LCI Industries (LCII) on Q2 2021 Results - Earnings Call Transcript
Operator: Good day, and thank you for standing by. Welcome to the Q2 2021 LCI Industries Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now hand the conference over to Brian Hall. Please go ahead.
Brian Hall: Good morning, everyone, and welcome to LCI Industries second quarter 2021 conference call. I am joined on the call today by Jason Lippert, President, CEO and Director. We will discuss the results for the quarter in just a moment. But first, I would like to inform you that certain statements made in today’s conference call regarding LCI Industries and its operations may be considered forward-looking statements under the securities laws and involve a number of risks and uncertainties.
Jason Lippert: Good morning, everyone, and welcome to LCI’s second quarter 2021 earnings call. We delivered another incredible quarter as we continue to drive record results in 2021. Demand across the recreational space remains at an all time high with no end in sight to the waves of new consumers entering the outdoor lifestyle. This quarter was historic for not just our company, but for the RV industry as a whole, as they hit a record of 153,100 RV unit shipments. At an annualized rate, the industry is set to shift near 600,000 units in 2021, even blowing past levels last seen in 2017. And we expect this trend to continue well into 2022 as inventories will likely remain at all time lows. Despite supply chain related headwinds continuing to impact our business, our teams have proven their operational expertise in mitigating the impact of production related challenges including rising input costs, to enable us to meet our customer demand. During the quarter, we achieved $1.1 billion in sales, up 108% year-over-year or 74% compared to second quarter of 2019 providing us with double and triple-digit growth throughout each of our respective business markets. This growth has been supported by our focus on executing our diversification strategy as we work to integrate our newest acquisitions including Challenger, Veada, Ranch Hand, Schaudt, and Trazcor. Additionally, we continue to drive market share expansion achieved strong content per vehicle growth as we further solidify our position as a global leader in the recreation space. Turning to our performance by segment beginning with RV OEM, sales increased 151% year-over-year or 56% compared to the second quarter of 2019 to $595 million for the second quarter driven by elevated retail demand throughout both North America and the international markets we serve. Preliminary results for July indicate no slowdown in this trend, despite supply chain and labor constraints, which continue to impact the rate of increase for the entire RV industry.
Brian Hall: Thank you, Jason. Our consolidated net sales for the second quarter increased 108% to $1.1 billion compared to the prior year, driven by strong market performance coupled with solid company execution. Acquisitions contributed $54 million to our quarterly results with organic growth contributing the balance of the improvement. As Jason mentioned, July sales remained strong, increasing 25% and when adjusted for the difference in OEM shutdowns year-over-year, it would imply a growth rate of approximately 35%, indicative of current Q3 growth expectations.
Operator: Your first question comes from the line of Kathryn Thompson with Thompson Research.
Kathryn Thompson: Hi, thank you for taking my questions today. Just for the quarter, if you could – you gave a lot of great detail about the various impacts. But if you could balance price increases, volumes, some planned downtime, because there were differences year-over-year and seasonality for the rest of the year as we think just about the stair-step for revenues and margins. Thank you.
Brian Hall: Okay. Hi, Kathryn, it’s Brian. So starting with gross margins, I would tell you that from materials and pricing certainly have the most significant impact on gross margins. And the way I’ve kind of looked at it, as it’s almost approximately 300 basis points worth of negative impact, just the difference in materials and pricing that we saw in the second quarter. Now, a lot of that starting to catch up in the third quarter and as our input costs such as steel, aluminum and freight have continued to climb, I’m expecting that to stretch a little bit more into the quarters beyond that might even be a chance that it makes its way into the first quarter of next year, just given the fact that aluminum and steel are still climbing today. Most of that is offset by a lot of great overhead leverage. So by the time, you’re said and done your gross margin was down by 60 basis points, I think, as I’ve said. And that’s mainly offset by our overhead leverage. When you get into SG&A, SG&A the transportation costs are pretty significant in there and those increased almost 60 basis points from the – even from the first quarter of this year. So we’ve continued to see inbound and outbound freight climb at a pretty significant rate. And to give you an idea, I think from first quarter to second quarter, that’s almost $11 million of additional costs from additional outgoing transportation that’s within our SG&A costs. The remainder, you’ve a couple million here and there, I think amortization was up a little bit, almost a couple million dollars. And then the transaction costs, as I mentioned in my prepared remarks were up some as well. So certainly had those – as I would say, those are the – this pipeline every line in financial statements. Those are the key movers from – for the quarter.
Kathryn Thompson: Okay. And if you were to give kind of a top three in terms of headwinds from an inflationary standpoint, you mentioned steel, aluminum and transportation, which of those three has the greatest impact and which of the three has the greatest amount and the least amount of visibility?
Brian Hall: Yes. Steel and aluminum combined are almost 50% of our material spend. So it’s a pretty significant mover. And when you’re talking steel up 250% from September of last year, that’s been pretty significant for us to adjust for and work with our customers to try to accommodate all the issues that they’re dealing with from a supply chain perspective and trying to meet record demand. So we’ve been pretty strategic as we’ve worked through that, and there’s still some to come there. A lot of the steel though is tied to some indexing contracts. So that’s where you do get a lot of the two quarter lag from aluminum, within that 50% call aluminum, maybe 10 to 15 percentage points on the rest is steel. So obviously steel is number one for us. But for aluminum, I think aluminum is the one that we still see climbing here in the short-term. It seems like steel has gotten up into the mid £0.90 and aluminum still, it’s kind of at least slowed its climb some, aluminum still continues to go up. So I think aluminum is the one that’s going to continue to hurt for the coming quarters. And freight is, I think, going to be a problem for a long time. We don’t really see that to correcting itself in the near-term. So that’s – those are things that are probably going to – we’re going to be dealing with well into 2022.
Jason Lippert: I just add real quick, Kathryn, that you take steel, for example, our largest raw material costs. It went up three times what it was prior to COVID over the course of 12 months. And it’s not stabilized, but it’s not an accelerated climb like it was over the last 12 months. So the hope is that it’s at least manageable at this point, same with freight rates up 10x, from Asia, from what it was prior to COVID and that stabilizing. So we might have a little bit of more increase there, but more than likely downside opportunity over the next 12 months than a lot of upside, a lot of more costs.
Kathryn Thompson: That’s helpful. And then just on acquisitions, it’s always been very active in terms of the acquisition front, typically, buying assets at a smaller market share or being proactive with technology and then expanding it to dominate. Did it make a little bit different acquisition that was more on the commodity side? And maybe help us understand some of the logic behind that and how you see your kind of growth tax going forward just in general for Lippert. Thanks. Thanks, again.
Jason Lippert: Sure, sure. So with the most recent acquisition of Trazcor, in any acquisition, the things we’re looking at is, can we innovate products. Do they have a large growth runway and how does the competition field look. And all three of those boxes are checked there. We feel we can innovate the product significantly. We feel the – there’s really only one other player in the game there. And we had our customers knocking on our door over the last eight or so months, asking us again in the game, because we’re already doing a lot of metal work as Brian alluded to earlier, our largest, 50% of our raw costs are steel and aluminum. So we look at the side metal on the RV products out there. It’s a significant product content opportunity, it’s right now wheelhouse and we feel we can innovate and grow. On top of that, the RV in flocks of – the RVs that category that are growing the fastest are the small entry level units that require the metal siding. So there’s a greater need for that product anyway, right now. So it’s a perfect fit and we can – we feel we can grow it pretty significantly over the next 24 months.
Kathryn Thompson: Okay, great. Thank you.
Operator: Your next question comes from the line of Scott Stember with CL King.
Scott Stember: Good morning, guys. And thanks for taking my questions as well. Brian, you give a lot of great detail about what’s impacting the operating margin, but if we look at it through the back half of the year, could you just give me a little granularity of where we can look for the operating margin? Are we looking for to remain in this level notably in the third quarter? Or it sounds like there’s a little bit of improvement going on, but just try to give us a little bit, if you could.
Brian Hall: Yes. I think that, certainly, if you rewound earlier in the year, we were talking about price increases catching us up, and that we would be able to recoup a lot of that when we guide into the second quarter and third quarter. As I mentioned, the fact that steel and aluminum and freight have continued to climb and you then have the quarter to two quarter lag on many of our product pricing adjustments. I think that it’s going to drag out into multiple quarters, as I mentioned earlier, maybe even a little bit into Q1 of next year, just given the fact that we’re still seeing those input costs climb. So we’re working very closely with our customers to push through some price adjustments, where we can. But a lot of those index arrangements are going to cause it to drag out. So from a margin perspective, I certainly think that there’s some upside potential given the volumes that we’re running and the strong leverage that we’ve seen. But I think that lag and price adjustments along with the continued climb and input costs is going to cause some temporary level setting of that margin. So I’m not expecting it to change greatly from at least in the next quarter or so.
Jason Lippert: And certainly with a significant part of our pricing increases coming by way of indexes Scott, there’s – that lag happens over the next few quarters. And then pricing will certainly subside at some point in time, our prices remain elevated over the longer term, while the – we catch up with the price decrease going the other way, when that happens – whenever that happens.
Scott Stember: So just to be clear, there’s a – the indexing it’s the same delay or the same time period on the way off as on the way down, correct?
Jason Lippert: That’s correct.
Scott Stember: Okay. And as far as, we seem to be an RV side, the 50,000 a month range in demand just appears to continue to be incrementally growing to new levels, but how do you see production over the next couple of quarters? Is this probably the most of the industry can detail right now? Do you see any relief on the horizon from that?
Jason Lippert: Yes. I think all suppliers and OEMs alike are trying to increase capacity any way they can. And the most refreshing thing I’ve seen over the last handful of months is several OEMs and suppliers, including us are looking at production capacity outside of Elkhart County. One of the biggest constraints going forward is going to be labor, the Elkhart County’s only got so much labor and we’re all working on some creative strategies to bring more labor to this area and increase our ability to produce. But like I said, the most refreshing thing I’ve seen is, OEMs in some suppliers going outside and the near counties to tap some of the labor outside of this area, that’s pretty stressed. So a lot of people are getting their second shifts up and getting capacity running that way. Some of the OEM capacity comes online third and fourth quarter, the new capacity. So I think right now to answer your question, 50,000, it’ll grow very slowly. But it certainly feels like, we’re heading toward a 55,000 number in the near-term.
Scott Stember: Got it. And then just lastly, July very next growth at 25%. I haven’t gone through all the math yet, but if you, I guess, adjust for the time you have one acquisitions fully take hold. It sounds like the lion’s share obviously of growth is still organic, correct?
Brian Hall: Yes. Yes. For the most part. The acquisitions have accounted for quickly, almost 10% in the quarter. So about 10% of the growth in the quarter and I’m expecting it to decline from there as we’re seeing strong organic growth in all categories. Do you see some nice organic growth out of our acquisitions we’ve made this year already?
Scott Stember: Got it. All right. Thanks again guys.
Jason Lippert: Thanks, Scott.
Operator: Your next question comes from the line of Bret Jordan with Jefferies.
Mark Jordan: Good morning. This is Mark Jordan on for Bret. Just switching gears to the aftermarket a bit. Can you kind of talk about some of the trends you’re seeing right now? Are you still seeing strong demand for replacement and repair parts and kind of maybe what are you seeing for more of the upgrade parts in furniture, particularly in RVs?
Jason Lippert: Yes. All of our aftermarket categories from repair, replacement service and upgrades, they’re all very strong right now, we’re seeing increases in all those categories. I think, one of the trends that we’ve seen here recently is, our aftermarket partners, they’re all asking for more products. So we’re adding more products to our aftermarket categories. As I mentioned in my opening comments, the peer to peer rental market is creating a case for heavier use of the RVs. Because there’s more – RVs are running the peer to peer marketplaces that have really evolved over the last 12 to 18 months. And it’s creating a whole new avenue for repair and replacement, which is because RVs are getting used more. Prior to COVID, you could have made the case that the average use of an RV is 14 to 21 days. And that’s certainly increasing with all this peer to peer marketplace rental use. So that’s really good for our business. On top of the fact that we’ve got $0.5 million RVs coming into use every single year, that’s going to be great for our aftermarket business.
Mark Jordan: Okay, great. And then I guess, thinking about the CURT Group, demand for RVs and Marine have been pretty strong lately. So I have to imagine that’s been pretty solid for the CURT Group’s hitch products. Is there anything to note there.
Jason Lippert: No, I’d say just the amount of – whether it’s RVs or bike racks or anything that people are going to do in the outdoors, you need a hitch. And we’re the largest hitch supplier in the country. So it’s really good for that business. We don’t see that slowing down. Like I said earlier, we’ve got – we’re on a 590,000 unit run rate right now for the industry this year. We’re running at a rate, if you take July’s rate, 625,000, if you’re to blow that out another 11 months. So I mean, that’s just going to create a case for more hitches and more current products. And we’re continuing to innovate and develop and launch new products there for the outdoor so.
Mark Jordan: Great. And then do you have any early reads from the Ranch Hand acquisition?
Jason Lippert: No. Yes, it’s early, but I mean their order – their orders and backlogs are robust. It’s as robust as our CURT Group businesses. So that’s what I can tell you there.
Mark Jordan: Okay, great. Thank you very much for taking the questions.
Jason Lippert: Thanks.
Operator: Your next question comes from the line of Fred Wightman with Wolfe Research.
Fred Wightman: Hey guys, good morning. I wanted to just circle back onto the production rate numbers that you gave that 570 to 590, I think is consistent with what you had quoted last quarter, but you guys outlined some capacity investments that you’re making. And then there’s also some OEM capacity coming online in 3Q and 4Q. Any sense for how much capacity that could add to the market. Is it just that incremental 5,000 units that you sort of touched on, any sort of color on where you think wholesale production could go over the next few quarters would be helpful?
Jason Lippert: Well, certainly the industry could build or could sell a lot more than what we’re building today. But there’s just – there’s too many material and labor constraints. We – you can add capacity really, really fast on the OEM side and the supply side. But at the end of the day, the entire OEM output and sell through to wholesale is strictly relying on the weakest supply chain links. There’s some weak ones out there. Every week something’s popping up. But what I can tell you is that we’ve seen this increase – gradual increase from where we ended up last year to the 590 – 575 to 590 rates. It looks like we’re going to hit this year based on current numbers and we – it just feels like we’re going to continually, gradually increase is the entire supply chain get through some of these material concerning problems, get through some of these labor concerning problems, adds capacity. It just feels like you can kind of count on the industry continuing to inch up volume as you’ve seen over the last 12 months in that type of fashion and not any slower, not any faster.
Fred Wightman: Okay. Makes sense. Those sort of slow and steady. I guess to shift a little bit, the color that you gave on the peer-to-peer rental impact for the refresh cycle. Could you put some more numbers around that? I mean is that a big enough chunk of business to where you could see an acceleration versus that three to five-year trade in, trade up cycle that you’ve touched on in the past? How impactful could that really be either from a wholesale sort of new RV side or the aftermarket business just with more wear and tear on those units?
Jason Lippert: Yes. There’s a lot to in that question, but I’d tell you without a doubt, there’s – I know in talking to some of the peer-to-peer rental companies, they’re looking to put their own fleets in because they don’t have enough RV owners in their marketplace to support all the demand that’s out there. I think the numbers like 75% of all people end up getting into an RV by starting out with a rental search. So the fact that there’s just these vast marketplace is out there right now for people to get into an RV and triumph. They say that after the second try, after the second rental, they’re highly likely to buy. So the fact that there’s just a marketplace where this can happen, that wasn’t always available. So outdoors is specifically has some really good data around their owner base. So you could get on their website and look at some of that, but their owner base, they’ve got owners that have multiple RVs that never own multiple RV. It’s just because of the fact that they have an ability to create some side income on running their RV. So and again all of this creates a case for heavier use of the RVs, which ultimately wears and tears the components that need to be replaced and a lot of those are ours.
Fred Wightman: Makes sense. Thanks guys.
Operator: Your next question comes from the line of Mike Swartz with Truist Securities.
Mike Swartz: Hey guys, good morning. Just wanted to touch on RV content loads in the quarter, obviously some pretty strong growth there and I think Jason and Brian, you said that a lot of that’s coming organically. Maybe give us a little more context about what’s driving that. Are you starting to see some trade up or mix towards higher content in units or what exactly is behind that during the quarter?
Brian Hall: Yes. I would say for the most part, we’ve been talking for the last, probably three quarters now where we’ve talked about other suppliers that were maybe a little challenged, and getting product to the OEMs. And we were pretty strategic about layering that business in. So over the last three quarters, you’ve seen new business get layered into that, that content per unit number. So we’ve expected that to continue to accelerate. I would say, the obvious thing is how much is price driving that, but I would tell you a price in the trailing 12-month period is not yet driving it in a meaningful way, if less than a couple of percentage points, because we were still given price decreases as steel and aluminum were declining during 2020. So net-net, I would expect that to maybe even start to accelerate a little bit more as some of those price adjustments come in, but we’re still layering in new business as well. And really from an acquisition perspective, on the RV side, it’s been Trazcor would be the one that had a small impact – a challenger a little bit. So some smaller deals, so it’s not having a meaningful impact on the content.
Jason Lippert: And I’d say that the increase in the content, the meaningful increase in content speaks largely to the market share. We have taken because we just keep seeing the amount of entry-level units that are getting shipped out there. It’s a pretty significant number. And they’re – I’d say they’re turning away from fifth wheels right now, but there’s a high focus. If you talk to any dealer out there, they’re looking to get their hands on as many trailers smaller trailers as they can get. And that’s certainly driving. The opportunity for content down and you look in the face of that we’ve increased content that’s pretty fantastic.
Mike Swartz: Okay, great. And then Brian, just on the SG&A side, understanding, I think a lot of the sequential increasing SG&A dollars was transport costs. Maybe help us think about from an absolute dollar standpoint, what with the SG&A line should look like in the next quarter or two into there’s sometimes seasonality there. And there’s some acquisitions coming in to that, I guess, is there a way we should think about that going forward?
Brian Hall: I mean, I – although I’ve said this before, and then it goes the opposite direction, but I would anticipate it to stay relatively consistent. I think that the big movers that I mentioned transportation costs, that’s not going away anytime soon. So I do think that those as I mentioned, sequentially from Q1 to Q2, it was up $11 million and aggregate dollars within SG&A line alone. I’m not expecting that to change much in the coming quarters. So the other thing that I mentioned, we’re a couple of million here, a couple million there, some of those do ebb and flow. So you might be – you might see some movement plus or minus $5 million or so for things like that. But for the most part, I would expect it to remain relatively consistent.
Mike Swartz: Okay, great. Thank you.
Operator: The next question comes from the line of Dan Moore with CJS.
Brendan Popson: Good morning. This is a Brendan on for Dan. I just want to ask real quick, looking at aftermarket, from a margin perspective, how much opportunity is there to expand margin and that business as it continues to gain scale with and you have these catalysts.
Brian Hall: Well, certainly, our price increases are lagging in that market, like our OEM business. So we’ll consider – continue to catch up margins and get where we need to be based on all the scattered costs increases that we’ve seen across the business. So that’s one piece. But like I said earlier, the customers in all channels in that space are looking to get product however they can. We’ve – I’m like a lot of small suppliers out there. We’ve beat up our inventories. We’ve been able to get inventory. So that we can get products out there and supply channels we haven’t in the past, the dealers, the warehouse distributors, the consumers on e-com out there, they’re all looking for products, whether it’s repair and replacement or upgrade parts or service parts. So our aftermarket team has done a stellar job of getting out there and getting in front of all those channels and making sure that they’re plugged with products. So margin opportunity is great. We’ll continue to launch new innovations in that space over the coming months. We have substantial prep programs going on with all of our OEMs right now. So we put prep hardware on the RVs at the OEM side. So there’s – it’s easier to plug and play aftermarket items into the OEM items. And it doesn’t – it creates a situation where the OEM doesn’t have to put on a high cost component. They can leave that to the aftermarket, and we’ve gotten really good at that over the last handful of years.
Brendan Popson: Okay, great. Thank you.
Operator: Your next question comes from a line of Shawn Collins with Citigroup.
Shawn Collins: Hey, great. Thanks. Good morning, Jason and Brian.
Brian Hall: Good morning.
Shawn Collins: My question is on operations. North America is clearly experiencing a recent COVID reappearance with the delta variant. I just wanted to ask if this had impacted your recent manufacturing and operations both on a labor availability standpoint and processes, and maybe how you think about this long-term. Is this now a permanent reality in operations I presume? Thanks.
Jason Lippert: Yes. So it hasn’t impacted our operations. I think over the last four weeks, we’ve seen a couple cases a week, which and back in October, November of last year, we were seeing 50 to 100 cases a day. So it’s – we’re tracking to the extent we can, vaccinations and things like that, we’re making it easier for our team members to get vaccinated, but it hasn’t impacted our production over the last couple of months. And if anything from the market standpoint, it’s just going to prolong some of the COVID-related demand we’ve seen in the marketplace as a result of some of the recent happenings with the delta variant and things like that.
Shawn Collins: Got you. That’s helpful, Jason. Thank you. Maybe just a quick follow-up, you’ve made three acquisitions in 2021, not unprecedented, as you’ve done a lot of acquisitions, but you’re in an unprecedented business cycle. You’re also experiencing rising input costs, so a lot going on. Can you just talk about how the integration is going on those three acquisitions? I think one is in Texas, one is in Germany and the most recent one is in Indiana. Thanks.
Jason Lippert: Yes. So I’d tell you that we’re getting better and better with our after the 75 acquisitions, me and our team have done over the last 20 years, we’ve kind of strayed away from a lot of the – I don’t want to say tuck-in, but tuck-in acquisitions that they get folded into an existing operation that they don’t have quite the leadership team. We were buying more today a lot of businesses and companies that have very grounded, capable leadership teams, that just allows us to be more inquisitive than what we’ve been in the past and be more effective at the integration. So I tell you the – from the Ranch Hand acquisition, Rock our CEO of the CURT Group, they folded that in, they’re doing a terrific job getting that one integrated, our seating and our door acquisitions from the recent months are going great. Management team’s still intact. We’re seeing synergies and then we’ve had some pretty significant organic growth in those operations already. Schaudt has been great, the European perspective, because it gives us kind of a electronics handle. And we’ve got some new products there that we’re looking at bringing back to the U.S. like we have other European acquisitions we’ve made. So it’s all in all by all marks has been really healthy and good this year from an integration standpoint.
Brian Hall: And I think I would add, I mean, just how much more mature we are in the integration process. I mean, we do look to make sure that we integrate them into our system. We’ve got teams that are well versed in doing so and then also our culture. So taking our culture leadership programs and putting them into these organizations to help give them more of the tools they need to be successful. And I think to Jason’s point those are the maybe a bit of a change in strategy from 20 years ago, we’re looking for a great innovative product, great leadership teams. And I think there’s a lot of great companies out there that fit that mold. And we went out and we raised some additional capital here during the second quarter, the pipeline is full. I think that there’s great options for us out there to be strategic and fold in the right technology, the right aftermarket business, the right innovative product, the right teams, as we mentioned, that can create a lot of long-term value for shareholders.
Jason Lippert: Veada and Challenger was $160 million in revenues, roughly we acquired there. Those are right here in town. So I think when you look at acquisition and integration, we can always integrate the ones that are close to our home office and where the brunt of our team members and leadership staff is. We can integrate those faster and more effectively. Then we can businesses that are a day trip away, for example, but we integrated a project management office in the last 12 months for our bigger acquisitions just to make integration more meaningful. So hopefully that answers your question.
Shawn Collins: That’s great. That’s very helpful. Thanks, Jason. Thanks, Brian.
Jason Lippert: Thank you.
Operator: At this time, there are no further questions. I’ll turn it back to Jason Lippert for closing comments.
Jason Lippert: Hey everybody, thanks for joining us on the call. We’ve got a lot of great things going on around the business with customer experience and leadership and innovation and demand. So we’re looking forward to update you on our results next quarter. Thanks for tuning in. Thanks.
Operator: Thank you, ladies and gentlemen. That concludes this conference call. You may now disconnect.
