Q2 2020 Patrick Industries Inc Earnings Call
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It's really shows.
Got you may begin.
Good morning, everyone and welcome to Patrick Industries second quarter 2020 conference call I'm joined on the call today by eating <unk>, President and CEO, a job or yep.
Certain statements made in today's conference call regarding Patrick industries, and its operation maybe considered forward looking statements under the securities.
There are another factor many of which are beyond the company's control, including without limitation, the disruption that business results or thinking about what did the coping Nike pandemic and its impact on economic condition.
Capital financial markets, and our operation, which could cause actual results to differ materially but those described is forward looking statements.
These factors are identified in our press releases, our form 10-K for the year I did 20, Nike and in our other filings with the Securities and Exchange Commission.
We undertake no obligation to update these statements reflect circumstances or events that occur. After the date forward looking statements for me.
I'd now like to try to call over to Abba.
Thank you Julie Ann.
Good morning, everyone and thank you for joining us on the call today.
First and foremost I'd like to welcome John for our interim CFO and current member of our board of directors.
It is doing a fantastic job as expected and his leadership has been energizing and engaging as we pursue our tailored to discipline search for a permanent CFO.
John will review, our second quarter financial results later during the call.
Before we cover the details of our quarterly results I want to provide an update on our efforts to mitigate the impacts of cobot 19, our business and prioritize the safety and protection of our team members their families and our communities as well as the overall impact to our business since our last call in late April.
We've been working very diligently during these unprecedented times to maintain a safe environment for all of our talented and dedicated team members well also prioritizing our goal is striving to take care of our customers at the highest level.
But the majority of our workforce returning to production in early May we establish the nevertheless, extensive back to work safety protocols to protect our team members in facilities in alignment with both CDC and state guidelines.
We're adapting and evolving with operational best practices and continuing to position ourselves to maintain a flexible and nimble operating platform.
Well some restrictions of east and our customers have returned to robust production levels. We remain focused on attentive to our discipline is team member safety and organizational goals.
Our leisure lifestyle markets experienced an unprecedented wholesale production shut down of more than five consecutive weeks on the RBC side of the business and between one and five weeks on the marine side of the business during the quarter as a result of Carbonite team.
Our housing in industrial markets experienced production shutdowns as well in certain geographic regions. However were deemed decentralized many territories and ran at reduced production levels during the same timeframe.
We focused our efforts on safety protocols. During this period cost reduction efforts in alignment with projected worst case run rates consolidation of certain facilities with excess capacity. These cash flows and being in the best position possible to be able to flux back up and take care of our customers once production levels resumed.
The resilience dedication and work ethic exhibited by all of our team members who during these unforeseen types have continued to work. So tirelessly every day, what professionally and personally to support the communities in which we live in work uphold our values as an organization show compassion and support diversity and encouragement for one another as we proceed.
During this incredibly challenging environment, it's been humbling inspiring and energizing.
We reported profitability solid cash flows and balance sheet strength during the quarter. Despite our net sales gross profit and operating margins being negatively impacted by the business disruption brought on by the previously mentioned unprecedented and rapid shutdowns caused by the pandemic.
Our April and May revenues were down, 70% and 27%, respectively and up 6% in June.
In may wholesale production levels began to resume with sequential week over week Tailwinds building and in June we experienced a strong resurgence in production rates, particularly in the RV sector with shipments up 11% compared to the prior year and reflecting the need for inventory as a result of retail resilience and a notable increase in consumer demand in particular.
I would new buyers.
The diversity of our end markets and geographic regions helped boost our results in the early part of the quarter and we were able to quickly accelerate production in response to the Swift rebound in demand in multiple end markets later in the core.
The significant <unk> sacrifices by our team members cost cutting and targeted surgical consolidation initiatives. We took in late March and April helped us bolster our ability to weather the impact of cobot 19 related production shutdowns.
Our teams to appeared sequential proactive actions in late March April in early may by adjusting business models and operations to align with the changing economic landscape.
Our second quarter revenues of 424 million decreased 31% versus the prior year and we are in three cents per diluted share, including one time costs of approximately 4.5 million or 12 cents per diluted share and despite the tremendous headwinds and uncertainty.
Liquidity and cash preservation were priorities during the quarter.
We paused, our strategic initiatives and flagstar business model voluntary reduced executive and board compensation and focused on maintenance capital expenditures and retaining our core talent.
We returned approximately 6 million a of capital to our shareholders via dividends in alignment with our dividend policy.
Although we did not make any share repurchases, we will continue to evaluate market opportunities to buyback our stock at appropriate levels.
At the end of the second quarter, we had over 520 million of available liquidity, which includes approximately 111 million up cash on hand, and that leverage at 2.3 times well under our four times covenant maximum and consistent with our leverage profile at the end of the first quarter again, despite tremendous headwinds and uncertainty in the quarter.
We were optimistic that leisure lifestyle markets would be go to lifestyle choices in a cobot in post covet environment and that scenario appears to be playing out.
Further we believe the government stimulus packages and incentives that were implemented as a result of covered 19 in the second quarter, we're extremely supportive of the consumers in all of our end markets.
And in our leisure lifestyle markets in the latter half of the second quarter benefited from increased interest from new consumers and we expect this momentum to continue.
Our being marine products provide families in many other consumers with an outlet to enjoy the great outdoors in a safe manner or practicing social distancing, especially during both the cobot 19 pandemic and into the future.
Yeah, matron industrial markets as well are ideally suited for social distancing security spending quality time with family and friends and the ability to work from home as we expect to see a more flexible work schedules.
In addition, the new virtual World is now firmly integrate into many aspects of our day to day operations and communications with our stakeholders.
Now turning to our end markets well the beginning of the second quarter was challenging returned to pre cobot run rates and momentum were seeing in our leisure lifestyle markets, representing 62% of second quarter revenues towards the latter half of the second quarter.
Strong retail sales helped throughout the quarter and increasingly lean dealer inventory forced Oems to aggressively ramp up production in response to the high demand levels.
And our housing in industrial markets, which represented 38% of our second quarter revenues, we saw a shift in consumer behavior from what we were experiencing at 2019 and the first quarter as a result of the cobot 19 disruption and other domestic social issues, causing concern.
Consumers began to migrate from urban environments to more rural environments, we're in suburban and rural environments manufactured homes are able to meet the consumers need for a lower price point quality home and single family in multifamily homes remain attractive as well, especially in certain concentrated geographic regions.
Now taking a deeper dive into each of our end markets. Our RV revenues were down 137 million or 40% in the quarter and represented 48% of our consolidated sales.
The revenue decrease was primarily due to the previously mentioned more than five week full wholesale production shut down in late March April in early May as a result of Carbonite team.
RV wholesale unit shipments were down 82% and 30% in the months of April and May prospectively as Oems shipped finished goods from their yards to dealers where possible even though they were not producing units in April in early may.
This was followed by an 11% increase in wholesale unit shipped in June for 35% overall decline in the quarter.
RBS, we're still retailing at certain dealerships as well as being used for FEMA purposes for frontline healthcare workers in certain states throughout the quarter.
As a result of stay at home orders throughout April and into early May many dealers increased online activity. During this timeframe, indicating continued resilient interest in the leisure lifestyle product suite.
Retail units are estimated to have declined 15% to 20% for the second quarter after statistical adjustments, which we expect to be material given the widespread governmental shutdowns and slow restart during the quarter.
It's important to note also that heading into the second quarter of 2020, RV Oems and dealers had already aggressively reduced and recalibrated inventories in advance of the 2020 model selling season.
Based on these estimates we believe between 55000 60000 additional units were pulled out of him an out of the inventory channel during the quarter, putting dealer inventories at their lowest level since prior to 2014 and positioning wholesale demand for the second half of 2020 to be very strong to meet retail expectations.
As discussed Rvs are you uniquely positioned to provide many different lifestyle in functional capacities outside of leisure, including serving the health care community in front line care givers with temporary and portable homes testing facilities in command centers as well as workspace away from home.
Additionally, the RV industry is extremely well positioned for a covenant post covet environment as arby's offer a value proposition of independents quality time with family friends and community. In addition to the ability and comfort of domestic travel while camping activities being an ideal means and environment to enjoy the eye outdoors and also while maintaining social.
Distancing guidelines.
In addition, historically low interest rates for consumer financing low entry level price points and low gasoline prices are all positive tailwinds.
On the marine side of our business. The narrative is similar to rvs, except the marine market carried heavier inventory levels into 2020.
Marine dealer traffic and interest in the early part of 2020 was positive and there was momentum building in marine retail trends in shipments dealers and Oems work together during the latter half of 2019 in the first quarter of 2020 to rebalance in calibrate wholesale unit shipments to align with optimal dealer inventories.
Most of the OEM suspended holder wholesale production for several weeks beginning in late March and April in response to cover 19, well marine retailers adapted with online sales protocols and marketing similar to the RV dealers.
With the inventory Recalibration and a strong rebound in retail in May and June both of which are key months for boat sales marine retail outpaced wholesale and further leaned out the inventory channel.
We estimate marine wholesale unit shipments down an estimated 35% to 40% in the second quarter and marine retail shipments down an estimated 5% to 10% in the quarter.
Our marine revenues declined approximately 31 million or 34% in the quarter and represented 14% of our consolidated sales.
Reno he understood it shut down quickly resumed operations to support improving demand and support a seasonality as the second quarter generally represents more than 40% of full year retail shipments.
The long term fundamentals remain intact for the marine market and similar to the RV industry or an ideal social distancing recreational conduit similar to arby's for the cobot and post covet environment.
In summary, and consistent with what we have experience with past global and domestic events leisure lifestyle is a resilient and retail interest in traffic was as well resilient during the second quarter for both the RV in marine sectors inventories as noted were leaned out even further in both markets well positioning and requiring the manufacturers to increase production levels to keep up.
With retail demand and plan for the channel refill for the upcoming selling seasons.
In addition, the new consumers pivot towards RV and marine happened quicker than we anticipated, resulting in a true V shaped curve in our markets with increasing backlog than lead times evidencing themselves.
This coupled with strong fundamentals demographic trends promotes the opportunity for a strong second half of 2020 and likely 2021.
We estimate continued strengthening in these markets in the third quarter.
Now turning to the housing industrial side of our business, both of which experienced positive tailwinds coming out of fiscal 2019 and during the majority of the first half of 2020, given low interest rates, a tight housing market and pent up demand for affordable housing.
Additionally trends heading into the first part of the year related to the migration from rural to urban have reversed as a result of covered 19 in the social unrest impacting a larger cities.
Well at the American residential housing market stand to benefit from this migration as well do multifamily housing in suburban areas.
Our manufactured housing sales represented 21% of our total revenues in the second quarter and decreased 20 million or 18% over the second quarter of 2019, reflecting an estimated comparable decrease in estimated wholesale unit shipments.
Many of our MH customers ramp production, albeit at reduced rates throughout the nation widen state and local cobot 19 related shutdowns due to being declared essential businesses in several locations and states.
In addition to the economic trends previously discussed demographic trends are very supportive of the outlook for manufactured housing.
The need for quality affordable housing is critical and increasingly attractive to the growing population of 35 to 44 year olds with the average price of NMHC unit at roughly one half to one third the price of an average price of a stick built.
Revenues in our industrial business, which represented 17% of our of our overall sales mix in the second quarter decreased 2% compared to the prior year.
We supply both new construction and remodel as well as big box home improvement commercial high rise hospitality and the furniture and fixtures markets.
Residential housing was deemed essential in many areas supporting production and Newbuilds and the stick built housing market during the cold in 19 impacted quarter.
New housing starts, which we're off to a solid start to the year as a result of low interest rate traits and tight supply of existing homes for sale increased 24% in the first quarter, followed by a decline of 17% in the second quarter, primarily due to the pandemic.
Social distancing has impacted residential housing build rates due to the limits on the number of subcontractors in a project at any given time.
However, home construction improvement remodel and the do it yourself business was resilient during the quarter. Despite this the state and regional shutdowns.
Our residential new construction products are generally the last to go into new unit and trail new housing starts by four to six months.
Single family housing starts which were up 14% in the first quarter declined 13% in the second quarter, while multifamily housing starts across all regions declined 27% in the second quarter, most notably in the northeast compared to a 50% increase in the first quarter.
In summary, we are anticipating positive back half trends in our leisure lifestyle businesses.
We currently anticipate RV wholesale shipments.
To be up high double digits for the third quarter and flat to down low single digits for the year.
On the marine side of our business. We currently anticipate marine wholesale shipments to be up low double digits for the third quarter and down high single to low double digits for the year, including the impacts of covered 19, and the related shutdowns and other factors.
In the manufactured housing and industrial markets. We're also anticipating positive trends with current expectations of MH wholesale unit shipments to be up high single to low double digits for the third quarter and up mid single digits for the year and we're estimating new housing starts to be down mid single digits for the third quarter and full year.
From an operating perspective, we have the ability to leverage our and flex or manufacturing facilities and high variable cost structure to align with changes in customer demand.
Additionally, as previously announced and beginning in the second quarter, we eliminated approximately 35 million of annualized fixed overhead and administrative costs of which we expect to reinvest a portion of these cost into the business to support the resurgence in demand and as well to support our operating platform as we pivot back to the focus on strategic initiatives and our growth plans.
We are extremely well positioned for both defensive or strategic purposes, and the additional actions taken during the second quarter combined with prior cost cutting initiatives position us with flexibility to further withstand and adapt to the ongoing impacts of covert 19 of the third quarter and the remainder of 2020 as well as changes in market conditions.
On the capital allocation front, we're pivoting to strategic Weve Reengage with our acquisition pipeline candidates and a refreshing our models based on the strong.
Patients and the rapid returned to production to support retail demand in our primary markets. We also expect to make investments in strategic Capex and automation initiatives to help partially offset labor constraints and ensure that we will continue to put ourselves in the best position possible to support our customers as they flex their business models.
As our markets are in a state of flux in demand trends evolve and shift we will stay nimble to support our customers appropriately allocate capital drive business efficiencies and support our team.
I'll now turn the call over to John will provide some additional comments on our financial performance.
Thanks, Andy our consolidated net sales for the second quarter decreased 31% to 424 million, primarily due to the law shipping days and temporary shutdowns of certain of our facilities due to the co bid 19 related business disruptions within our end markets in April in early.
Okay.
This was followed by a strong resurgence in the back half of May end throughout June at all or end markets, particularly really RV and marine reflecting the relaxation of many stay at home restrictions by various states as well as an increase in consumer demand.
Revenue from our leisure lifestyle markets, which was comprised of RV and marine decreased 39% with RBC in marine revenues down 40, and 34% respectively.
RV content per unit decreased 2% to $3086 per unit and estimated marine content per unit decreased 13% to $1439 per unit.
During the second quarter, our RV and marine content per unit was negatively impacted by Oems curtailing production in April in early may but continuing to ship finished goods is during the suspension of operations in support of the ongoing resilience in retail in these markets as dealers continued to deliver to retail.
Retail units to customers.
Excluding the impact of the lost RV production days, we estimate our content per unit was flat during the quarter.
Our customers lost production days that negatively impacted our content per unit also impacted our organic growth as was most prevalent in our RV market sector. What was also felt in both the marine and MH markets.
Revenues from our housing and industrial markets decreased by 12% in the quarter with them H. revenue was down 18% versus the prior year, an estimated MH content per unit, increasing 16% to $4529 per unit.
Gross margin in the second quarter was 17.4% decreasing 100 basis points compared to the prior year.
The gross margin erosion was primarily driven by fixed operating costs incurred at plants that were shut down in April in early may and the cost of wages and benefits paid to furloughed hourly employees and indirect personnel retained while plants were not operating at full capacity and April one in early may.
Operating expenses were 14.5 presented sales compared to 11% in 2019.
Warehouse and delivery expenses increased 50 basis points due to a higher mix of MH sales in the quarter and the corresponding impact of fixed costs incurred at distribution facilities in April and in early may.
As Jay Benet expenses were 7.4% of sales in the quarter by 200 basis point increase compared to the prior year, primarily reflecting lower sales volumes.
SGN a expenses were down approximately $1 billion compared to the second quarter of 2019 as a result of the cost reductions completed last year and the proactive cost continue containment measures implemented in response to cope with 90.
Operating income of $12 million decreased 73% in the second quarter and operating margin of 2.9% decreased 450 basis points, primarily reflecting estimated pretax onetime net cash and noncash cobot related expense.
As of approximately four and a half million or 12 cents per diluted share and due to the factors previously described.
Our net income per diluted share in the second quarter was three cents down from $1.18 in the prior year.
Our overall effective tax rate as reported increased to 44.4% for the second quarter of 2020 compared to 25.1% in the prior year, primarily reflecting the impact of permanent tax differences related to the treatment of certain Corona aid.
Relief and economic Security Act also known as cares credit.
For the full year 2020, we are now estimating our all in effective tax rate to be in the range of 26% to 27% excluding the impact of one time items.
Now turning to the balance sheet.
Our total assets increased approximately $22 million as our June 28, 2020, largely reflecting the addition of acquisition related assets and a strategic increase in seasonal working capital.
Looking to cash flow in the first six months of 2020, we generated apart approximately 39 million of operating cash flows.
In the first six months in 2020, we paid 12 million in cash dividends to shareholders in alignment with our dividend policy and invested 11 million in capital expenditures.
At the end of the first quarter of 2020, we've made the decision to suspend acquisition initiatives and our share repurchases.
We do not expect any change to our quarterly dividend policy.
Our operating cash flow is very quarterly based on seasonal fluctuations in working capital among other items and then the second quarter and six months of 2020, we made the strategic decision to carry increased inventories to support our customers.
In the restock after coated shutdowns and as well based on building Tailwinds and strong resurgence we were experienced in all our end markets in late may and throughout July.
We have over 520 million of total liquidity at the end of the second quarter, including 111 million of cash on hand, with no major debt maturities until 2023 and today, we have not borrowed on our revolver since the third quarter of two.
Thousand 19.
The strength of our cash flows combined with our ample liquidity provided us with the flexibility through these unprecedented times our leverage position at the end of the second quarter was 2.3 times net debt to EBITDA.
As we move into the second half of 2020, our financial plan is based on the market assumptions Andy previously highlighted.
The expectation our markets will continue to strengthen as we progress through the third quarter and into the fourth quarter.
Our business model today is one that is highly scalable and end market and geographically diversified, allowing us to be in a better positioned than before to outperform through an economic cycle, the proactive cost containment and financial measures we've taken.
And we'll continue to take if necessary.
Combined with our flexible cost structure provide the ability to whether a downturn such as the current pandemic.
We have the ability to build cash by aggressively reducing our inventory levels and working capital over the remainder of the your if necessary.
Further reduce nonessential spending variable compensation.
And curtail non essential capital expenditures.
And are prepared to further take additional cost containment measures if necessary.
We have leveraged certain provisions in the cares act, including payroll tax deferrals that will provide additional financial support in 2012.
As we look to capitalize on the long term upside and all our end markets. The aggressive actions, we've taken thus far along with our supportive capital structure in conjunction with the market assumptions, we've outlined in our current financial plan, we're estimating our ability to generate more than 180 million.
End of operating cash flows in 2020.
We expect to increase our strategic capital expenditures in the back half a year in alignment with the expected to increase in demand or end markets and are estimating $30 million to $35 million capex for the full year.
That completes my remarks Andy.
Thanks, John.
We are prepared to stay ahead of that dynamic macro environment with disciplined execution.
Proven flexible and nimble business model cash on hand, strong cash flows and no near term debt maturities position us well to navigate through these dynamic economic times, we remain confident in our ability to quickly pivot and execute our strategic plan through a variety of economic scenarios.
We feel our end markets are very well positioned to being the main beneficiaries of lifestyle changes and adaptations that are ever evolving as pandemic continues down its current path.
We have the ability and resources to continue to flex up with our customers and invest in our infrastructure and working capital to support their projected growth needs.
The combination of our operational financial foundation customer first per permits oriented culture, and the talent and dedication and passion of our more than 7000 team members will continue to position us to execute on our strategic plan as we strive to consistently exceed our customers' expectations.
Our overall goal of increasing long term shareholder value by serving our customers at the highest level reinvesting in and protecting our talented and dedicated team members dealing ethically and responsibly with our business partners and supporting our local communities remains our highest priority.
This is the end of our prepared remarks, we're now ready to take questions.
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First question today is coming from.
Andrus of Keybanc capital markets. Please go ahead.
Hey, good morning so.
Andy obviously, a nice recovery in the end markets here lately. Just curious you can share any insight on the production schedules in July and August for the Oems I think you'd said high double digits for the third quarter on shipments, but just any more color there.
We'll be helpful.
Sure, Yes, we've seen continuing tailwinds building on the RV side of the business as it relates to production schedules the leaning out of the dealer inventories have been significant as we noted and we continue to see them. The production rates schedules increase through June through July into August through our expectation is really through the third.
Third quarter and into the fourth quarter at this point and then positioning it for the restock for the 2021 model season. So right now units are in very high demand production run rates are continually getting.
Increasing so we've seen that really through this point in time and I expect strong production run rates here for Q3 in Q4.
Got it and then I guess just building off of that into retail I think you said to Q RV retail was down 15 to 20, I guess Im just curious what you've seen here more recently in June and July really just trying to tie that to your flat some low single digit wholesale outlook.
Yes retail is as continue to to increase as well from all of our touch points.
Right now one of the things that we're dealing with is just getting units to dealers.
As we've gone through the stimulus package here.
A lot of dealers are independent contractors, and so we're getting them back.
And we've seen a little bit of build up on the large but at the end of the day, we're hearing and again that retail units continue to be in high demand and retail continues to grow.
Got it.
Any stab at kind of what maybe June July what would I guess threeq you retail good look like against that wholesale.
Hey, Brad This is John Hey, RV I information on June retail was plus 10.8%.
And of course.
We're still in July so we don't have that information yet, but all indications are.
Well I'll be very strong retail month as well, we're expecting what I would tell you Brad is that we would expect.
High single to low double digit increases in retail through the third quarter based on what we're hearing.
I appreciate it thank you.
Thanks.
Thank you. Our next question is coming from Scott Stember CL King. Please go ahead.
Good morning, guys and thanks for taking my questions.
Morning.
Obviously demand is strong across the board right now people just buy everything it seems like but what's the mix.
Right now, particularly within our views that you're seeing and how could that affect your content in the back half of the year.
Sure. This is Andy mix is still consistent with what we've been seeing as it relates to low low end units on the travel trailer side entry level consistent with the new buyers that are entering the space today.
So what we would tell you as on a on a mix from our perspective, there's upside as units get content into upwards and so the more caught that we see the more will benefit theres been no change in the mix from a negative perspective anything we'll get additional content as the mix shifts we've also heard.
Through our channel in trucks as well that that motorized production rates are picking up as well so we're optimistic about.
Across the spectrum as it relates to the buyers that are that are in the space today.
Got it and just regarding costs I know you said that there were some extraneous kobin cost 12 cents in the quarter.
We've also had some other meaningful cost cuts.
What happens most those covert costs as we go forward in the back after the year and.
From a cost perspective, what what sticks from what's being cut what structural and whatnot.
Right. So couple of things first of all as it relates to the foreign half million on call. It one time cobot another related expenses, that's not an ongoing.
Costs that we will incur going forward.
Implemented covered protocols across our operating spectrum, we're used to that at this point our team members have gotten used to those protocols is a little bit of inefficiency in there, but I don't expect it to be material and then as it relates to kind of our fixed cost structural adjustments that we made we implement about 35 million a fixed costs.
Estimates across the platform during Q2.
We are going to be reinvesting some of those back in but our expectation is that we're also going to be able to retain.
A lot of that that cost adjustment as well. So a good estimate is probably 50% of those.
Right now as it relates to what will need to reinvest back in the business. If we if we continue to see the aggressive run rate that we're we're experiencing and we fully expect to see those run rates continue at this point in time so.
But we will be able to retain some of the 35 million that we we implemented.
Alright, great and just last question I know that.
Recently, you've talked about getting back to that 30 to 50 basis points of op margin.
Expansion can you talk about your ability to get there the back half of the year.
And heading into next year.
Yes, we firmly believe that we will be able to get there in the back half of the year and into next year.
And so we're very optimistic about our ability to grow our margins, especially with our fixed cost structure, where it's at.
With the adjustments that we've made so far and then certainly with the industry run rates that we're seeing today.
We believe that are fixed our fixed cost structures in a really good spot in our team is very flexible and nimble to be able to support that so we believe we absolutely can can grow our operating margins.
Got it that's all I got thank you.
Thank you.
Thanks for your next question is coming from Daniel Moore of CJS Securities. Please go ahead.
Andy and John Good morning.
Good morning.
Andy as types as fast as I could could you repeat the expectations by end market for Q3, and the full year I know RV wholesale shipments up high double digits in Q3.
And then maybe go from there real quick.
Sure RV wholesale.
Up high high double digits Q3 flat to down low single digits for 2020 full year.
Marine wholesale up low double digits for Q3.
Down high single to low double full year on the wholesale side.
MH up high single to low double digits in Q3.
Up mid single for the year.
And then our industrial markets down mid single for the quarter and down mid single for the full year.
Perfect I appreciate it.
And just point of clarification post Q1, you suspended buybacks and M&A obviously.
Given uncertainties in the environment.
That's still the case as we look back into the back half of the year, particularly on the M&A side.
No what we have pivoted to strategic at this point in time, given the strength in our markets the visibility the confidence across our checks across our entire platform.
We're dusting off our acquisition models at this point in time, and we're certainly looking at strategic Capex to support the expected continued growth in each of our markets to make sure that we've got capacity to grow with our our customer base, especially as they continue to grow. So we have made the pivot to strategic.
Got it perfect.
And then do you have a rough estimate a decline in.
Overall inventory levels for marine in Q2, and maybe an update on where we stand in relation to historic levels over the last 510 years.
Yeah Marine inventories are definitely low at this point in time.
There's been marine came into 2020 with a little bit higher inventory and so you know we saw Marine trail RV as it relates to kind of the the significant recovery by about three to four weeks, but it is absolutely caught up.
With RV as it relates to expectations.
We think there's probably been.
Between 30 and 50000 units.
Taken out of the channel over the course of the last 18 months on the marine side of the business and so marine is extremely well positioned we're hearing tremendous dealer demand for new units out there both on the RV and marine side.
And given Q2 is typically the 40% of the year do you see that shifting seasonality shifting into Q3 this year given the early.
Early shutdowns and slow start to the season.
A little bit I think when you think about the timing of the production slowdown.
Or shutdowns as it relates to covert just coming out of the spring in particular in the aluminum side of the business on marine.
Retail continue to flow and dealers adapted very quickly and so I think we're going to continue to see strong retail.
As we see those new consumers move into marine.
But I don't know, you'll see a material shift I think that again, both retail very well during Q2 as well did did RV. So there's a little bit of movement, but I wouldn't say that its overly significant okay.
On the content side do you expect to return to growth in both our views and boats.
And content per unit basis, as we get into Q3 in the back half.
We do.
Okay Lastly from me in terms of gross margins.
Yes.
Do we see that getting back to flat or even up in Q3 on a year over year basis, or do you expect ongoing headwinds and.
Raw material labor, social distancing challenges et cetera, maybe temporary Matt.
We would expect to see improvement on the gross margin level.
Especially with the the cost reductions that we've done to really position our business. Our our we've retained our core talent.
We're in a really good spot to leverage the volume increases.
As materials move in fluctuate, we'll move with those.
No and pass along price increases or decreases as we see the material markets move will probably feel a little bit of labor headwind flavors, certainly getting tight as it relates to the tremendous demand that we're seeing and we're working through that but from an overhead perspective, we're in a good spot and we would expect to increase incremental margins.
That's it for me I appreciate the color very much.
Thanks.
Thank you. Our next question is coming from Craig Kennison of Baird. Please go ahead.
Hey, good morning, Thanks for taking my question I think many had been asked already but going back to your wholesale forecast for RV and for marine.
It feels a little more conservative than what we've heard from some other Oems.
You think thats.
A function of maybe a more conservative retail forecast or are you concerned at all that.
The Oems may struggle to fully ramp up production to meet that shipment demand.
I think that there is tremendous retail demand out there today.
We could be a little bit conservative in our estimates as it relates to wholesale we're going to continue to do everything that we can to flex with the manufacturers I think the manufacturers on the on the wholesale side or have been extremely disciplined as it relates to managing their business Theyve got capacity.
From a plant perspective, and we're feeling plants coming back online. So you know from our perspective, we see the opportunity and optimism out there.
Got to make sure that again, we're positioned well to be able to take care of that so I think our estimates are.
Again in in the Fairway, if you will earn but I think theres definitely upside as well with a strong demand that we're seeing.
That helps and then with respect to.
Labor.
I imagine you've got a few challenges here one you've got to watch Tobin trends in Elkhart, especially the mature workforces save too.
You know there are some federal programs that.
To provide some unemployment comfy.
Compensation Im wondering if either of those changes at the headwind for you.
We think the unemployment benefit and that piece will be.
Tailwind if you will depending on on where the stimulus package comes out but you know I think that was that was game changer from our perspective, the overall stimulus package and keeping the consumer in a really good spot in Q2.
But we do not see the unemployment benefits decreasing as a headwind if anything again I think it'll help.
We are seeing definite without question labor.
You know labor tick up not as a percent necessarily but the need for labor.
In the area and so again, we're going to work through that at this point in time, but we don't see a lot of headwinds I think that we're going to do everything that we can to work through that situation and like I said, we're going to invest in some strategic automation and capital expenditure expenses over the next six months to make sure that we're not only position for the back half of this year, but for the 2021 season.
We expect coming.
Thanks, and finally could you comment on just your M&A pipeline in RV in marine in particular or any other segment I mean, you're generating a lot of cash kind of really strong balance sheet.
It's curious what the flavor of deals looks like in there.
Our.
Your targets more interested in selling now given this could be a minor pekin demand or or are they less willing to sell because they see better long term trends.
We have a full pipeline of candidates that we continually talk too.
And we're engaged with.
Given the nature of the V shaped curve, especially in leisure lifestyle were truly able to carve out the impact of cobot 19 in the shutdowns on both of those two markets in particular, so we're able to really take a look at normalized run rates.
To really get a feel from a valuation perspective, and so I think you know with our candidates we maintained a solid dialogue.
We're excited about the potential that's there and.
We havent seen a rushed to the table as a result of covered 19, and you know companies coming and saying Hey, I'm tired of this I want to I want to come in and be acquired we've seen more I think again because of the V shaped curve, there's theres opportunity out there.
An excitement for whats headed for the future. So at this point in time, we feel really good about our pipeline in our candidate pool.
Perfect. Thank you.
Thanks.
Thank you. Our next question is coming from Tim Conder of Wells Fargo. Please go ahead.
Andy.
Just wanted to follow up on a couple of items here selling on the Craig's questions and your interest payments on labor.
So tight.
Tight getting tight labor just given the the sharpened rebound in demand.
But I guess are you seeing maybe maybe the digress here in a little bit into into what's going on Washington, but but.
Is.
The existing unemployment things or I should say just expired was that maybe a headwind to getting labor back maybe again, the proverbial people, making more not working than they did and then how do you see what's happening on the proposals.
To help or hinder are not change in the current labor.
Tightening the true that you're experiencing there.
We do believe it was a headwind in Q2.
I think but when you look at it from both sides I think it was instrumental and.
Very dynamic and game changer to keep the consumer and.
You know our employee base in it really good spot so as much as it was a headwind to get labor I think again, it re instill confidence and their ability.
To be in a really good spot coming out of this so again I think there is that I.
I don't I don't want to look at as a tailwind going forward, but it's certainly not a headwind if there's a change in the unemployment benefit package going forward on the downside.
Okay, so supported consumers as needed in the past.
But maybe made it a little tougher on labor, especially in Q2.
Thats kind of normalizing out here in Q3, hopefully [laughter] from the policy perspective, okay.
Okay.
So you talked about again, good visibility into demand as a as user is your meeting the needs of your of your.
Customer base to as they ramp up production to refill pipeline channels.
From your seat what do you see when do you see the channels in our VP for the industry normalizing the dealer level and the same question I guess for it for Marine importantly.
So with the strength in demand, we believe that inventories in both markets have been overcorrected and there is tremendous demand out there on the retail side to keep up with what was already a strong demographic.
Playing into leisure lifestyle, but then you add the new consumers that have entered the channel as well.
In both of those two markets and so it so if anything its embolden the the opportunity for the long term as it relates to correction. If you will tick getting back to a place of balance.
And normalcy and at this point in time based on our math you know there's definitely some catch up to be made as it relates to wholesale production catching up with retail and positioning retail, especially for the 2021 model season. If we continue to see this strength in retail demand, which we fully expect at this point.
So again, there's there's there's quite a long runway as it relates to visibility.
Subject to these these demand conditions.
Okay. So so potentially then it's going to be in 21 is that is that a fair statement before you get you get channels normalize to maybe early 21, and RV and maybe little bit longer in marine.
I think it can go based on our numbers and our calculations on turns and retail demand just depending on you know where retail lands this year.
I think it go well into 21.
Okay. Okay. Okay.
And then and then lastly, you mentioned that you are making some strategic capital investments as well as looking at strategically for M&A, but on the capital investment side.
How do you see I guess at this point.
You mentioned, what your Capex is going to be this year.
Do you see that Capex number going up a little bit to enable you to meet that well into 21 demand of your end customers.
Not at this point I think our 30 to 35 million as appropriate we've identified several projects.
Where we see some potential bottlenecks building.
That will alleviate that and again I think we're really planning to make sure that were in the best positioned to be able to support the growth heading into 2021. So I think our 30 to 35 is a reasonable estimate.
Certainly at this point in time, and we've got projects identified.
Okay, Sir congrats thank you.
Thank you.
Thank you. Our next question is coming from Steve O'hara from Sidoti. Please go ahead.
Hi, good morning, how are you.
Morning, Florida.
I just I guess, maybe just in terms of the now the strong retail demand.
You know about your thoughts.
Maybe I missed it in terms of how sticky do you think.
These new entrance in the industry is maybe.
In terms of new buyers what your thoughts are there I mean, how much of this.
And improvement is new buyers or kind of.
Existing buyers wanting to get ahead of production shutdowns and things like that.
No.
No.
Inside of the buyers are they less apt.
Right time, RV years, where now as opposed to.
Yes, well defined people usually by two to three in their lifetime are now as other options open up like international travel and things like that.
Sure. So what we're hearing consistently across all our checks.
Is that the new its the new buyers are certainly a tailwind to.
The already strong buying population that was there already and going to be buying units and so the new buyers are active.
We think it's pretty sticky, especially when you look at all the situations you know that are certainly impacting the next six months and possibly next 12 months as it relates to covert you look at domestic and international travel restrictions.
You look at that kind of where things are going to be at for the fall as it relates to education schools and fall sports.
Really the recreational leisure activity from our perspective is ideally positioned to support that consumer.
As an avenue and so we think that it feels very sticky we think that again with arch actually what we're hearing is that the manufacturers and the dealers believe this is a real opportunity to engage with those new consumers and really make sure that it's a very positive experience for them to make sure that they come back into the channel. So what we've heard is.
His tremendous focus and attention to you know knowing that there is new buyers entering and there's tremendous opportunity to keep them long term and upgrading units and consistent with what we've seen in the past as it relates to upgrade cycle. So.
We're not touching the consumer at that level, but again.
Certainly supportive of all the initiatives that the manufacturers and the dealers are putting in place today.
Okay. That's helpful. And then maybe just lastly in terms of.
M&A.
And your outlook there I mean can you just talked about.
Maybe by market or where you're focused on is it still in marine is it.
Is it or is there another adjacent market do you guys could attack or just kind of some comment there. Thank you.
Certainly leisure lifestyle like I've talked about is ideally positioned so RV and marine we're very excited about we're very excited about.
Our industrial model, which we think is in its infancy as it relates to our single and multifamily opportunities that are out there from a geographic perspective.
And then as well I think with manufactured housing.
The strength that we see there and the opportunities. We're we're excited about those opportunities too. So we've got a full pipeline of candidates across.
All four market sectors.
And again I think really as we as we look to pivot here and have pivoted.
Again, we're very optimistic about about really off all four market sectors leader lifestyle, certainly, though I would tell you you know with the tremendous demand that we're seeing today and the runway.
Very excited about.
Okay, and maybe just one more follow ups that.
I guess, GDP, obviously, a contract and quite a bit the second quarter as expected more or less.
Can you just talking about maybe you're feeling for how long.
Now a.
A large consumer discretionary.
Our industry on outperform kind of that.
The typical economy or make threedic omni maiden.
And how important is that the kind of normalizing and kind of getting back to normal.
I am not an economist, but I think what I can say at least as what we see is when you look at again the opportunity that's there for the leisure lifestyle markets and especially in this environment with the pandemic going on and the overhang that's likely to be there for a longer period of.
Time.
You know the consumer his ability to social distance and still be able to enjoy.
You know leisure activities that are these two markets are ideally positioned for that and so.
Thats one of the reasons I think that we have competence across the industry.
It relates to the long term demand projections that novartis ideal on and again, so I think that we would believe that theres opportunity to perform and then again the stimulus packages that are going in place and even hopefully the upcoming stimulus packages that we put in place we'll continue to keep the consumer and a good spot and so we feel very optimistic about.
Those markets I can't really comment on whether or not it can exceed GDP or not how long will do that but I can tell you that certainly what we see in what we're hearing today is tremendous.
Tremendous optimism and excitement and then our joint of the leisure lifestyle activities that we're engaged with.
Okay. That's helpful. Thank you very much.
Thank you.
Thank you. Our next question is coming from John Lovallo of Bank of America. Please go ahead.
Hey, guys I. Thank you for taking my questions as well as the first one SGN in absolute dollars have declined on a year over year basis for two consecutive quarters. I mean would you expect that trend to reverse in the third quarter as volume picks up and some of the investment.
It is reengaged.
We're going to add a little bit of investment on SGN, a but a lot of that you know we flex our business model very very quickly.
And were high variable cost business model, even in the DNA side. So our expectation is that we're going to continue to leverage that but I wouldn't expect it to go up materially we do have incentive compensation that will move in incentive packages. The again as we flex variably with with upticks in demand and profitability, but again I think we'll be able to keep it and Jack.
Okay. That's helpful. And then on the housing side demand certainly has accelerated nicely are you seeing any change in the mix of buyers. So it's still kind of being led by the first time buyer or are you seeing any change there.
We haven't seen a lot of change in that mix. There are still you know there's demand and lack of inventory on the stick built side.
And then certainly on the manufactured housing side, we think that demand should continue to pick up, especially with the migration that we've seen from urban to rural which was which was the opposite if you will heading into 2020, we saw the consumers migrating into the urban areas and we've seen that really shipped as a result of cobot and some social unrest that's been taking.
Plays and so we think the MH for both first time buyers and those look into two separate a little bit and make sure that they've got you know the opportunity to do that we think there's opportunity there.
Great and then one more by Ken on the industrial side can you just remind us of the exposure there to maybe hospitality in some of the other end markets that have been.
Outsized effect into an outsize weighted by cobot.
We are we've seen a heavier mix of our business shift towards.
Residential housing on the industrial side of our business and so we've got commercial and hospitality opportunities out there those of paused a little bit during this timeframe, but I wouldn't say that's been a material impact on our industrial business. What we've seen is the strength in residential.
As well as the the do it yourself in home improvement model has definitely been very very strong. So we've not seen erosion as it relates to.
The hospitality piece of our business.
Okay. Thank you guys.
Thanks.
Thank you. Our next question is coming from Brett Andress of Keybanc capital markets. Please go ahead.
Hey, just a quick follow up for your Threeq you RV outlook.
Im learning this morning that high double digits means different things different people.
Can you just maybe broadly bucket that for us is that plus 20% to 30% at that higher lower just any kind of.
Rails there.
So, let's let's say that.
Plus 18% to 25%.
Got it thank you.
Thank you at this time I'd like to turn the floor back over to MS. Kotowski for closing comments.
Thanks, Don again, we appreciate everyone for being on the call today and look forward to talk Thank you again at our third quarter 2020 conference call.
Play of today's call will be archived on Patrick's website, Www Dot Patrick I'd dotcom under Investor Relations.
Now I'll turn the call back over to operator.
Ladies and gentlemen, thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.
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