Q2 2022 Patrick Industries Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to Patrick Industries' second quarter 2022 earnings Conference call. My name is Robert and I'll be your operator for today's call.
At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded.
I would now like to turn the call over to your host Ms. Julie Ann Kotowski from Investor Relations you may begin.
Good morning, everyone and welcome to our call. This morning, I am joined on the call today by Andy Nemeth, CEO , Jeff protein, our president and Jake pack of Itch CFO certain statements made in today's conference call regarding Patrick industries and its operations may be considered forward looking statements under six.
<unk> slot.
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 forward looking statements.
These factors are identified in our press releases, our Form 10-K for the year ended 2021 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 Julien good morning, ladies and gentlemen, and thank you for joining us on the call today.
We're pleased to report our second quarter and first half 2022 results, which are a reflection of a number of factors as we will discuss most importantly, the dedication and commitment of our team members to serve our customers are better together culture, and the continued execution of our strategic and operational initiatives.
For the past 24 months, we've seen an incredible invigoration for the attractiveness of outdoor recreation and leisure lifestyle products.
These meaningful and impactful quality of life alternatives prioritize quality time with family and friends and ushered in a significant increase in new leisure lifestyle participants seeking the enjoyment and exploration of the great outdoors. Additionally, both families and individuals find creative alternatives to travel remote work environments and experiences.
The use of Rv's boats and personal power sports products.
Now there are more people than ever across the country participating in our leisure lifestyle experience pointing towards continued participation rates and long term optimism and growth potential in this space.
As demand has outpaced supply over the same period, our industry's who've worked tirelessly to supply the tremendous demand created by this resurgence on top of what we're already strong demographic trends and a positive outlook.
While supply chain constraints and other challenges created by the pandemic impacted virtually all markets, we have been energized and inspired by the aggressive cadence creativity and innovation across all of our markets to meet customer demand and further promote the lifestyle.
Second quarter, and first half 2022 production run rates in the RV Marine and power sports market, which represents 77% of our revenues were strong and RV Oems continue to show their incredible agility and ability to scale to meet strong demand in refill the dealer inventory channel.
On the RV side of our business, which represents 57% of second quarter consolidated sales first half wholesale production run rates annualized at over 600000 units.
We believe this strong production and scalability has recalibrated RV dealer inventories to an estimated new normal range, which Jeff will highlight and and that there will be disciplined and meaningful wholesale production declines with virtually all Oems, which we are already seeing and have been preparing for in the back half of the year to drive alignment in balance with retail on the Gulf.
Forward basis.
Ultimately the RV Oems continue to do a spectacular job of flexing their models to support and match up with retail demand and the focus and attention to ensure this balanced across the dealer inventory channel as evidenced.
Alternatively on the marine and power sports side of our business, which represents 20% or our second quarter revenues. We believe dealer inventory levels are still depleted from historical and expected new norms pointing towards the longer repo window and strong production levels expected to last through the remainder of 2022 and likely into and possibly <unk>.
Through 2023 until the dealer inventory channels are appropriately restocked and backlogs are reduced.
Our manufactured housing and industrial markets, which are primarily residential housing base and represent approximately 23% of our consolidated second quarter revenues collectively.
Continue to benefit from similar dynamics, primarily the recognition and value of spending quality time with family and friends.
Similar to leisure lifestyle over the past 24 months strong retail demand and limited inventory levels have been prevalent in these markets as well and we further believe the affordability and quality value proposition with MH will become even more apparent given current elevated housing prices and rising interest rates.
Our MH end market, which represents approximately 13% of our revenue serves Oems who are working through healthy backlogs in asps in the MA space are attractive when compared to current site built housing prices.
Finally, I'll highlight our industrial market, which represents approximately 10% of our second quarter revenue.
Even though single family housing starts appear to be down we're still seeing the benefits of do it yourself and multifamily built that are not showing signs of weakness currently.
To encapsulate and summarize while production levels in the RV market are expected to materially decline for first half run rates approximately 43% of our business, which is in the marine power sports and housing markets is expected to be stable if not strong for the second half of 2022, highlighting our diversified model.
We have been heavily investing in automation infrastructure and human capital initiatives over the same period to drive scalability as well and this in combination with our market strategic diversification initiatives and disciplined capital allocation strategy should help bolster margins from the historical impact of such scale change in the RV market.
Generally consumers remain in a strong position with employment resilient.
Over inflation and higher interest rates represent meaningful challenges for the consumer and we are monitoring these factors closely and.
Finally, turning to the numbers, our second quarter revenues increased 45% to $1 5 billion.
Our year to date revenues increased 51% to $2 8 billion and on a trailing 12 month basis, our consolidated revenue surpassed $5 billion.
Our net income in the second quarter increased 98% to approximately $117 million or $4 79 per diluted share and adjusting for the impact of the accounting treatment for our convertible notes our adjusted earnings per share was $5 20.
Year to date net income increased to 115% to $229 million or $9 33 per diluted share adjusting.
Adjusting for the impact of the accounting treatment for our convertible notes our adjusted diluted earnings per share was $10 14.
I'll now turn the call over to Jeff.
Thanks, Andy and good morning, everyone as Andy said, we increased our revenues across all of our end markets driven by durable efficiency and throughput gains continued strength in the OEM production levels contribution of acquisitions and market share gains.
In the second quarter of 2022, our RV revenues were up $242 million or 41% to 837 million and represented 57% of our consolidated sales.
Wholesale unit shipments of 152400 remained flat compared to prior year quarter as dealers appears to have recalibrated to new normalized inventory levels.
While wholesale shipments were flat in the quarter, our RV content per unit increased 34% on a TTM basis to $4754 per unit driven by market share gains acquisition and our investment in automation initiatives over the past 24 months.
The consistency of production scheduling has improved due to better visibility longer runs and our teams creative and focus ability to mitigate supply chain constraints.
Commodity pricing continues to remain elevated during the quarter.
We believe however, this is starting to plateau and we will continue to adjust pricing in partnership with our Oems as changes occur.
RV retail unit shipments were estimated to have decreased by approximately 29% during the quarter totaling approximately 143800 units with the added approximate net 808600 units to dealer inventory in the quarter. Our estimates indicate TTM dealer inventories on hand at the end of the.
Second quarter or approximately 20 to 22 weeks up approximately two weeks from the 18 to 20 weeks from our estimates at the end of the first quarter of 2022.
We estimate dealer inventories have increased but are still below historical pre COVID-19 estimates in 2018 in 2019 for the second quarter at 22% to 26 weeks.
Our marine revenues, representing 20% of our overall consolidated sales increased $124 million or 74% in the quarter to $290 million driven by acquisitions market share gains and pricing.
Marine wholesale unit shipments increased an estimated 10% in the second quarter of 2022 compared to 2021 on retail unit shipments, which were estimated to be down approximately 16% to 18% due to due primarily to inventory availability.
Our estimated marine content per wholesale unit increased 66% on a TTM basis to $4699 per unit.
Marine dealer inventories continue to be lean our estimates indicate that marine dealer inventories are at roughly seven to nine weeks on hand compared to historical averages of 35 to 40 weeks based on our estimates and channel checks. We continue to estimate strong wholesale production to carry through the remainder of 2022.
And into 2023.
We also expect our marine revenues to surpass $1 billion in annual sales on a pro forma run rate basis.
Our manufactured housing revenues of $200 million in the quarter represented 13% of our total revenues increasing 44% over the second quarter of 2021.
<unk> estimated wholesale unit shipments were up 14% in the quarter and the MH content per unit increased 22% to $5851 per unit.
MH Oems maintained a strong position through the second quarter with sound industry backlogs and also appear to be increasing capacities.
Manufactured housing remains a viable cost effective alternative site built housing.
Revenues in our industrial market sector, which primarily tied to single and multifamily residential housing where $148 million or 10% of our overall sales mix in the quarter, increasing 24% compared to the prior year.
Total housing starts for the second quarter of 2022 increased by 3% with single family housing starts down approximately 3% and multifamily starts up approximately 20%.
Rising interest rates are likely to have an impact on residential housing. However, we believe limited inventories and the need for multifamily housing remains strong and the current labor market.
Moving away from the end markets results and further into quarterly operating and strategic highlights.
We continue to be able to produce more with less through effective labor management and enhanced production capacities.
That are adaptable based on OEM needs.
We have seen how our ability to flex our production and leverage scale to ensure raw material availability has translated into new and existing customers, who recognize our ability to leverage our diverse operating model.
As Andy noted, we continue to prioritize automation and strategic initiatives.
Create production efficiencies and scalability, allowing us to just quickly to customer demand.
Over the last 18 months, we have deployed over $100 million in capital to drive efficiencies throughput and scalability during.
During the same period, our innovation initiatives continue to drive best practices across our facilities, resulting in synergies and increased production capacity.
These investments and the initiatives have translated into overall outstanding performance by our team for our customers, which in turn translated into market share gains.
A few examples of our ability to scale include our metals group.
Showcase their expertise in creating and obtaining products OEM customers needed over the past several months, which allowed us to pivot in areas our competitors could not.
In a volatile supply chain environment, our businesses are fabricated and distribute aluminum products benefited from creating available capacity and creatively procuring inventory leading to customers to switch to our products are.
Our lamination group drove increased production penetration as well as we leveraged several incremental automated processes.
Availability and exceptional customer service.
We're also very excited about our most recent major automation expansion project with our printing operation, which began production in June the.
The new equipment and facility features multi million dollars state of the art printing press that triples, the output of our existing printing presses with fewer people.
And which also can produce both vinyl and paper, allowing us tremendous flexibility scalability and transfer ability to drive market share increases and production efficiencies.
Our automation initiatives have and will continue to reduce direct labor costs, and our human capital investments continuously innovate our product offerings.
And both of these key investment focal points remain a core driver of our margin resilience.
On the acquisition front this quarter, we continued the execution of our strategic diversification and investment in the marine space through the acquisition of Diamondback towers, a Florida based manufacturer of premium.
Way forward in ski towers and accessories for the Marine Oems.
The Diamondback acquisition and team further helps solidify patrick's position as the market, leading wake and ski tower designer fabricator and supplier.
As we've noted our four end markets represent diversification, which we believe will prove to bolster margins. We expect to continue seeing the benefits from our strategic investments product offerings and scalability.
Which put us in great position to respond appropriately to customer needs, while creating long term value and growth for our company.
These investments will give us greater flexibility as production levels move up and down our.
Our company wins this quarter are a result of our team's dedication as we continue to strive to be the premier product solution of choice for our customers.
I'll now turn the call over to Jay who will provide additional comments on our financial performance.
Thanks, Jeff and good morning, everybody for the second quarter of 2022, our consolidated net sales increased by $456 million or 45% to $1 5 billion driven.
Driven by organic and market driven growth and continued strong demand and customer order activity in each of our principal end markets.
Gross margin in the second quarter was 22, 2%, increasing 220 basis points compared to the prior year quarter, driven primarily by contributions of our fiscal year 2021, and 2022 acquisitions, our realization of production and labor efficiencies are automation initiatives higher production volumes and effective leveraging our fixed costs and horizon.
Cost environment, while at the same time, we are beginning to see a deceleration of inbound freight costs.
Operating margin expanded by 250 basis points from nine 3% in second quarter of 2021 to 11, 8% in the second quarter of 2022.
Operating income increased by 83% or approximately $79 million to $174 million.
Operating margin benefited from increased labor efficiency and leveraging of our fixed costs as we continue to align with customer production schedules.
Our warehouse and delivery expense decreased by 40 basis points as a percentage of sales primarily driven by our growing utilization of technology that allows us to better coordinate deliveries of goods to our customers and in addition to the leveraging of certain warehousing fixed costs are.
Our SG&A expense increased by 20 basis points as a percentage of revenue for the second quarter of 2022, reflecting continued infrastructure investments and the impact of acquisitions.
Net income grew 98% in the second quarter of 2022 in comparison to the second quarter of 2021, increasing $58 million to $117 million or $4 79 per diluted share adjust.
Adjusting for the impact of the accounting treatment for our convertible notes effective in 2022, our adjusted diluted net income per share was $5 20.
Net income per diluted share also reflects the pretax impact of $3 7 million and inventory step up adjustments from purchase accounting related to acquisitions and $1 9 million of contingent consideration adjustments for a combined $4 2 million of after tax reduction in net income or <unk> 17 per diluted share.
Our overall effective tax rate was 26, 8% for the second quarter of 2022 compared to 26, 9% in the prior year, we expect our overall effective tax rate for 2022 to be approximately 25% to 26%.
Cautionary pressures continued to impact consumers in the macroeconomic environment remains turbulent while demand remain elevated through most of the quarter. We are beginning to see the effects of rising interest rates and greater macroeconomic uncertainty on the consumer and continue to remain committed to a prudent cadence of production consistent with cues from customer driven demand.
As Andy mentioned in the second quarter of 2020, we displayed prowess and our ability to maneuver through uncertain conditions, our variable cost structure allowed US then it allows us now to remain agile and fluid during periods of volatility.
Addition to our diversification and growing aftermarket presence provides further protection against potential headwinds.
Looking at cash flows we generated approximately $97 million of operating cash flows for the second quarter of 2022 compared to approximately $28 million in the prior year's quarter.
This increase was a result of our improved profitability and growth in net income partially offset by continued investments in working capital in the quarter to better position our platform.
As Jeff alluded to earlier this enabled us to better support our customers robust production activity in the quarter and mitigate the global supply chain through 2021 and into 2022.
Our inventory levels are higher than historically due to supply chain constraints and extended lead times over the past 18 months and to navigate we have made strategic working capital decisions to ensure our ability to differentiate ourselves from our competitors.
However, we are well positioned from an inventory perspective to continue serving our customers and gain market share and we expect monetization of working capital to materialize in the latter half of 2022.
This quarter, we invested $26 million and capital expenditures of $14 million from second quarter 2021.
As noted our capital expenditures remains centered on improving operational efficiencies through investments in automation and technological improvements.
Our focus on automation and investment in infrastructure will allow us to stay agile in the face of greater macroeconomic uncertainty with our primary end markets.
In combination with our highly variable cost structure, we are confident that our capital expenditure initiatives position us well to face whatever macroeconomic environment materializes in the coming quarters.
Strategic investments and business acquisitions totaled $19 million in the second quarter of 2022.
We acquired Diamondback towers, a manufacturer of premium wakeboarding ski towers and accessories for marine Oems further expanding our marine presence.
Additionally, in the second quarter, we continued our share repurchase activity and repurchased approximately 288600 shares for a total of approximately $17 million in accordance with our dividend policy, we returned $7 million to shareholders in the form of quarterly dividends.
At the end of the second quarter, we had approximately $346 million of total liquidity comprised of $77 million in cash on hand, and unused capacity on our revolving credit facility of $269 million.
Our total net leverage ratio was one nine times.
In part due to our liquidity profile, we are confident in our ability to navigate the macroeconomic environment, allowing for swift adjustments to best meet our customers' needs. This.
This profile in concert with our ability to monetize working capital in the latter half of the fiscal year will allow us to continue to execute our disciplined capital allocation strategy.
In our RV end market, we have seen an industry wide restocking of dealer inventories approaching pre pandemic levels.
We are beginning to see OEM production react accordingly.
We currently estimate full year 2022, RV wholesale unit shipments to range from 500000 to 520000 units an estimated 60% to 65% of the unit production to be in the first half of the year.
We expect full year retail shipments to be down low to mid double digits or approximately 19% to 22%.
In our marine market, we expect marine wholesale shipments to be up approximately low single digits in marine retail to be down low double digits, primarily limited by supply chain constraints.
We still see lean dealer inventories throughout 2022 with restocking to appropriate levels not occurring until 2023.
On the manufactured housing and industrial side of the business. We continue to expect MH wholesale shipments to be up high single digits to low double digits for 2022 with retail sales absorbing available wholesale production on a real time basis.
In our industrial end market, which is primarily tied to residential housing. We expect 2022, new housing starts to be flat to up low single digits.
Completes my remarks, we're now ready for questions.
Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
A confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Our first question comes from Brent interests with Keybanc. Please proceed with your question.
Hey, good morning, guys.
So just on the updated 500 to 520 RV.
RV shipment forecast, obviously, it's Steve.
Drop off in the back half, but theres still debates out there around is that enough to get the channel right.
And what's the confidence level.
And the industry, maybe quickly pulling back to those levels. So just any more color I guess on how you really see the back half.
Playing out given what you see right now.
Yes, Brett this is Jeff.
Good question and I can tell you that we're seeing are the Oems, we believe reacting accordingly.
Taking out days of the week go into three days or four days a week in production.
Taking a week off here or there.
I think that they are really keeping a close eye on it and there they are backing off production levels.
And giving us some fairly good.
Foresight on what those are going to be so we can react to them. Accordingly also but we believe that there is.
There is definitely.
<unk>.
Ah.
A tone out there that they understand what's going on there.
We're very conscious of whats happening and they're pushing back their production levels to react to that.
Got it Okay and then when we're sitting here I guess thinking about the model for the back half of your businesses.
Different Navy.
Maybe from the last time, we saw a big role.
Excuse me in RV shipments. So can you just walk us through how we should think about the decremental margins.
And that piece of the business or maybe you or your total business I guess.
At this time around just just any guideposts there.
Yes, Brett it's Jake and I appreciate that question as we think a lot about where the margins go for the rest of the year and we think about the planning inside of the portfolio of businesses we have.
With an acknowledgement that as Jeff mentioned in his remarks, 500 to 520 of RV wholesale of $65 or so 6% to 65% weighted to first half, we expect a little bit a little bit of pressure in the second half on that part of our business, which on a trailing basis is 57% of our revenue at least from my from our last quarter and year to date perspective.
Evenly, but we think about the other 43% of our business, which has got a really great tailwind behind it whether it's the marine side or the MH and other related housing sides of our industrial businesses give us some buoyancy there.
When I think about the margins and the impact that comes with that certainly on the RV side, we'll see some reverse absorption so to speak as we bring down production levels and take some of that capacity out of the system to match, what the wholesalers are doing which we fully expect them to continue along that trend and show that discipline.
But we continue to pick up on the other sides of our business. So again, we looked at that point it from the other 43% when I think about the margins. We have and you saw we turned in another great quarter of margins, which was consistent with last quarter, where we're up a couple of hundred basis points. In this quarter is no different from a gross perspective, we're over 22% gross margin, which is up 220 basis points over the.
<unk> quarter.
Same things that are driving that value at the same kind of things that are going to drive us the buoyancy in the second half of the year and Thats the pay off from all the automation and productivity improvements our ability to get our hands wrangled around the labor.
Which of course, both are very meaningful variable part of our cost structure that in materials as we spoke in the past about 70% of our revenue, but we think about that and the productivity of the acquisition.
And as you've noted in previous conversations much weighted that strategic capital allocation towards the marine side of our business, which plays very well into how we feel about second half is going to play out.
We're still thinking this year when we think about just from an operating margin perspective will be up 100 to 150 basis points over last year and all of those factors are going to resonate through and drive that success for us for this year.
Got it thank you.
Our next question is from Craig Kennison with Baird. Please proceed with your question.
Yeah. Thanks, Brett asked a lot of good questions I had intended to ask maybe just pivot to.
The housing side of your business.
It's not an area where as fluent maybe you could just help us understand how interest rates move higher and maybe that slows.
And in that area, just how does that business segment react to this sorted environment relative to maybe your RV sector.
Hey, Craig This is Andy. Thank you as we think about the housing side of our business.
First of all it's a complement of MH.
Single family and multifamily and so right now we think the interest rates. The hikes are definitely having an impact primarily on the single family side, we're seeing resilience in the multifamily component of our business and we also think that the manufactured housing side of the business is going to be more resilient to those interest rates as single family buyers Mike.
Right to a price point and Thats, where the MA attractiveness really comes in it's about half the cost of site built housing and so therefore, we think that again, we will see some migration from cycle site built single family to MA. So we've got a nice complement of housing.
Single family multifamily MH, and then as well we've got do it yourself and.
Retail through the big boxes.
Are you seeing any project cancellations come through just as rates move and the economics change for builders.
We are not at the moment.
Great. Thank you.
Thank you.
Our next question is from Scott <unk> with MK and partners. Please proceed with your question.
Good morning, guys.
Good morning, Scott.
Could you talk about what the current pace of production is on the RV side from I guess from a percentage standpoint compared to last year.
Yes, Scott this is Andy so.
I think about it and if you think about if you do some math on our numbers.
What we're seeing right now for the back half, which really kind of started in the June July timeframe as we think that both the manufacturers in the RV industry are going to go from from five days a week to three to four days with likely and potentially a week off included on top of that so if you do the math.
On our $5 $5 10 to $5 20, with 60% to 65% of the shipments in the first half that roughly equates to about a 35% to 45% decline in the back half and production run rates, which should keep things normalized from our perspective to a weeks on hand, that's at this new normal and I think as well anecdotally if you.
Think about the last time that the RV industry Recalibrated in 2018 2019 prior to the pandemic inventory.
Inventory levels are today from our from our math and estimates right at that place, where the inventories had recalibrated to an optimal level and so we feel like.
It is in balance we feel like the manufacturers are doing the right things. They are absolutely aggressively adjusting their production run rates to align with retail and so all of this matches up fairly well, but we do think it'll be a softer back half an alignment, but we do think that the inventories are calibrated.
Got it and then going back over to.
Manufactured housing I guess, you alluded to in your comments that.
Demand is pulling through everything that's being shipped to the dealers right. Now can you maybe talk about what youre seeing at retail right now and.
Maybe how that.
Plays out for the whole year.
Yes, we still see it.
It's still pretty strong through the year the backlogs I think the way they sit today with the manufacturers that we've talked to feel like those are going to pull those pull them through the rest of the year like Andy alluded to some of these interest rates are going to potentially push some of the single family buyers down into the MH market.
We will see some of that but we feel pretty.
Pretty encouraged by what they're doing on the housing side with their with their capacities and what they're doing there. So.
Through the rest of the year seems pretty solid.
Alright, and then just lastly on the aftermarket.
It seems like a lot of it is in marine and power sports.
But can you talk about how big that is.
Grown.
From a percentage standpoint is their whole business over the last couple of quarters.
And just talk about.
How do you expect.
That part of the business to.
Significantly outperform.
Recessionary environment.
Thanks, Scott This is Jake so pretty consistent with some of our comments in the past that's about a $250 million to $300 million of annualized business for us and growing.
A lot of that is weighted towards the marine side of our business, which now is about 20% of our business for this past quarter.
One thing to think about there is there was a little bit of a slow start to the boating season, and some of the northern climates had some.
<unk> and cold weather that got them out there a little slower so it's got it going to have to get.
Get a little more acceleration to the rest of this summer and into the fall, but we still expect to see thats something that.
Should follow the the cadence that we would expect similar to a.
R&R type spend on the housing side, where when you may find some some primary activity a lot of folks are busy out there up fitting in re kidding, there their rvs or their boats or otherwise and we fully expect to see that materialize on our aftermarket business if.
If we see some softness in the retail sales at some point, but again, we think about the marine side Theres. Good buoyancy in tailwind for that business and we expect that to be up taking into 2023 before you can restock, though it is encouraging that there is a pretty meaningful boat park out there and theres, a little bit agent as well that really lends to those folks getting out there and executing that aftermarket spend to kind of.
R&R their equipment.
Got it that's all I have thank you.
Our next question is from Daniel Moore with CJS Securities. Please proceed with your question.
Thank you and good morning, Andy Jeff J, Thanks for all the color.
First one is a little bit of a crystal ball question, but.
Where do you see current run rates annualized retail demand on the RV side, and where do you see that may be leveling off.
And then I've got a quick follow up thanks.
Sure Dan This is Andy I think as we look at at RV retail right now.
We think it's going to be down double digits full year.
The kind of $4 40 to $4 60 range. If you if you want to equate it to an annualized number.
And so again I think we will see it down double digits I think we're seeing the wholesale calibrate to that number and I think from our perspective, we will see where everything goes here with with the economic conditions and the headwinds that are there.
But there is still strong traffic on the dealer lots.
Customers are coming prepared to buy traffic is down a little bit, but but but.
The resilience of the customer that is ready to buy it that at that point in time that point purchase sale is still resilient. So.
We're pretty optimistic.
Think things feel good.
But we're certainly watching it and certainly prepared for it in the calibration of the inventories is really again, what we've got some good confidence.
Got it and then when we think out a little further.
The operating margin guidance update Super helps.
Is that level as we think about that for fiscal <unk>.
What's implied in that for the back half of the year is that a level that's sustainable in your view as we look out and be up.
Hey, Dan It's Jake we do believe that as I mentioned, we think about a lot about.
Where the improvements have come at our gross margin line and how that Cascades through our income statement as we spoken about last quarter and this quarter, we see that durable improvement associated with productivity being better with labor better with <unk>.
All our efficiency gains as well as our investments in the business to both organically and strategically to drive that durable kind of <unk>.
Benefit we expect to see that resonate through the future now as I mentioned in the second half of this year on the RV side of our business. We will see some of that reverse absorption is with some of the fixed costs come back around although we have a highly variable cost structure and we expect a bit of throw a lot of those levers to make sure. We can maintain these margins.
Dan This is Andy just a little bit of added color. When you think about the back half of the year and the RV industry scaling down on the wholesale side.
As we look at our op margins as we've talked about we feel like again, there's sustainability there we think.
You're going to see a little bit of mix shift, which is why we like to talk about op margins. We think that our gross margins are going to stay resilient given the margin profile of the 43% of our business. That's not RV, we do expect to see some additional opex, but net net it's an it's an increase more op margin and so we'd like to talk about op margins, but we will see a little bit of mix shift inside there.
But overall again the resilience of the op margins I think us and we're optimistic will be evident as we move to Q3 and Q4 with a 43% of our business that's outside of our base.
Perfect last for me.
Just capex still expected to be about 100 million of.
Obviously, if you start releasing working capital Youre cash flow is going to be significant for the next few quarters.
Okay.
Mutations for the pace of M&A as well as buybacks.
<unk> EBITDA will likely decline at least for the.
Next handful of quarters.
Hey, Dan it's Jake so when it comes to Capex, we're about $44 million on a year to date basis, and we are still thinking $90 million to $100 million for the year again, we continue to think about how we can best invest in that infrastructure to keep driving those productivity and efficiency gains that are really showing up in our gross and operating margins for now.
Continue to think about the balanced capital allocation as we as we traditionally do we've been active with the share repurchases.
I think we're at $41 million on a year to date basis for 654000, or so shares I think average price and we'll have some more disclosure in the Q about that in the low sixty's.
When it comes dividend of course is program at seven 7% to $7 $5 million a quarter.
We think about our cash flow generation is really what we fully expect as we mentioned in the initial remarks of how we can release some of this deliberate working capital build that we had to support the <unk>.
Very meaningful scaling up and mitigation mitigation, rather of the supply chain, which show through our inventory last couple of quarters full X patient expectations to bring that down and put us in a position where we can be very nimble and continue to be very opportunistic as we think about both organic and strategic investments in the business.
Very good thanks for the color again.
Thanks, Dan.
Our next question is from Mike Swartz with truly Securities. Please proceed with your question.
Hey, Good morning, guys just wanted to follow up on the margin.
Question, and then more specifically on gross margin and maybe just looking at it from a different.
View, if we look at the improvement year over year, the 220 basis points, how much of that can we attribute to maybe M&A versus automation from the efficiency benefits that you are telling us are more structural versus things that may go the other way against you in coming quarters, just the way that.
Kind of bucket that out.
Thanks, Mike It's Jake again, when it comes to that margin, it's not a dissimilar story to what we spoke about last quarter were about 50 to 75 basis points of that margin lift has come through that continue moving through higher specialized products, whether using our innovation teams and doing a better job and come out with new product new product introduction.
Organically or through our acquisition activity, which again weighted towards marine which typically carries a little bit of a higher gross margin profile. So that's about like I said 50 to 75 basis points of that in the the bulk of that I would say 100 to 125, it's driven by those efficiency gains we're able to dis intermediate some of the labor pressures, which we are able to do.
Very efficiently now both through automation, but also as we normalize against the RV backdrop over the next couple of months.
Material is still a little bit of a headwind that pressured that call it 50 basis points or so this quarter.
Freight inbound freight is not is not as much of a headwinds with last quarter start to ameliorate, some but still a little bit of pressure there.
The bulk of what's left on that margin lift is a little bit of a certainly absorption across our overhead in some of our our SG&A categories.
Okay.
That's helpful.
As we look at the 40 <unk>.
A growth of 45% could you just help us understand how much of that was M&A in the quarter and then.
The organic how much of that would be from pricing how much of that would be from market share gains and volume growth sure.
Sure Mike It's Jake again, so when I think about the composition of that call it 45% up quarter over quarter about 10% were up 10% on acquisition activities of acquisition contribution to our revenue line about 4% of that is the industry lift in tailwind on more units and higher production levels that are as you know on a monthly basis, starting to come down a little bit as we.
Transition through the.
The first half of the year.
Think about the organic lift in pricing lift so we're up about 20% on pricing and as Andy and Jeff are both mentioned in their remarks that starting to flatten out a little bit as we're starting to see supply chain unlock a little bit certainly some pressure points out there specifically with resins and a few other of our inputs, but in many cases, we expect the second half of the year to kind of flatten out so maybe maybe.
Not as much pricing activity, there, which leaves us about 11% as organic both through just take in many cases, we're taking share as Jeff mentioned with somebody has been yet in his prepared remarks related to our ability to not only with the working capital investments, we had put us in a position to supply our customers when others could not but also our ability to get there.
SaaS and on time with higher quality products.
Okay. That's helpful and just one last quick question on.
Apologize if I missed this but I think on your prior call. You had you had expected about $450 million and I think thats operating cash flow for the full year is that still the bogey.
We're thinking thats, probably more in that $3 50 to 400 range as we think about how fast we'll move through that monetization of inventory against the backdrop of a probably a little more investment inventory to support what's happening in the other 43% of our business as they continue their strong production activity. So the monetization we expect will happen on the RV side, but we continue to expect to be in a position.
To make sure that we're that first choice supplier have the product that folks need to keep driving the marine MH and industrial businesses that we have.
Okay perfect. Thanks, a lot.
As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad one moment, please while we poll for questions.
Yeah.
Our next question comes from the line of RAF.
<unk> <unk> with Bank of America. Please proceed with your question.
Hi, Good morning, it's Rafe thanks for taking my question.
Can you talk a little bit about what within your inventory how much of that is price versus volume.
Yes, Ralph I would tell you that that probably follows very closely to the <unk>.
How do we think about the organic part of our growth which is about <unk>.
If you combined organic and price and we think about that outside of industry and acquisition. That's about 30%. So about 20% up on inventory is related to pricing activity still up on volume as well, but without question from a standard cost perspective, the price of aluminum price of resin price of fiberglass and so on and so forth.
It helped that number as well.
If you look at our turns and we think a lot about that in the context of the pricing activity and our ability to monetize we sit in a pretty good spot with our.
30% to 45 days of inventory that puts us in a position to kind of make sure. We don't get caught too badly if theres a dramatic swings to the negative.
Raw material pricing perspective, though we don't expect a lot of degradation in pricing, but more of a flattening out level and the pricing of our raw materials in the second half of this year.
Okay that helps and then following up on that within your Cogs can you just update.
Sort of the components of it I'm, assuming it's probably changed in the last the last two years, but how much of these raw materials labor and overhead.
When we think about.
Give it to you more as a percentage of revenue Ralph and I would tell you obviously the more.
Variable piece of that our materials and labor and those represent about 68% to 72% of our revenue.
Of course, there is always a fixed and a variable component to overhead which rounds out what you see there to the gross profit.
Profit line that 22, 2% we turned in this quarter and then Theres a theres elements of other fixed variable mix across the bulk of our everything below gross margin that we have the ability to to really actively manage as we continue to move through the second half of this year.
And then what are you seeing just in terms of labor cost inflation.
The manufacturers cutting back on days like you started to see any relief there.
Yeah. This is Jeff we Havent really seen I think it is flattening out on the labor side, where we're not having that pressure we've had.
That we've had over the last probably 18 months with labor, so with taking days off.
Kind of scaling back on contract labor overtime.
We're seeing we're seeing it kind.
Reduce and not having as much pressure on the on the upside as we've seen in the past.
Hey, Ralph it's Jake to add a little bit to that as we mentioned some of that durable improvement we have to our gross margin, which certainly those categories. Our direct labor falls into has really been the benefit of the automation spend which has helped as Jeff mentioned Peel back a lot of the temporary labor for us, which as you can appreciate is a very expensive piece of the direct labor line.
As well as we think about the continued.
Kind of right sizing the normalization of the RV industry for the second half of this year the ability to Peel back that over time and think about how we can manage it but from an absolute dollars per hour perspective that hasnt started to come down yet.
But those high cost tiers are peeling back rapidly and help us manage our and maintain that gross margin benefit and then leverage that automation to keep.
Keep us in a position where we can be most efficient.
Okay and then.
Just on your.
I apologize if I missed this but on the convertible note matures in 2023.
You have plenty of liquidity and you're going to generate cash with sort of what's the plan.
That maturity that will you refinance or would you just pay it down.
Do you have any kind of visibility to that.
Yeah, Ralph again, it's Jake so we think about that as coming in February 2023.
Mentioned, we maintained very significant liquidity and expect to generate even more as we get out there will tell you look at the debt capital markets at the moment, they're a little bit and dislocation and that's whether it's the bond market, where we have.
Credit were under two times Levered, but our bonds are trading off meaningfully with the rest of the market institutional term loan market is a little locked up with all these <unk> that are out there and the convertibles market is kind of a little bit Katie Walter is that hybrid between equity and debt.
So we look at that and say.
It doesn't make sense right now to lock in any kind of transaction. There. So we maintain that liquidity through our revolving credit and cash on the sidelines to fully get fees that node and we got all those arrows in our quiver and we will use the one that's best but if you were to ask me what how it redeemed right at this moment I would take it down with revolving credit facility and cash and.
And refinance to a pretty pretty advantageous cost here of that for us.
Got it so it will come down to the borrowing costs as we go as we kind of approach that maturity, but that makes a lot of it.
To be real clear you think about the bond market the way, it's trading I'm not going to we're.
Great credit I'm, not going to go lock in some 8% to 9% debt.
Because I want to take out a 1% convert when I have a very supportive bank group with some of the best banks in the nation.
Supporting us so we're going to be in a position to really be nimble and flexible in how we approach. It while also maintaining the adequate layers of liquidity that we need to run our business and be opportunistic.
Okay that makes a lot of sense. Thank you.
Thank you, ladies and gentlemen, I'll turn it over to Andy for closing comments.
Our constant it Patrick is the creativity ingenuity cooperation sacrifice and hard work that our team members have showcase this quarter and over the past two years. Our team members have positioned us for success, both offensively and defensively as we collectively navigate the emerging possibilities of how we can serve our customers and our end.
<unk>.
Their dedication in tandem with our company's strong offering of resources have translated into a quarter of gaining market share and strengthening our existing relationships.
We will continue to invest in our platform and we expect to see operational improvements that are already presenting themselves. This year.
We are aware of and poised for the market changes, we have seen in the midst of inflation and rising interest rates. However, our portfolio emphasizes balance as our scalability and strategic diversification allows us to monitor the ebbs and flows of our four end markets with confidence that our overall company's health is not only sustainable but robust.
Two of our Patrick team members and partners for being so pivotal to our past successes current wins and the key to our future.
Thank you ladies and gentlemen. This concludes today's teleconference. Thank you for participating you may now disconnect.