan, this is Andy. I think that that's probably accurate, probably a little bit lower in the end of the range, just given the tremendous discipline we've seen in the space as it relates to the OEMs matching up with retail and really maintaining that balance of dealer inventory. And so I think as we head into the spring selling season, we would expect Q2 and Q3 to rebound above and beyond those levels from Q1. So, just from an overall seasonality perspective, Q1 is going to be a little bit lighter, but picking up certainly and making up that difference to get us to the 7.5% to 8.5% that Jake talked about on the op margin side by the end of the year.

Very helpful, Andy. Last one, and I'll jump back. But maybe just a little bit more about Transhield in terms of revenue and EPS contribution and what you see them bring into the table? Thanks.

Sure. Transhield, Dan, this is Andy. It's about a $50 million business without question, you know one of the things that we look forward in our acquisition model is accretive margins and the opportunity for increased share and growth out of the business. And so, we fully expect to be able to drive that business. There's a ton of organic opportunity out there, a ton of synergies across the space and the markets that we serve today to be able to execute not only on the organic growth that Transhield expects to achieve, but with things that we can do with Transhield Shield inside our portfolio. The team is phenomenal. We're excited to partner with them, and we think that the growth trajectory is significant, as well as driving accretive margins.

Very good. I’ll jump back with any follow-up. Thanks.

The next question comes from Craig Kennison with Baird. Please proceed.

Okay, good morning. Thanks for taking my questions. That's been a very helpful call so far. Just wanted to follow-up on the content per unit question. If I look in the RV space, historically, that tends to grow sequentially, and that's true even from like Q4 to Q1, but I understand the comments you made about pricing trends and whatnot. I'm just curious if you think in Q1, we can see a flat to up content per unit metric. And then for the full-year, do you think if it was [indiscernible] I think in Q4, will we be lower than that for the full-year 2023 ex-acquisitions?

Craig, this is Andy. I think as we look at content, as Jake mentioned, the biggest risk to content today is the pricing piece. That being said, we've got a tremendous amount of opportunity, as Jake mentioned also, as it relates to the organic opportunity that's been created in partnership with our customers over the last 12 months to 18 months, due to our size and scale and our ability to be able to deliver on products. So, we've been very, very excited about the growth potential that's come, the customer partnership that we've experienced and the opportunity for new business. And so, our goal would be to achieve a flat balance in Q1, let's call it, and then continue to be able to grow our market share as we head throughout the year. There is some pricing risk as we look at things in commodities, but we've been giving some of that back as well in Q3 and Q4. So, it's not like the pricing is just starting in Q1 of 2023, it's been happening over the course of the last couple of quarters, and we've been really working with our customers to make sure that we maintain that partnership. So, our goal is to be able to deliver above and beyond with a little bit of pricing risk in there, but other than that, we expect to take organic share net of pricing.

Got it. That's super helpful. And just working down the income statement. Jake, a question for you. Just you've made so many changes to the balance sheet, you returned capital to shareholders, the share count is changing. Just as a plug for our models, what's the right assumption for your quarterly interest expense going forward now that you've paid off the convert?

Well, I think from a net basis, Craig, I would take a 100 basis points at $172.5 million out of the calculation and replace that with SOFR plus [125] [ph] on that same amount. Is the way to think about it. So, we've refinanced it to our revolver, which gives us a lot of flexibility in how we address that in the future, whether pay it off, penalty free or refinance it out to other markets. But there is a negative arbitrage in the interest expense there to the tune of about 3%. And the remainder of our – and then if you think about the remainder of our balance sheet is fixed rate debt that we would not prepay given the penalties.

Yes. And then given all the share buybacks and everything you've done since the end of the year, like what do you think is the fair share count – diluted share count for investors to use in your EPS calculation for [2023]?

Around 22 million, Craig, this is Andy.

Okay. That's really helpful. And then lastly, just on the M&A environment. You've got the balance sheet and the dry power to pursue it. Curious what you're seeing there and whether it's a good time to buy or whether you maybe expectations have to come down on – as these markets slow.

Craig, this is Andy. I think as we look at M&A and we look at the strength of our balance sheet, we're pretty optimistic about the opportunities that we think are going to come our way here, especially as it relates to the inventory buildup that a lot of suppliers have seen over the course of the last 18 months. And as things have slowed down, certainly, in certain markets, we think that we're in a great position to be able to execute on M&A. We're going to stay disciplined. We're going to stay thoughtful. We're going to watch trends, I'd say as it relates to multiples. Multiples definitely have come down from where they were at the beginning of last year, let's call it. And certainly, with the expectation on centering around where 2023 is going to land from a run rate perspective. So, we're in a great position to be able to execute on M&A. We're currently evaluating deals. And – but we're going to stay disciplined and thoughtful about it, and we're going to, kind of watch what happens. But overall, I really like where we're at.

Great. Thank you so much.

Our next question comes from Rafe Jadrosich with Bank of America. Please proceed.

Hi, good morning. Thank you for taking my questions. The first one, I just wanted to follow-up on some of the comments on commodities and pricing. Can you just first remind us, kind of where you have the largest exposure in terms of commodities, like the mix has changed in your business like RV or some other categories. So, what are the biggest commodity exposures that you have right now? And has it changed?

Yes, Ray, this is Jeff. Plywood and particleboard in kind of different wood paneling is probably one of our biggest exposures out there in the market. We certainly deal quite a bit in the aluminum space and different resin-related products and copper. But certainly, by far, wood is probably the biggest commodity that we look at.

And then how should we think about the timing lag of raw material inflation or deflation? And how long it takes to flow through your P&L, compared to when it changes the pricing to your customers?

Right, this is Jeff again. It really is dependent on the specific commodity and within those commodity ranges, specific product lines. Certainly, we're flowing those through to the customer as we are certainly able to with the inventory levels that we may or may not have in queue at the time. But ultimately, especially when we're looking at wood, we're passing below those long real time. There are some different commodities that we are a little bit heavier on coming out of 2022 and into 2023, but we're very mindful of getting through those quickly and passing those decreases alone.

Would you say it sort of tracks with your cost of inventory?

Yes, that's correct. We don't – with customers, we're not doing a lot of index pricing or things of that nature, we're really pricing along with where we are at with our inventory levels. And pushing those through as quickly as we can to make sure that we're at or as close to the market pricing as we can be.

Got it. So, but I mean some of those materials, obviously, there was a lot of deflation in the second half of last year, but we've seen them bounce a bit although some have come back a little bit, but like on the lumber side, for example, that's up quite a bit since December. Like, would you start passing that through, what's your expectation on something like that or is that something where you have to see more of an increase before you would push that pricing through?

Well, it really depends on where we're at with our inventory levels at the time of when those prices go up. And if we're able to hold off a little bit, we will and try to see where it ultimately changes. We don't – we try to keep with where our inventory levels are and don't really knee-jerk react to the commodities immediately based on, kind of it going up. Maybe it's just going to be a temporary pop-up or even a temporary slight down. And we communicate that through to our customers on a regular basis with where commodities are at and what we're doing with our pricing to make sure that we're all on the same page.

Rafe, this is Andy. We really look at our inventories and partner with our customers, both on the upside and downside of pricing, if you will, as pricing increases and decreases. And so, as Jeff mentioned, we really want to make sure that that's in place and that we're working with our customers in alignment with where our inventories are at. So, we don't have these significant lags or either way. And so, that's really, kind of how we focus our model from an inventory perspective.

Okay. That's very helpful. And then just on the – you obviously really appreciate you giving an industry outlook across all of your end markets for 2023 and understand in difficult environment to do that in. Just as you look across each of those three end markets, like how do you think about share gains relative to industry growth? Would you expect like across the board to continue to drive share gains, like just how do we think about your growth versus the industry in 2023?

Yes, our expectation is that we're going to drive share gains regardless of where the shipment levels are in the industry. And we continue to focus on that. I think we continue a number of things within our value proposition to make sure that we're partnering with our customers to be able to identify those opportunities and really take advantage of organic growth opportunities as they exist. So, we expect – absolutely expect to take share.

Thanks. Very helpful.

We have a follow-up question from Scott Stember with ROTH MKM. Please proceed.

Yes. Could you guys talk about the [aftermarket] [ph], how it performed in the quarter and maybe by type, whether it was the off-road vehicle or Marine side?

Yes. Scott, it's Jake. So, aftermarket was down a little bit for us. It was as much our exposure to maybe some of the installer network out there from a retail perspective to the consumer, the actual direct-to-consumer kind of model. As it feels like some folks had done the work, there's a little seasonality in there, particularly regionally based, where focus aren't working on their cars. They're changing their speakers on their trucks, for example, in the winter times. But little bit down. But ultimately, we feel a little bit – that's – I would call that more on the audio side of the business of our aftermarket on the more traditional Marine side, a little bit of softness there, too. That's more of a front half of the year, weighted type of exercise as folks are getting ready for the seasons. But ultimately, we feel very strongly about our investments in the aftermarket and our exposure to the boat park or the auto park out there, and we'll continue to evaluate investments there.

Yes, Scott, this is Andy. I want to just add a little bit there as well. I think as we look at some potential softening as it relates to just overall wholesale units, we would expect the aftermarket to kick back in a little bit as consumers continue to spend on upgrades and things like that. So, we're optimistic about where the aftermarket is going to head for 2023, given the strength that we saw in the first half of 2022, a little bit of lag in the back half of 2022, but into 2023 coupled with that decline, let's call it, in just wholesale units as a whole, we would expect aftermarket to perform better.

Got it. Thank you.

Thank you.

Thank you, ladies and gentlemen. I will turn it over to Andy for closing remarks.

Thank you. I want to conclude our call by recognizing the outstanding contributions of the Patrick team. While market dynamics have changed over the last 12 months, the performance and dedication of our team members has not wavered. United behind our core values, our team demonstrates the power of our better together culture. As we enter 2023, we are confident in our team's ability to navigate the challenges ahead and execute on our strategy in [division] [ph]. Thank you for joining us today.

Thank you, ladies and gentlemen. This concludes today's teleconference. Thank you for participating, and you may now disconnect your lines.