Greetings, and welcome to the Patrick Industries Second Quarter 2023 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Steve O'Hara, Vice President of Investor Relations. Thank you. Steve, you may begin. Steve O’Hara: 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 Matt Filer, interim CFO. Certain statements in today's conference call regarding Patrick Industries and its operations may be considered forward-looking statements under the securities laws. There are a number of factors, many of which are beyond the company's control, which could cause the actual results and events to differ materially from those described in the forward-looking statements. These factors are identified in our press releases, our Form 10-K for the year ended 2022 and in our other filings with the Securities and Exchange Commission. We undertake no obligation to update these statements to reflect circumstances or events that occur after the date the forward-looking statements are made. I would now like to turn the call over to Andy Nemeth.

Thank you, Steve. Good morning, ladies and gentlemen, and thank you for joining us on the call today. Before we begin talking about the second quarter and first half of 2023, I would like to take this opportunity to express my sincere gratitude to our incredible team members and their unwavering commitment to excellence, especially in these dynamic times. Their dedication empowers us as we strive in our pursuit to consistently deliver exceptional products and provide the highest level of service to our customers. They are the foundation of our company. And their hard work is one of the reasons we are increasingly optimistic about and well positioned for the future. As we reflect on the second quarter and first half of 2023, we are pleased with our performance, especially against the tough comparison to last year's record sales and earnings. This period has seen some of the most significant declines in RV production in over a decade as a result of the incredible discipline exhibited by industry OEMs as they managed field inventories in response to macroeconomic uncertainty. Our strategic diversification, inventory management and disciplined capital allocation have played out largely as we intended and helped partially offset the impact of the decline in production on our quarterly results. Our marine business has been more resilient and helped bolster our margins while diversifying our business model. And our teams have prudently managed our balance sheet and working capital, generating significant free cash flow. As we prepare for the marine industry to calibrate to retail now that inventories are believed to be replenished, we are becoming increasingly optimistic and starting the sense tailwinds building on the horizon for the RV industry as our estimates suggest dealers have reduced unit inventories as weeks on hand even further in the second quarter…

Thanks, Andy, and good morning, everyone. Our second quarter RV revenues, which represents 42% of our consolidated total, decreased 54% from $837 million to $384 million. Our RV content per unit increased 6% on a TTM basis to $5,051 per unit compared to the same period in 2022, driven by market share gains, partially offset by pricing. RV wholesale unit shipments of 86,200 decreased by 44% or 66,000 units from the second quarter of 2022. We currently estimate second quarter retail registrations of approximately 124,000 units, an estimated decline of 16% from the second quarter of 2022. The metrics we have outlined imply a net decrease of over 37,000 and 42,000 units, the dealer inventory in the quarter and year-to-date, respectively. Our estimates indicate that TTM dealer inventory weeks on hand at the end of the second quarter of 2023 have declined to approximately 16 to 18 weeks on hand from 19 to 21 weeks on hand at the end of fiscal 2022 and in the first quarter of 2023. This is below historical pre-pandemic levels of approximately 26 to 30 weeks. As we outlined in our last call, demand in the RV market has continued to normalize over the past 12 months. Our touch points suggest dealers have nearly worked through a less-than-optimal mix of model year 2022 units. And we continue to scale our production to ensure parity with OEM and industry needs. Our marine revenues, which represents 29% of our second quarter 2023 consolidated sales, decreased 8% to $268 million on wholesale shipments that estimated to have declined 19% in the quarter. The decline in revenues was due to lower shipments, partially offset by acquisition and market share gains. In concert with our marine business, we have a strong and growing aftermarket portfolio approximating $200 million on…

Thanks, Jeff, and good morning, everybody. Our consolidated second quarter net sales decreased 38% or $555 million to $921 million. As Jeff noted, RV OEMs maintained disciplined production schedules in the quarter. And in June, we began to see similar inventory management strategies from a number of our marine OEMs. Our RV and marine end market revenues declined 54% and 8%, respectively, while our housing end market revenue decreased by 23%. Gross margin increased 60 basis points to 22.8% as our strategic diversification efforts helped offset the impact of the significant decline in RV shipments and lower levels of production in our housing end market. Additionally, we benefited from recent acquisitions, cost reduction initiatives and production and labor efficiencies as a result of our automation initiatives. Operating expenses for the second quarter declined 12% to $134 million or 14.6% of sales, representing an increase of 420 basis points versus the prior year period, primarily reflecting our investments in recent acquisitions which tend to generate higher gross margins but also carry a higher SG&A mix. Warehouse and delivery expenses declined $8 million to $36 million in Q2 2023 but increased 90 basis points as a percentage of sales on lower revenue. SG&A expenses declined 13% but increased 240 basis points as a percentage of sales on lower revenue. On an annualized basis, we have taken out approximately $35 million in total fixed costs. Some of the work our teams have done on fixed cost is obscured by the impact of acquisitions we have made. But we expect these cost reductions to be durable when our businesses flex to higher production levels in the future. Operating income decreased $98 million and operating margin decreased 360 basis points to 8.2%, primarily driven by the factors previously described. Net income decreased 64% to $42…

[Operator Instructions]. Our first question is from Scott Stember with ROTH MKM.

Congrats on the better-than-expected results. Can you maybe talk about what you're seeing of what the net result is as of right now with the dealers regarding '22 products? I think last quarter, you might have given an update, like a percentage of what you thought the average dealer's inventory -- new inventory was accounted for by '22s?

Scott, this is Jeff. Yes, last time, we were thinking that was in about the 30% range. But we felt like it was kind of moving down pretty quickly. And I think they really did -- were focused on the '22 units in the second quarter, where we saw some of that retail action. So we feel pretty good. Our touch points are saying they've gotten them down into a manageable range and really are looking forward to the '24 units now. And where they're at with the '22 seems to be in good shape.

Okay. What percentage that you think it probably is? Are we talking maybe 15%, 20% or lower?

Scott, this is Andy. That's where we think things are at. And we also think that pricing at the dealer level is matched up with a lot of partnership there to make sure that they've moved out the '22 units. So we think there's equilibrium in pricing. And we also think that the '22 mix has come down to that, you can call it, an average 15% range or 10% to 15%.

Got it. Okay. And if you were to look at -- I guess, I know that July has the July 4 week shutdown. And we know that dealers and everybody was making sure -- I guess, a race to the finish before the '24s come out. Can you maybe talk about where you expect production -- what you're hearing from the OEMs for July, August and September heading into open house?

Yes, Scott, this is Jeff. Coming out of the Fourth of July shutdown, we see some pretty consistent production levels from where we left in June. I think we're going to still see some shutdown weeks between now and the show to try to continue to manage the inventory levels at the dealers going into that show with the hopes that puts them in a little bit more of a buying position, come the show. Certainly, we see that the '24s are coming off the assembly lines now and going to dealers. So there is going to be some activity of getting those '24s out there for the dealers to see and for the end consumers to see. So we feel like it's been pretty consistent with what we've seen so far this year, may have the down weeks like we've seen throughout the year between now and the show and leading into the show really just to continue to manage that inventory at the dealer level.

Scott, I want to add a little bit to that. As we look at the decelerating retail declines, I think as we look at, as we mentioned, dealer weeks on hand, they're very lean right now. Our touch points across our sectors, whether it be with our individual transport yards or whether it be with lenders in the space, indicate that not only is there capacity on floor plan lines, but that we've seen in the inventory in the field as it relates to our transport yards are down from kind of historical averages and even kind of normal run rates. And so we feel like the channel is very, very clean right now. And so as we go through the next quarter in anticipation of the show in September, we think that production will be scaled as it is and has been. And there's been tremendous discipline. But we're encouraged and optimistic as it relates to really the cleanliness of the inventories and the weeks on hand that are sitting there today. And we think it's well positioned. So right now, production levels are very, very disciplined. But again, the inventories are lean and clean is what we would say.

Got it. And then lastly, could you give the usual fleshing out of the components of the sales decline, the 38% sales decline in the quarter?

Sure, Scott. This is Matt. So of that 38% decline, we're seeing about 34% of that driven by industry. And that's obviously led by the RV decline as we noted. Acquisitions are actually up 1%. And from an organic growth standpoint, we're down a net 5%. That includes 7% down on pricing, but 2% up on organic growth.

Our next question is from Noah Zatzkin with KeyBanc Capital Markets.

Just real quickly, hoping you could provide some color on what you're kind of hearing or seeing in terms of retail demand on the marine side July-to-date. And then second, maybe just drilling out a bit, you continue to post kind of strong CPUs across end markets. So just maybe some color around the drivers behind your ability to kind of continue to show strength there.

Sure, this is Andy. I think as we think about retail at the marine level right now, what we're seeing is we do see that marine is feeling a little bit of the impact as inventories have calibrated. I'd tell you that we're again encouraged by the rate of deceleration of retail declining on the marine side in particular and again encouraged by what we see as it relates to the inventories in the field. And so the marine OEMs have reacted extremely quickly to kind of what I think was anticipated once the inventories were rebuilt. And so we feel like again the inventories are lean as we position into that. As it relates to our content per unit across our various market sectors, I think our teams have done a great job in really working hard to manage our inventories, work with our customers. We've given back pricing where we've needed to and with customers, in partnership with customers as we've been able to bring certain inventories down. And so that's been there. But overall, I think when we think about a 2% net organic gain in the quarter, net of pricing, again it's in line with our expectations and where we feel we want to be. So again, we're not losing business. Content declines are really specifically related to pricing. And the team is doing a great job of managing our efforts with a lot of different solutions and options that are out there today for our customers.

And maybe just one more, I know you touched on this a bit. But in terms of kind of the M&A opportunity set that you guys are seeing out there right now, maybe just comment on kind of where valuations are, maybe where your appetite might be from an end market perspective, just any detail there would be helpful.

Sure. This is Andy again. I think as it relates to M&A, it's part of our, let's just call it, DNA in that we are constantly cultivating an acquisition pipeline, whether it's organic or deals that are being brought to us. And right now, what I would say is that we've certainly got opportunities in the pipeline. We don't buy broken businesses though. And so as we look at the opportunities that are there, valuation expectations really haven't changed too much. I would say that multiple expectations are in alignment with where we think businesses are at. That being said, with the volatility and kind of the lack of certainty just today to find a normalized run rate, the valuation expectations with the multiples aren't necessarily matching up today. But as Matt noted, with our liquidity position, the strength of our balance sheet and the strength of our cash flows, we're well positioned to execute and continuing to cultivate a pipeline.

Our next question is from Craig Kennison with Baird.

I wanted to start with marine. Do you see a need at all for the marine industry to destock in the same way that the RV industry went through a destocking cycle? Or are we in a situation where 1:1 going forward would be sufficient? Even that would lead to a decline in shipments, but I'm curious what you're seeing with respect to marine inventory and the need to destock.

Sure, Craig. This is Andy. I think as we look at the data, and we spend a lot of time with data and metrics on retail and wholesale and weeks on hand as we talked about on our call, we feel like the inventories are lined up right now on a 1:1 as we look at marine. I think the manufacturers have prudently and thoughtfully paused very, very quickly to make sure that, that 1:1 alignment stays the same. And so if we just look at kind of weeks on hand, as Jeff mentioned, at 16 to 18 weeks on the marine side, in total, in general across that space being. And I'll tell you again, that's down from Q1 and certainly down from where historical levels have been. The data, certainly as we look at it, points towards balance in the space and we're at that 1:1. So destock, as we kind of look at the seasonality of the business, we could see a little bit of that, I think, as we go forward. But our hope would be as we look at things right now and say that the inventories are in line and in balance on a 1:1. So I think the manufacturers are very, very disciplined in that space as well. And again, we've seen them react very, very quickly.

And do you have a perspective, Andy, on marine affordability? It just feels like from our checks that dealers in the marine space are really concerned about the higher price of boats and feel like that has done a lot of damage to volume and demand in that way. Is there an outlook where inflation comes down and where your input costs maybe start to fade a little bit such that affordability ultimately improves for consumers?

Sure, Craig. I certainly can't speak for the manufacturers and the dealers. But the one thing that I can say is that in the marine space, there's tremendous focus on innovation and engineering and technology. And as we look at that in that space, we just look at that continuing to be forward-leaning in the way that the marine industry thinks about bringing those innovations to the consumer. And so I don't know what their overall strategic plans say. But what I would tell you is that we view that push towards technology innovation, maintaining a level of pricing at the marine level, it probably does constrain overall unit sales on an aggregate basis. But I think I would also say that on a normalized run rate basis, I think the marine industry continues to look at kind of capacities and where they're at today and really focus on that innovation and those technology-leading efforts. And so our view, I can't talk to pricing, like I said, as it relates to where their heads are at. But as we look at it, we think the innovation push that the marine industry continues to use is focused around kind of that normalized run rate that they've kind of historically seen over the last several years. So again, I think that again it's industry-forward and forward-leaning on innovation.

Our next question is from Mike Swartz with Truist Securities.

I just wanted to touch on, I think, maybe, Jeff, you were talking about some of the structural or fixed cost reductions that you've made this year. I think you've quantified those as about $35 million. Maybe a couple of questions here. I guess, where are those costs predominantly being taken out of the system? And then two, if it's $35 million annualized, how much of that have you, I guess, gotten year-to-date? How much do you expect of that $35 million to kind of flow into 2024, i.e., incremental versus '23?

Mike, this is Andy. I'll take that one. When we look at the $35 million in annualized fixed costs, our team has been really aggressive in moving. And I would say that there's probably 1/3 of that in the first half. As we kind of look at where things are at, RV group has done a fabulous job of managing that side of the business. Our marine teams are certainly working as they've been making sure that we're taking care of the customer. And so we do expect some to come in the back end. And it's really split above the line and below the line almost equally as it relates to the fixed cost reductions and certainly fixed costs that are sustainable on a go-forward basis. In total, as we look at it, as we look at the business, net of materials and labor, so our direct labor, we will have -- on a variable cost basis, in totality, we're estimating about $100 million of total cost taken out amongst the categories across the spectrum, net of materials and labor. So the team has done a fabulous job really reflecting the flexibility and nimbleness of our variable cost model.

And just to clarify, that $35 million is out of the system even when volume comes back in RV?

Correct.

Okay, that's helpful. And then as we think about the RV content, it sounds like a lot of what we've seen just in deflation there quarter-over-quarter is pricing and some of the giveback that you've talked about in prior calls. And I think it was down 7% is what I think I heard you say. I guess, how do we see that playing out through the balance of the year? Was down 7% in the second quarter kind of the peak number and then it kind of starts to smooth out in the back half of the year? Or are there kind of high single-digit declines to come going forward?

Yes, this is Jeff. So the way we look at it is we're looking at the second quarter being down a little bit is really driven by pricing. And primarily, we see that pricing starting now and kind of spread out through the rest of the year. So we will see some additional decline based on pricing, but feel like the commodities have come down and they've stabilized. We work with our customers very closely to pass those commodity decreases along as they get through our inventory kind of in a real-time basis. So we've got some pretty good visibility on where we think that will take us throughout the year and feel good about where we're at with the pricing that we've been able to pass along and what that -- how that will affect our content per unit. We do believe that we still have opportunities for market share gains and growth on the organic side, which will give us the ability to offset some of those pricing changes.

Okay. And then just one final question if I can. Just on the acquisition, the transport acquisition that you made during the quarter, I think it was BTI. I don't remember you calling it that. But any way to size that business from a revenue or any other kind of metric standpoint?

Sure, Mike. This is Andy. We've rebranded it as Patrick Marine Transport. As you know, we've got some expertise in the transport industry, certainly on the RV side. And this was a very cohesive opportunity for us to take advantage of. It's about a $20 million business today with a lot of opportunity for upside.

Our next question is from Daniel Moore with CJS Securities.

Putting together what you described in terms of production levels, how should we think about revenue by segment and overall for Q3 relative to what we just reported and saw in Q2?

So in total, as we're looking -- Dan, this is Andy. I think as we're looking at the back half of the year and certainly by segment, we think that shipment levels going across the space are going to be pretty consistent on the RV side of the business. We think marine is going to be down a little bit. In the second half, as we mentioned, we were kind of 60-40, 60%, 40%, first half to back half in marine. So a little bit stronger decline on the overall production side in marine. That being said, like I said, the inventories are at a very low level out in the field. So I think as we see the deceleration in the retail declines, I think there could be some potential for some uptick in that. But overall, as we're looking across our markets, pretty consistent with Q2 as we look at just in general revenues on a Q3 basis. And then again, we'll see what happens after the third quarter as we see the RV shows and into the fourth quarter.

Very helpful. And on the margin side, gross margin is holding up extremely well despite the decline in shipments, especially on the RV side. In terms of your guide, unchanged for operating margin, are you leaning towards the kind of higher end or the lower end of the range at this point? And how do we think about the cadence between Q3 and Q4?

Sure, Dan. This is Andy again. I think as we look at -- seasonality, from our perspective, has really kind of come back into the business. And so Q2 and Q3 are our strongest margin opportunity, especially in light of the cost that we've taken out of the business and also in alignment with some of the efficiencies that we've gained from a pricing and margin perspective. As we note, our acquisitions have certainly done a great job of bolstering our gross margin profile. We've got a higher OpEx on a lot of those but a better op margin as well that's accretive to Patrick overall. And so again, Q2 and Q3 are the strongest. And we would expect Q2 to kind of come back in from a seasonality perspective. But really, kind of as we look at the model overall seasonality-wise and from a margin perspective, we see that Q2 and Q3 remain kind of those strong periods for us, especially in light of what we've taken out. So as it relates to our guidance, again we're 7.5% to 8.5% today. They've done a great job, teams have done a fabulous job of managing our business. And so I really don't want to get into high or low end of that. But again, we still feel like that's a relevant range for us to be able to be very successful in.

Perfect. Last for me and I'll jump out, if I look back the last few years, operating margins peaked to just over 10% in fiscal '22. Given the diversification and some of the cost reduction initiatives described on the call today, as demand normalizes over the next few years, what do you think is a reasonable longer-term target? In other words, is there upside to that prior peak level, given some of the changes in the business?

Sure, Dan. This is Andy. I think again, it's a highly leverageable model. We continue and our teams continue to do the right things as it relates to cost takeouts, managing inventory levels, managing our pricing to make sure and working in partnership with our customers to make sure that we're being good stewards and good partners with them. And so we certainly think there's upside to those numbers as we continue to leverage and volumes get back to normalized levels.

Our next question is from Griffin Bryan with D.A. Davidson.

There's a lot of stuff covered here today. So I'll just do one question here. Regarding the new model year '24 that are hitting the market, can you just kind of talk about the comparable unit pricing you're seeing versus model year '23s? I mean, I know that pricing kind of on everyone's mind, given the environment. So any color there would be great.

Sure. This is Andy. I think I'll touch on that, and we hit it just a little bit. But right now, at least from what we're hearing, and we certainly can't speak for the dealers and the manufacturers, but all of our touch points indicate that pricing equalize, let's say, across models. So appropriate levels of discounting on the '22s to match up with '23s and as well match up with '24s. So we believe there's equilibrium at this point in the model years based on at least what we're hearing from our touch points.

Our next question is from Rafe Jadrosich with Bank of America.

I thought that the comparison to 2019 was really helpful and kind of shows some of the stickiness of the market share. So thanks for breaking that out. I wanted to just follow up on that pricing question, not on the retail side, but just what are you expecting for your pricing in the second half of the year? And then maybe how does that compare to what's happening in terms of labor costs and raw materials?

Sure, Rafe. I think as we look at pricing just in general, as Jeff noted, materials have pretty much stabilized across the commodity space. And so again, we're continuing to work with customers and making sure that we're managing that and making sure that we're giving back pricing as we get it as well. So we're not expecting a lot of significant pricing erosion going forward. But we certainly are going to partner with our customers in light of any commodity changes that we see. On a TTM basis, we do expect, as Jeff noted as well, our overall content per unit, especially in the RV space, to come down on a TTM basis just because of the pricing that we've given. But as you noted as well, we do expect some organic content gains. And then as it relates to labor and just general cost, labor costs have stabilized as well. And so that is being managed really effectively today. We're not seeing a lot of labor inflation across the space. And so we're not expecting a lot of volatility as it relates to those two.

Okay, great. And then just obviously, the marine and housing mix has continued to rise. And some of that has to do probably with the RV destock that's going on right now. But how should we think about the mix longer term? Is there a specific target or strategy that you have out there in terms of how you expect that to evolve?

Sure, Rafe. This is Andy again. I think as we look at kind of the longer term, we're certainly encouraged by the diversification that we've been able to execute upon. We certainly see opportunity in the marine space. And we certainly see opportunity even in the housing space as well to continue to drive that model. And then I would tell you, honestly, as well as RVs, we see some opportunities. So the mix, we like the diversification and the way that it's played out. I think this is a great result from our perspective as it relates to the current mix. And when we think about the leveragability of the cost model, especially as RV comes back, we're very excited about the potential that's there. So we look to continue to stay diversified and continue to improve on that to make sure we maintain stability of our business model.

Okay. And then last one for me, just the -- you gave the outlook on retail and wholesale by end market, which again is really helpful. It seems like the channel inventories have fallen below where they were in 2019. Is your expectation that as we go into next year, we start to see like a rebuild of those channel inventories? Or are there reasons to kind of sort of believe that like going forward, the dealers are just going to operate with lower than historical levels of inventory?

Sure. I think that's a really good question. And that's something that everybody is kind of looking to get their arms around. I think the dealers certainly have learned to operate with lower levels of inventory. But as well, we've seen retail on the decline across the sectors for quite some time now. So once things start to bounce and rebuild, it certainly looks like, as we look at kind of weeks on hand at the inventory level, it would look like there is definite opportunity for a build there. When you look at kind of the cost of capital and where everybody sits today certainly with the interest rate environment, I think everybody is staying disciplined to managing inventory levels. And so from our perspective, I think there's upside potential to a little bit of inventory build would be where kind of our heads are at. But certainly, we've seen a lot of discipline in the space. And we're encouraged by the fact that the weeks on hand are at the levels that they're at across the space today. So if anything, I think we feel like it's 1:1 and stabilized with some opportunity for some rebuild depending on what happens with rates and the overall economic environment.

There are no further questions at this time. I would like to hand the floor back over to Andy Nemeth for any closing comments.

Thank you. I want to again wrap up the call today by thanking all of our team members. Your hard work and dedication has been instrumental to our success. We will continue to support our valued customers as a leading supplier to the leisure lifestyle and housing markets while growing in our mission to be a reliable partner, supporting OEMs and addressing retail demand and driving mutual success in an ever-evolving marketplace. As we look ahead, I remain optimistic about the future. Our business model has a proven track record of success. OEMs remain disciplined and many demographic trends point towards sustained long-term growth. With a strong foundation, a talented team and the right strategies in place, we are confident in our ability to navigate short-term challenges and deliver value to our shareholders over the long term. We thank everyone who has joined us on the call today.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.