Q2 2022 LCI Industries Earnings Call
Good morning, and welcome to today's LLC second quarter 2022 Conference call. My name is James and I'll be coordinating your call today, if you would like to ask a question. During the presentation. You may do say by pressing star followed by one on your telephone keypad. If you change your mind. Please press.
Followed by two.
I'm going to hand over to Brian <unk> to begin. Please go ahead.
Brian the lines.
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Yes.
Thanks.
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Thank you again for your patience, ladies and gentlemen, the LCI second quarter of 2020 conference call will begin shortly.
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Thank you everybody for your patience we welcome.
We believe will generate great value for years to come.
We ended the quarter with $1 5 billion in revenues up 40% year over year with strong demand across the markets. We serve to support double digit revenue growth in each of our core markets. Our recent acquisitions of Purion Gerard <unk> core and others added approximately $81 million in net sales for the quarter, helping expand our market share in new high growth markets.
Successful diversification initiatives continue to show fantastic results and improve our financial performance and strengthen our balance sheet, giving us the flexibility to execute on our strategic priorities and further invest in our business.
The OEM sales increased 52% during the second quarter of 2022 compared to 2021, reaching $906 million driven by elevated wholesale shipments and market share gains the north American RV market continues to be the foundation of our success and our OEM space. Despite the impacts from a constantly evolving macro economic environment, including record inflation.
The outdoor recreation space has continued to grow as travelers recognize the advantages of camping boating and are being over the experience of airline travel and hotel lodging and the soaring inflation associated with those two categories outdoor.
Outdoorsy, the world's largest RV rental and outdoor experience marketplace recently shared data illustrating the seven day family trip is an average gas cost of $275, that's less than one night stay and many hotels and lessen the cost of a typical airline ticket to add the recent 40% increase in hotel prices and 25% increase in the airline and rental car prices.
Our outpaces rising fuel costs impact on RV travel since 2021, the average RV trip go to buy Outdoorsy has risen only $5.
Families looking for an affordable safe and hassle free vacation experience and outdoor trip is clearly an attractive in an affordable option and.
In addition, listing vehicles and peer to peer rental site is easier than ever expanding accessibility for potential our viewers will helping out first time owners looking to monetize their vehicles because the typical family only uses ERP for a few weeks a year.
We now have the option to rent there are views on these platforms significantly lowering the total cost of ownership.
Current rental platforms like Outdoorsy, an RV share have also recently enabled customers with the option to deliver rental arby's campsites directly significantly lessening the hassle involved in the rental process as well as eliminating the fear that some people associate with tolling in RV for the first time.
contributed to new products brought on through our innovation process as well as acquisitions like Gerard and Ferrient. Further, because we had ample inventory over the course of the last two years, we strategically add it to our market shares in various product lines, picking up business from supplier peers that struggled to meet demand during that time. Based on feedback that we've received, dealer total limitories are now very full. The industry remains on track for another strong year from a total unit standpoint, but the next 12 months look to be challenging with respect to OEM volumes as dealers work down their ematories. Our longstanding and seasoned leadership team is prepared to adjust our business to these new levels as long as necessary. As volume skyrocketed in 2021 and 2020, we focused on investment and second and third shifts to increase our output and our core product lines, creating a flexible cost structure that enables us to quickly and easily adapt the changes in the production environment while helping us maintain solid levels of profitability. Second and third shifts are much easier to flex than if we had added new buildings. We are also continuing investment in automation and manufacturing improvement projects throughout our business to ensure that we have flexibility to scale in line with industry demand. In 2022, we have a goal of completing 10,000 continuous improvement projects as part of our corporate-wide continuous improvement program, which involves every team member at every level. Our team of continuous improvement experts are dedicated to finding every opportunity to help improve our cost structure as many of our input costs continue to rise. Moving to aftermarket, revenues grew 13% year over year, supported by a combination of organic and inorganic growth. Our RV aftermarket was up close to 40%, while our automotive aftermarket was flat after going almost 50% in the last two years since we acquired current.
We are also realizing content gains from our acquisition of Furrion and are finding ways to incorporate its advanced appliance to deliver sophisticated new product offerings to our existing aftermarket customer base. We are particularly excited about the off-grid solar supply product, cameras, and tankless high water heaters that will enable customers to camp more effortlessly.
Markings were somewhat softer in the aftermarket during the quarter as we ease production in our court automotive business due to their customer stabilizing the inventory.
We do expect this impact to be largely seasonal and short-term when we have plans to adjust operations to enable a return to historical margin levels. We do expect this impact to be largely seasonal and short-term at 12 AM. We do expect this impact to be largely seasonal and short-term margin levels.
That said, we continue to see strength in our VF market business as hundreds of thousands of our Vs on the road and are the repair, replacement and upgrade cycles.
We are focused on both supporting and maintaining this growth through developing an unmatched service and customer experience. To follow up the resounding success of our Lippert Getaway Rally last year, we are holding our second rally in August in Pine Mountain, Georgia, where we will leverage our amazing LCI service teams to directly engage, serve, and collect real feedback from hundreds of our viewers that are coming to the event.
Finding ways to creatively engage our BRB consumer has led to a great return on investment for our business, helping us build real trust and real relationships with our peers who keep coming back to the Lippert brand. Lets do this...
Turning to our second quarter adjacent market, revenues rose 37% again driven by heightened demand in our marine business, along with strong content growth. The marine market currently has a solid near-term growth run-white compared to the RV OEMs. We should help stabilize our revenue streams over the course of the remainder of 2022 and 2023. subjects."
Looking forward, boating mentors remain low all over the country, giving Marina great growth trajectory. As we drive to expand market share through industry-leading brands and supply key products like windshield, furniture, shade products, and many other key marine components. Like in our V, innovation of new products, like our electric biminis, continue to bolster our marine sales in the OEM and after markets into the future.
Similarly to our V, we are working to expand our Marine Customer Experience programs for voters everywhere. Our Capins Customer Experience Group, not both over 1,000 members, and are giving us immense feedback. We will continue to encourage these brand ambassadors to offer ideas for services and products to help ensure we stand a leading edge of the industry. We are working to help ensure we stand a leading edge of the industry.
In addition to marine, manufactured housing has seen significant increases lately as well. And not only manufactured housing, but residential housing as well.
Our window products for both markets are gaining a lot of ground.
For manufactured housing, it's important to remember that with our chassis and window products, every 10,000 units that the industry grows equals about another 20 million in sales with relatively low incremental costs for the LCI business.
We have many manufactured housing customers that are adding facilities due to meaningful growth in their businesses today.
Our international businesses grew 5% for the second quarter of 2022 compared to the same quarter in 2021.
Care of End Registrations decreased 27% with registrations in Germany, the largest market, and 11% during the quarter.
Uncertainty surrounding chip shortages for their motorhome chaffees, economic slowdown and inflation will continue to challenge our European business into early next year, but will likely extend the demand tail over the longer term.
Further, our direct exposure to these headwinds have been fairly limited as the international market represents just 7% of our total revenues.
As the chip shortages get resolved, it is very likely that there will be a whiplash effect in industry production as the oil ams in Europe will rush to fill the man at the other latch much like the US did over the last two years. The oil ams in Europe will rush to fill the man at the other latch.
Moving to our innovation highlights, our customers are increasingly coming to LCI for technologically advanced products. We hope you have a great day.
We have been very successful in leveraging this demand to drive margin expansion and content growth throughout our business. Thanks for all our business. Thanks for all our business. Thanks for all our business.
In July , we introduced Current RV industry first independent suspension in our axle line up, which reduces the vibration pound and the traditional axle RV platforms.
With more RVs going off road and off grid, the innovation should prove extremely valuable for our customers. For our customers. For our customers.
We are rolling out, here, as we power cord set into many of the industry's leading brands.
Increasing functionality for consumers while neatly helping up Add content across the board.
Every RV needs a power cord and our new cord is another industry first, reducing cord weight by 30%. We launched ABS brake technology this year with one of our largest OEMs and already have several other OEMs lined up for launch early next year. We believe ABS systems are a much needed technology on today's recreational vehicles and will eventually be the norm.
Also worth mentioning is the Furion tank with hot water heater.
We're working to make the old tank heater technology obsolete and give customers what they want, hot water in seconds. Our innovation teams have been operating in a high year to drive new product development, including solutions that will help complement the electrification of bottom reveals and much more. In addition to innovation, our continued passion emphasis on culture that set us apart from our competitors. Our culture initiatives including philanthropy programs and leadership and coaching programs have successfully made lippered a place where people come to us to grow and develop a human being.
not just as professionals. Due to these initiatives, retention rates remain elevated, and we've seen that higher retention means improved safety, efficiency, quality, and innovation, which are the true core sense of our business.
We continue to invest in improving our team member resources to help ensure that we can consistently elevate our output while providing a workplace that fosters personal and professional growth.
Regarding capital allocation, our focus remains on paying down debt and the integration of our recent acquisitions, our returning capital to our shareholders that are laid above our industry peers.
Investment towards innovation and operational enhancements remains a focus point for our teams in order to drive efficiency, quality and profitability throughout the business.
In the second quarter of 2022, we allocated 15 million in two growth and automation catbacks and expected spent an additional 35 million in the remainder of the year.
We are working to maintain a solid financial position and balance sheet in order to achieve these goals as we continue to tell our business forward.
No matter how challenging the three may get, history has proven to thanks to us.
First, the downturn is never as long as many fear. And second, we have one of the best and most seasoned management teams that have guided the business through these types of times and great shame. And closing, we want to thank all of our team members for their dedication and hard work as we continue to meet demand for all our segments while striving to deliver quality products and the best experience to each and every customer. And the best experience to each and every customer.
Our performance continues to be supported by our strong foundation in leadership and culture as well as our operational strength and expertise of our workforce, guided by an incredible and experienced leadership team.
As we look forward, we will strive to deliver continued outperformance while generating value for our stakeholders as the year progresses.
I will now turn to Brian Hall, our CFO , to give more detail on our financial results.
Thank you, Jason.
Our consolidated net sales from second quarter increased 40% to $1.5 billion compared to the prior year period, supported by continued execution to meet strong market demand.
Acquisitions contributed 81 million or 7% growth to our quarterly results, with organic growth contributing the balance or 33% of the improvement.
While we have seen retail demand across many of our markets temper from the historical level to 2021, July sales were up 5% to 368 million versus July 2021. Demonstrating positive trends as we move into the second half of 2022. A testament to our diversification efforts which are helping to offset the deceleration we are experiencing in North American RV production.
Q2 2022 sales to RV OEMs increase 52% compared to the prior year period driven by strong wholesale shipments and market share gains stemming from content expansion in toll bulls and motor homes.
Content per toable RB unit increased 49% to $5,382. While content per motorized unit increased 35% to $3,569 compared to the prior year period. If you want to? your reference, it is the annual document, and it is a content that can be available in places among Kind and Int? speakers. Com noticing, mounting calls that provide the experience of bullshit. you
Towable content growth can be attributed to organic growth of 12% in addition to the impact of price increases enacted at the start of the year.
Acquired revenues contributed 7% of the year-over-year growth in tollable content per unit.
We saw great performance in the marine market driven by the same trend seen in the RVOEM market and North American marine sales increased 44%. And North American marine sales increased 44%.
Content per Powerboat increased 71% to $1,848, driven by market share gains and price increases.
In all sales to adjacent industries grew 37% versus the prior year period supported by strong growth in marine sales as well as meaningful growth in our manufactured housing business, which has remained elevated at the broader housing markets has slowed recently.
Aftermarket segment sales increased 13% and international sales increased 5% year over year as the recreation space continues to attract millennials and new customers.
Gross margins were 26.6 percent compared to 23.6 percent in the prior year period, supported by strong operating leverage and efficiency, as well as realization of price increases, which were implemented earlier in the year, necessary to combat rising steel, aluminum, and freight costs. For more information, visit www.fema.gov
SG&A as a percentage of sales decreased year over year due to fixed costs spread over a higher sales base.
Operating margins increased roughly 565 basis points compared to the prior year period, driven by operational leverage on significant sales growth and the successful implementation of our continuous improvement efforts.
Gap net income in Q2 2022 was 154.5 million or $6.6 per diluted chair compared to $67.9 million or $2.67 per diluted chair in Q2 2021. This increase is reflected by robust demand as well as effective cost management.
EBITDA increased 108% to $250.7 million for the second quarter compared to the prior year period.
Non-cash depreciation and amortization was 63.7 million for the six months into June 30, 2022, while non-cash stock-based compensation extends with 13.7 million for the same period. We anticipate depreciation and amortization in the range of 130 to 140 million during the full year of 2022, primarily due to increases in capital investments to enhance production capacity and enable further manufacturing of the companies.
For the six months in the June 30, 2022, cash generated from operating activities was $348 million, with 52 million being used for business acquisitions.
71 million for capital expenditures and 50 million was returned to shareholders in the form of dividends.
Operating cash flows were again possibly impacted by increased earnings and as inventories continue to normalize, we anticipate a further reduction in the impact of working capital on cash generation. So, we anticipate a further reduction in the impact of working capital on cash generation.
Driven by our strong operating cash flows, we were also able to de-leverage, making net payments of over $168 million on outstanding borrowings through the first six months of 2022.
At the end of the second quarter, we had an outstanding net debt position of $1.1 billion, or 1.3 times pro forma EBITDA adjusted to include LTM EBITDA of acquired businesses.
With the constantly evolving operating environment, we are focused on maintaining a strong balance sheet and continue to target a long-term leverage of 1.5x net debt to EBITDA.
In the near term, we are working to integrate recently completed acquisitions, which we expect to positively impact our operating cash flows in the coming quarters.
For the four year 2022, capital expenditures are anticipated to the range of 120 to 140 million dollars. The range of 120 to 140 million dollars.
As we look forward to the remainder of 2022, given the modest slowing and retail demand within the North American RV market, compared to the all-time industry record achieved in 2021, OEMs continued to balance inventories to align current retail demand with industry production output.
As a result, we anticipate RV production levels to decline in the second half of 2022 from those experienced in the first half of 2022, partially offset by growth in the other markets we participate.
The decrease in RV production coupled with the contractual sales price reductions effective July 1st related to declines in steel, aluminum and freight costs will negatively impact top line growth rate.
As such, we anticipate your over-year growth rates to decline to approximately five to seven percent in the third quarter. In the third quarter.
For them, given the aforementioned expectations, we anticipate margin contraction on a sequential basis as we progress through the remainder of 2022. As we progress through the remainder of 2022.
In Q3 2022, we anticipate operating margins to decline between 6 and 7 percent.
Longer term, as we move towards the end of 2022, we continue to generate strong profitability as efficiencies are driven throughout our business since we utilize our leverage at fixed costs with second and third shifts. We will start with second and third shifts. We will start with second and third shifts.
We believe these dynamics will support margin expansion over the long term.
Further, additional price increases and operating cost adjustments anticipated in the coming months will support strengthen margins towards the end of the year and into 2023. Further, additional price increases
We remain committed to investing in innovation, our facilities and our team.
all cornerstones of our long-term strategy.
We are confident that our talented and experienced leadership team position LCI for continued long-term growth.
That is the end of our prepared remarks. Operator, we're ready to take questions. Thank you.
Thank you so we'll now start today's Q&A session. If you would like to ask a question please press star followed by one on your telephone keypad now. If you change your mind please press star followed by two and when preparing to ask your question please ensure that your phone is unmuted locally. So our first question today comes from Scott Stember from AKM members. Your line is now open Scott.
Good morning and thanks for taking my question guys.
Let's go out the sky box.
Jason, could you maybe just follow up? I'll get a little more granularity on your comments about inventories being very full. And could you also maybe just talk about what you're seeing right now, the level of production cuts that you're seeing with me, a customer's on a year-over-your-basis? I'm going to give you a customer's on a year-over-your-basis. I'm going to give you a little more granularity on your comments.
Yeah, sure. So I'll just the production cuts first. And you know, our industry is working the past with the little down clicks where, you know, the industry typically stamps on the brakes more than they do ease and do it some kind of meaningful transition. So, you know, we're always prepared for those types of things. I mean, it's just the way it is and we just live within an industry. But, you know, we went from, you know, a couple production months to the next couple months look like.
you know, 12 production days approximately. You know, we have visibility over the next two months. So August and September , we expect 12 days of full production on the RV side, but you know, as we keep founding to the message, you know, we're diversifying so many other businesses because our housing business is growing very strongly and marine businesses growing. Strongly our aftermarket business for RV is still super strong, you know, at 40% plus.
You know, power sports. You look at all the other industries where I know those are gonna continue to help off some of the, some of those down click in RV. So, but I say for the next couple months, it's, you know, 12 production days, maybe plus a month, the West Coast RV, many factors seem to be running a little bit better than the Elkart County groups. And then with respect to dealer touch points, I'm talking to some of the larger dealers every week. And, I want to?? for my next couple months here. and...
I think May retail was obviously not so great, but June seemed to be better for everybody and just by using the mirror to use them. So classify the dealer retail activity as decent and certainly as we look to really downscale the OEM production retail as of this minute is far outpacing what wholesale is producing. So that process has started and in the matter of months we've had a healthy balance likely.
All right, and maybe, you know, obviously, we could all appreciate the diversified business funnel you have, but maybe just give us a little bit more.
maybe high level color of the other pieces of your business, how big they are, how strong they are. We know that Maureen is doing very well right now, but maybe talk about manufactured housing and a few of the other segments that we could look for that we could track in the next few months.
Yes, so I mean we've been up anywhere from 35 to 70 percent month by month on our housing, which is if you look at the residential and manufactured housing businesses, it's a couple hundred million-ish. Our marine business.
You know what Brian approaching?
North American Marines around a quarter. A quarter, yeah. So you know, yeah so call it close to 500 million there and that's you know that's growing significantly right now as we said you know the RV or the marine inventories are significantly low right now so the supply chains are just starting to free up enough where they're not having supply chain issues every day and they're able to run what they'd like to run to be able to meet the demand. you
Either up or we keep saying RV is down and it is, but the rail and the marine businesses in Europe are both doing well. Our marine business area is gonna have their record quarter coming up. So marine and rail and Europe is good. And then again, you look at some of the power sport businesses, less meaningful dollars, but still part of our diversification. Um.
What am I forgetting? We talked about RVA aftermarket. That's going to continue to grow at probably a 30 to 50% clip. And that's a $400 million piece of our business, just the RV aftermarket and marine aftermarket piece. So hopefully that's some good color. If you look at Q3 going forward, RV might be 45% or so of our business and kind of this new environment for a period. And that other 60% is going to continue to grow and help offset what we've seen on the Dip
you know, the antilock breaks and all this other stuff.
Hey Scott, Ms. Brian . You know, I think here in the short term, many ways, you know, as we pointed out, our prepared remarks year over year, our content growth of, you know, 49% year over year growth, about 12% of that is organic growth today. And you know, with that, we've talked in the past, with that being a trailing 12 month conversation, the timing of some of that new business getting layered and that will continue to grow.
I do think that that will, ultimately, here in the third quarter, reach somewhere around 15 percent type year-over-year growth that's all organic, with the remainder being pricing and acquisitions that we've called out, and the acquisitions were up 7 percent and shouldn't change greatly in at least the short term. And to add to that, we're looking at close to 250 to 300 million in new business ads post- Post.
the entire industry on that, which we feel that we will. Same thing with the Power Quartz, some of the new products, hot water heaters, trying to convert, that's an easier conversion for us because there's already tanked heaters in every RV that we have no business on. And our goal is to take 400,000 to 500,000 RVs and put tankless hot water heaters in them. So, in the furnaces are coming soon for us, which is another big appliance that we're selling zero out.
especially on the RV side. Marine obviously looks like you've still got a good runway. Maybe just give us an update where you see inventories. And it's kind of a timetable of your best guess of when you would expect them to be more in balance or closer to where we are on the RV side. This DC growth and production through the first half of 2023 at this stage, any additional color would be great. Thanks.
Yeah, that's a great question. I think easily through the first quarter, we feel confident, especially with the pontoon production, which is most of our business settles in, where most of our content is on boats. Some of the big water boats and fiberglass boats, those power boats, their retail, their dealer inventory seem, maybe like it's gonna be more toward the end of the year, but it's been.
We still feel we've got a lot of runway and still a lot of content and market share taking opportunity with especially the pontoon business out there that's growing at a pretty nice event.
Great. The second for me is, you know, you've got a balance sheet that's in great shape going into, you know, any kind of temporary slow down. Maybe talk about in prior pullback slowdowns, your ability to gain share both organically and via M&A and whether you see, you might see more opportunity in that type of environment. And that's it for me. Thanks.
Yeah, that's another good question. We're already seeing activity and opportunity, in the acquisition space, because people see the writing on the wall, and there's some people that had high inventory is coming into this little bit of a slowdown. And if you're purely RV, that's a trouble spot for a lot of, maybe smaller mid-sized businesses. So there's already opportunities on the table, and we're excited over the next.
you know, probably six to 12 months to evaluate those as they come along and there's certainly gonna be opportunities like there was, you know, this isn't like in 08.09 because, you know, we're much further along in diversification on our end. And we feel like this is gonna be a shorter blip because, you know, like I said earlier, the inventories are starting to write size now with wholesale production really pulling back and retail still being fairly decent. So.
There'll be opportunities for sure. Thank you. Our next question comes from Catherine Thompson from Thompson Research Group. Your line is now open.
Hi, thanks for taking my questions today. If you look back at the history of Lippert, manufactured housing was a much bigger portion of your business and you've diversified. But given where we are with affordable housing, the landscape has obviously changed.
One of the impediments historically had been around financing for manufactured housing. I guess a couple questions related to manufactured housing specifically. First, what is the financing landscape look like today and how is it different since pre-Great Recession? What is the financing landscape look like today and how is it different since pre-Great
And then also, where are you seeing demand strength from a geographic standpoint for your manufacturer housing product? Thank you.
Yeah, hi, Katherine. You know, I think financing obviously has been a bumpy road over the last decade or so. So, you know, with interest rates changing upward today, you know, I'm sure things are changing that landscape as well. I certainly not specific to the manufactured housing world, but across a lot of our markets, the financing has still been relatively, I would say strong.
where you know you haven't seen a great deal of the winch when see these credit scores are some of the higher that we've seen in the past. So I think those are contributing a lot to all markets, including manufactured housing. And certainly to your point, you know, it's still relatively small as a percentage of our total sales, but certainly something that we know, you know, a market really, really well and have great partnerships with many of the OEMs. And I think Jason mentioned, you know, for every 10,000 unit, how much, how much just it are.
stick build home at 400,000 plus. I mean, there's a much bigger gap between, you know, manufactured housing today than what there was. It was stick build housing back 15, 20 years ago. So the real quick, the answer to the other question is, you know, you look at Capco champion Clayton, some of the bigger players in the business. They're all adding capacity right now. Probably the tune of between the three of them, you know, more than 12 facilities.
They're running out of capacity and coming to us on chasties. We're putting a chastie plan up. We're just finalizing the last part of that and launch in September . So we'll actually be building chasties again in Texas. We haven't added a manufactured housing plant to our portfolio in over 20 years. So that's really a bright part of the housing business for us today. We're...
We're still building a lot of windows today and a lot of chassis for the housing businesses. And we've recently expanded in the last few years our vinyl window product to the residential new site built homes. So we're actually selling distributors in the site built market that are building new homes that aren't manufactured housing. We're doing quite a bit of windows there and are continuing to expand that business because it's a really...
Really big market and we're really good at building windows and on all the stuff, chassis and windows. We've got ample capacity. All we have to do is add team members to the plants we already have. And then we're seeing a lot of this capacity being added in the Southeast and Texas and things like that. So we think that that's going to continue over the next couple of years, the trend there for adding capacity in the manufacturing housing side.
Okay, helpful. In Texas, you cited in the southeast.
What is your projection, you give projections for RV in terms of shipments? Do you have a similar one for manufactured housing?
Well, we see it going to 200. I mean, we see it getting closer to 200,000. I mean, we were, if you remember, 2011, we were probably, you know, in the 48, 45,000. And it's just been slowly climbing back and we see that moment, I'm continuing the soul. And we see that moment, I'm continuing the soul. And we see that moment, I'm continuing the soul.
I wouldn't be surprised to see it get over 200,000 in the next couple of years.
Okay, and just for those calling in the perspective, what was it last year?
Last year, I want to say 130-ish maybe?
Okay. We can't ever make every 10,000 homes that are built another 20 million in top line for us. Mm.
Yep, okay. And then, and historically, those margins had been relatively better. Those margins had been relatively better.
still proving to be the case today.
Still true today, yeah.
Okay.
Then just kind of being the devil's advocate, you know, makes a lot of sense to see tapping the brakes on the RV business, but... I'm just going to be tapping the brakes on the RV business, but...
Why wouldn't that eventually be the case?
for categories that are in the leisure area, including voting.
Oh, I think for sure will. I just not gonna have, you know, because they were so slow to, you know, get supply chain ramped up and, you know, we're a little bit more careful for whatever reasons, why they did that. It's just gonna extend that tail, you know, into the middle and next year likely. So, and then, you know, we expect that, you know, inventory will get pulled there, but by that time, you know, RV should be right size, and we'll see RV take back on again. So, we've got this next.
I just want to make sure I heard right. Did you say that you expect EBIT margins in the third quarter to be 6% to 7% and then kind of improved over the course of the fourth quarter into 2023? And then I guess that's the case. Maybe just walk us through the moving pieces behind that outlook.
Yeah, he might. You know, certainly if you went back a quarter, you know, gauging where we thought RV production was gonna land for the remainder of the year, Q2, we thought was gonna be a little bit lighter than what actual... than what actual...
You know, we ended up with and we talked about the back half of the year being somewhere around very low double digit percent type margin. You know, we've seen more of that get pulled forward the front part of this year. Certainly in Q2 it didn't fall off as dramatically as what we originally anticipated. So you're seeing a little bit of that margin pull forward into the second quarter and then the third and fourth quarter, you know, result in a little bit lighter margin. So I think that
high single digit type margins for the back half. Certainly going into Q3, we're right sizing the business quickly. So a lot of the typical levers between overtime reductions and dropping down production days where necessary, depending on which market we're talking about. We're making a lot of those changes as we speak. So certainly anticipate that Q3 declines by what I.
had intended to say in my remarks was that it would decline six to seven percent from where we were in the second quarter. That's going to get you pretty close. You'd be around seven, you know, high single digit type margins. But then as you move into the fourth quarter and beyond, obviously we will still be executing on right sizing the business. You know, commodities are a bit volatile, so you know it's tough to gauge, you know, with 100 accuracy where price increases end up with our contractual arrangements.
But we certainly have seen those declining in the more recent months, but who knows where that goes and what that ultimately means for the fourth quarter and the beginning of 2023. But really it's all about that RV volume. If I were to look at all these other markets, as we've talked, they're going to continue to perform strong in the back half of the year. We don't anticipate much change from how they're running today. And it's really just about that RV production volume and where that lands in the third and fourth quarter that's causing the upset.
the factor above.
Top line coming in stronger, but even if we look at it on a sequential basis You know operating margins or leverage or were pretty strong given the step down in revenue just quarter to quarter So I guess was there anything in the quarter that was I guess a tailwind was outbound freight or there anything I guess anything you can just call out Or is that kind of what we can think about for operating leverage going forward?
Yeah, I mean, you certainly, going from the first quarter to the second quarter sequentially, you know, we guided and actuals ended up within that range for the margin change. But I would tell you where we benefit a little bit more that we didn't, I think, guide to is this where our material input costs landed. Certainly when you're on the tail end of this, you know, we suffer on the front side with our contractual arrangements, but then on the back side.
there's a period of time where we will benefit. We were benefiting from that in the first quarter and then benefit a little bit more in the second quarter than what we'd originally anticipated just because steel had continued to come down, aluminum has now continued to come down, freight costs have come down as well. So there's short periods of time where we will benefit from that. I wouldn't necessarily say it's something that it's always anticipate and carry into the third and fourth quarters, but it's certainly.
Do you mind just sort of giving us the latest and greatest on what you're thinking for the full year on the RV side?
Yeah, I'm a bread. It's certainly a moving target, but I think if you went back to last quarter, we were in that 525,000 unit range. I still think that's an opportunity, but I would say more 500 to 525, and we're targeting more of the 500. And like I've continued to call out in discussions, you've got to really compare and contrast the first half of the year versus the back half of the year. I think wholesale shipments from the first half were.
324,000 units. So pretty hefty number. So that should give you a good idea of what the trend looks like in the back half before we anticipate more of that 500,000 unit number for the year. And retail, you know, 440 to 460 somewhere in there, which is a bit healthy balance, especially considering, you know, how light the back half of the year is loaded with wholesale. Like I said, it's going to, you know, retail.
already starting to how pace with the wholesale current demand is so we'll be back in good shape before too long.
Great. And then on the aftermarket business, the sales growth number there slowed sequentially. And I think there was also a comment in the prepared remarks just talking about margins being a bit below expectations. Can you just walk us through where the disconnect laws and how to sort of think about that going forward?
Yeah, so half our business area is RV and marine aftermarket and that's growing pretty significantly right now, high double digits. I mean, we were 40% here recently. The Kurt business. The Kurt business.
which is a good chunk, you know, 40% of the other half is, has grown, you know, 50 plus percent over the last two years when we acquired that business. And then they got a real stark pullback here in recent months. So, we've seen demand fall off on the automotive side of our aftermarket, but, you know, we're still extremely bullish on the RV and marine side. It will continue to grow, that part of our business will continue to grow nicely with good margins, so.
That's why the numbers look a little wonky on the aftermarket because we kind of talk about aftermarket as just one big piece of the business, but really we look at it as RV marine staff and the automotive.
aftermarket is the other half.
And Fred, we don't talk about the current business by itself too often, but to really understand it more, I know you understand the automotive market and what disruption they've seen through supply chain issues, et cetera. So you certainly have automobile production quite a bit off from where it was two, three years ago. So that's a contributing factor as well as used vehicle sales as well. A lot of those, you know, hitch-pride oxalgued.
replaced on used vehicles and there just hasn't been a whole lot of activity there. So the channel is pretty full and you know the dealers are looking to work off a lot of that inventory that was built up over the last 12 to 18 months. And we're the market share leader in automotive aftermarket on hitches and towing. So as soon as new vehicles pop back up, I mean we'll you know we'll see our demand pop up and sales pop up as well. Perfect thanks guys.
Thank you. Our final question comes from Brett Jordan from Jefferies. Your line is now open.
Hey, good morning guys.
On the 1-6 to 700 basis points of sequential margin decline, could you kind of carve out what you see the deliverging from lower volume versus...
the timing of some of the price benefits you've had. I think you mentioned that some of the material costs had come down as you had a higher price deal, but you renegotiated as of July .
You just sort of parse that volume versus pricing in that margin trend.
Yeah, I mean, I probably look at it today, going into the third quarter, and I'm roughing this out in my head right now, Brad. So it's the, I'd say it's 25% price and 75% RV volume. So the RV volume is the key driver to that. We did have a July 1 price decrease that went into effect, that certainly reflected in the numbers that you're seeing for the July number we reported.
being only up 5% year over year. So I think we're back to a more normalized period right now. You know, we've benefit from these plus, you know, 50% type numbers for a while now and we're back to more normalized year over year. So expect in that July run rate to be consistent or a good proxy for the third quarter, five to seven percent. And that's got that the price adjustment piece baked into it. And from a margin perspective, I'd say, you know, see.
to my point earlier, it's probably more driven by just the absorption of the fixed costs on the RV decline.
Okay, great. And then a question I think earlier there was talk of on the M&A outlook. And I guess at one point three times levered on a trailing 12 month and obviously there might be some decline in the forward 12 months, maybe gets you closer to your actual leverage target of 1.5. Do you think that you would be less active in the near term? Is it sort of to look at the cycle or are you thinking that you'd be looking at M&A regardless of where we go in the next six or 12 months because it's just stable enough long term? Okay. Thanks.
Yeah, I mean your point is you're spot on. You know leverage is lower today. We're benefiting from you know the high record levels of EBITDA that we've turned in. So I would expect in the back half of the year for that leverage ratio to start to trend a little bit back up, but likely end up right around where our strategic target is at one and a half times. So I think we'll be in a comfortable position to execute on what we need to from a strategic perspective.
at 70 some acquisitions in the last 20 years, you know, our sweet spot is 20 to 50 million. We've made a lot of great acquisitions in that neighborhood price range. There will be opportunities and, you know, we're in a great position to take advantage of those opportunities. So like Brian said, we're not going to go out and likely do a $300 million acquisition, but there are a lot of smaller acquisitions that we can grow and develop and plug into our, you know, our distribution network of customers and our markets. And, you know, we're hopeful that we get a look at those opportunities in the coming months.
And the last point I would add was, you know, regarding our own Lippert inventories, we certainly have talked in the past, we've strategically increased those to be able to support the record levels of volume. I still think, you know, there's more than a couple hundred million dollars that we can pull out of inventory, so that additional cash will certainly help from that perspective as well.
Great, thank you.
Thank you. That concludes today's Q&A session. I'll now refer you back to Jason Lippert for further remarks.
Yeah, I just want to call back to a comment I made in my initial remarks, which is these little downspouts on the RV business, they never last long and remind everybody that 80% of Americans through a lot of surveys said they're going to take road trips this summer. 65 million people said that they're going to camp with their family this summer. The RV industry continues to grow and there's lots of opportunity for us and our peers in this business.