Q3 2022 LCI Industries Earnings Call
Good morning, and welcome to today's LCI Industries' third quarter 2022, adding school my name is Bailey and I'll be your moderator for today's call.
All lines will be muted during the presentation portion, but an opportunity for questions and answers at the end.
If you would like to ask a question. Please press star followed by one on your telephone keypad.
I would now like to go ahead and pass the conference.
Brian Hope so please go ahead when you're ready.
Good morning, everyone and welcome to the LCI Industries third quarter 2022 conference call I'm joined on the call today by Jason Lippert, President CEO and director, we will discuss the results for the quarter in just a moment, but first I would like to inform you that certain statements made in today's conference call regarding LCI industries and its.
Operations may be considered forward looking statements under the securities laws and involve a number of risks and uncertainties. As a result, the company cautions you that there are a number of factors many of which are beyond the company's control, which would cause actual results and events to differ materially from those described in the forward looking statements.
These factors are discussed in our earnings release and in our Form 10-K, and other filings with the SEC. The company disclaims any obligation or undertaking to update forward looking statements to reflect circumstances or events that occur. After the date. The forward looking statements are made except as required by law with that I would like to turn the call over.
Jason Lippert Jason.
Good morning, everyone. Thanks, Brian I'd like to start off by thanking our teams across the business for their dedication and hard work. They put in this quarter that drive our business forward as a company LTI has been laser focused on building a portfolio that will help position us for profitable growth in any operating environment through the steadfast execution of our diversification strategy, coupled with a companywide committing.
Onto innovation.
While we are seeing softened RV demand due to the overbuilding of inventory and continued macroeconomic challenges we were able to largely overcome the nearly 40% drop in north American RV OEM production in the third quarter to a strong performance in our diversified portfolio of marine RV aftermarket and other adjacent market focused businesses we.
We delivered revenues of $1 1 billion in the third quarter down 3% year over year against record 2021 results that being said our performance. This quarter remains far above that seen in pre pandemic years further illustrating the impact that the outdoor lifestyle trend and are focused on diversification has had on our business recent acquisitions, including <unk>.
Leon Gerard <unk> and others added approximately $39 million in net sales for the quarter, helping expand our market share in new high growth markets North American RV OEM sales decreased 14% during the third quarter of 2022 compared to 21, and we ended the quarter with revenue of $541 million driven by decreased wholesale shipment.
Over the past two years RV demand exploded as consumers flooded the space looking for safe and affordable alternatives.
Two traditional vacations in the wake of the pandemic as expected demand has come down from those record setting levels that said, we remain confident that the underlying demand driver, but is there to be outdoors isn't changing and people across the globe continue to recognize and take advantage of the white house and adventure that campaign boating and are being offer over here.
Airline travel and hotel lodging.
At the Elkhart RV open house in Investor briefing that we held at the end of September we had the opportunity to speak with several industry leaders to discuss their views on the long term impact of the secular outdoor lifestyle trend, including how it has and will continue to shape. The recreation space as we know it one powerful statistic brought up was that from now till the end of 2000 <unk>.
<unk> the U S will see 10000 baby boomers reach retirement age each and every day.
That is an astonishing number of people in one of our core demographics that are prime to take vacations or generally spend more time outdoors and retirement on the other hand younger groups like millennials and Gen Z Ers continue to stream into the space at record levels, one of our panelists from outdoor travel marketplace Outdoorsy reported that 70% of all rental bookings.
Fall within these younger generational groups. These younger demographics consistently seek out boats and rvs with more smart technology, which is exactly what LTI is positioned to provide to our strategic focus on driving innovation throughout our portfolio.
One of our great accomplishments recently with delivering record content growth in the quarter by capturing demand for innovative products content per towable, RV increased 54% to a record 50 $824 while content per motor home RV for the third quarter of 2022 increased 39% to 3800 $4.
In terms of wholesale shipments RV Oems have adjusted production schedules to better align with moderating retail demand dealer inventories and we expect this trend to continue for the next couple of quarters. Despite lower RV OEM production in the near term, we have been able to quickly flex capacity. Thanks to the operational teams and the improvements implemented in.
The past several years.
We're also able to shift manufacturing capacity in personnel and other areas of the business that are running strong like marine RV aftermarket and other adjacencies to ensure we're meeting customer demand and keeping our best team members with the business over the long term.
Revenues in our aftermarket business were flat year over year, driven in part by lower sales to the automotive markets offset by strong sales to the RV aftermarket.
New product development coming from RV aftermarket is consistently supported further content expansion, especially as we leverage <unk> and its robust catalog of innovative appliances and electronics.
We've launched nearly 50, new products into the RV aftermarket this year, which should continue to gain sales over time.
We are focused on continuing to grow our RV aftermarket business by meeting demand from hundreds of thousands of RV entering the repair replacement and upgrade cycle each year as well as by supporting consumers throughout the customer experienced department.
By having the support teams in place to directly engage and work with consumers along with extensive portfolio to replace almost every part on the RV were able to quickly solve problems, while establishing lipids brand is one that consumers consistently can depend upon for further help.
Further our <unk>.
Customer care and call Center has over 100 touch points with RV consumers each month between phone calls and E mails.
When they're not reaching out to us we are seeking out the RV consumers to help us create the best experience. We just finished our second annual getaway at Pine Mountain campground in Georgia, where we heard from hundreds of RV years in person collecting feedback on what we can do to drive improvements in product and services for every type of our beer.
And outside of the major rally event or major initiatives like the campground project Liberty passengers lipid scouts and our liberties Scouts.
Scouts owner schools are helping to engage tens of thousands of our <unk> throughout the year.
Strengthening relationships with RMB consumers proves even more important during turbulent times and is already paying dividends as we create a highly engaged community around deliberate brand.
Turning to our third quarter adjacent markets revenues rose, 20% driven by continued strong demand in marine along with solid content growth throughout the adjacent businesses. Our strong footprint in marine is a substantial advantage with a long growth runway. There is to further stabilize our revenue streams in the coming quarters.
As proven in our results this quarter to be less volatile than the RV market, helping to boost revenues as RV production slowed.
Just like our other markets Marine remains well positioned for long term growth through the increasing popularity of the outdoor lifestyle with increased accessibility through boat clubs and rental programs coupled with added functionality as manufacturers continue to innovate.
As we expand our product offerings, we are working to advance our marine customer experience programs are Kathryn as customer experience program now boasts over 1000 members and we will continue to encourage these brand ambassadors to offer ideas for services and products to help ensure we stay on the leading edge of the boating customer experience.
We're also continuing to see growth in manufactured housing one of our legacy markets.
With rising prices of housing impacting people across the country manufactured housing is picking up as an alternative for some that might be priced out of traditional residential homes. A stick built homes reached an all time high average cost for Americans.
Because of our low cost footprint in this business, we are well poised we had great margin to our overall business as this industry continues to grow in a meaningful way our manufactured housing business is up 40% year over year, and it's a meaningful part of our diversified portfolio outside of RV.
International businesses grew 6% for the third quarter of 2022 compared to the same quarter in 2021.
Our marine and rail divisions held up nicely in the wake of a slowdown in the European RV business caravan registrations decreased 26% with registrations in Germany, the largest market down 17% during the quarter issues stemming from global chip shortages have continued to impact motor home chassis production, which we feel will continue into the next year.
In addition, elevated raw material and energy costs remain a headwind towards the European business that said our exposure to these challenges remains limited due to our ability to continue with pricing strategies and our overall European diversification with our rail and marine businesses, there and we believe we will enjoy a long demand tail for the Caribbean business once OEM motor carrier.
Van chassis supply normalizes.
In a challenging operating environment it becomes even more critical that we maintain our focus on innovation and continue to invest in this portion of our business with over 150 team members dedicated to R&D and innovation in our business major players in the RV and marine space recognize lipper as it comes.
<unk> to come to when they are looking for new and innovative products and ideas a key piece of our innovative strength is not recreating the wheel a large part of our growth comes from taking existing products and building. A next generation version with improved features products like ABS have existed in cars for decades, and thanks for the deep.
Deep R&D talent, we were the first to bring this feature to our <unk> in a meaningful and cost effective way, we anticipate that in the next five years. Most total rvs will have ABS brakes, resulting in one of the most transformative products we've launched in years.
Alex and improvements like these can translate to hundreds of dollars of content per vehicle. We also launched many other exciting products this year, including a new version of electric remedies for pontoons or features for one control independence independent suspension axles skylights, new popped up sleeping systems as well as auto lock features for our entry doors to name a few.
We had the opportunity to showcase one control at our Investor briefing event in September giving attendees that chance to explore the wide range of functions. The platform provides the one control app connects users to almost every facet of their RV from operating slides and leveling to monitoring tire pressure to performing whether checks.
Pre trip checklists, and keeping RV owners in the loop on upcoming maintenance needs. The one control system allows us to stay in touch with tens of thousands of our viewers every week.
We are also actively exploring opportunities where electrification in the <unk> world and displayed our concept electrical electric total chassis at the investor event as well.
Still in development stages. This type of R&D puts LCI in the forefront of the significant growth trend innovation is one of the reasons for the success of our growth story over the last three decades, and we certainly plan to turbocharge. This critical area during slower times.
We've never seen more innovation in the pipeline than we do at the moment and we're excited how this should continue to grow our content in revlon relevance with our great customer base.
Next I'd like to address our cultural focus our culture begins with our outstanding leadership team. Our leaders have decades of combined experience and we've now been on a culture journey for 11 years.
Our leaders throughout the organization are better equipped than ever to help create an engaged workforce, which we believe is our strongest competitive advantage. We founded a highly engaged workforce is more efficient more accurate safer and more innovative we believe these results.
That our culture and help creates puts us in the best position to win in our markets.
We believe our very experienced and tenured team and great culture is what will help students through tough times and keep us on the path for long term growth.
Leaving 2001, and 2008 2009, we have a group of around 30 individuals in our culture and leadership development Department, who are focused on coaching team leaders across the business and how to lead themselves and lead their teams more effectively.
We believe this is what makes lipid a great place to work and proves to our teams that in good times or bad we are committed resources for culture to help our team members grow and develop.
Because of these resources that are having a great impact to our teams' retention rates remain elevated in turn driving better efficiency quality and innovation in the business. We will continue to invest in improving our culture and lead our development resources. So we can keep elevating our output while fostering a workplace that encourage his personal and professional growth addition.
Holly at our getaway rally that we just finished we launched a new serving initiative that will allow serving events that happened in over 70 camping locations across the country. This next year, which will be carried out by our customer experience team, our philanthropy teams and our beers throughout the country.
Regarding capital allocation paying down debt and the integration of recent acquisition remains a top priority. While also continuing to return capital to shareholders. Additionally, investment in innovation acquisitions and operational enhancements are the main focal point for our teams as we aim to drive efficiency quality and profitability through our business.
I can't possibly close without thinking my good friend and partner in the business Brian Hall for his nearly 10 years of service with this great organization. He has been integral in helping us grow in annual revenue from $1 billion to $5 billion, Brian has not only been a great leader in the business, but he's also completely transformed our accounting and finance team, placing many great people here.
To run this function very successfully.
One path is where contributions here at LCI. He has also been a standout leader with respect to our community impact initiatives, Brian of serving many charitable boards, helping to lead local charities and help spearhead fundraising for general in large capital projects that these organizations as many of you know Liberty has a community impact focus and Brian has been a true leader showing those.
Around him how important it is to lead in the community just as strongly as one is expected to lead here at Lipper.
Ryan We think we thank you for all that you've helped create and you'll always be part of <unk> family. As you saw this morning. The board has initiated a search for Brian's successor, and we appreciate his support to ensure we have a smooth transition that being said we are going to favor the last six or so months youll have with US and are excited as you enter the next chapter in your life.
In closing I think the biggest takeaway is that our diversification strategy is working at most of our revenues were tied up in RMB. The picture will look much different this past quarter. After 2008 and 2009, we made a commitment to diversify our portfolio in a strategic and productive way and we're really proud of the work we have done in a way it's turned out well.
Are tough on the RV side of the business things don't feel anything like it did back in 2008 2009, when we're almost purely an RV supplier.
I'd like to thank all of our team members for their hard work again and commitment towards being the best in class supplier as we strive to continue our recent trajectory of outperformance.
There is some of the best leaders in the industry and the best in class culture, driving the business forward and we are proud to see how our teams are all growing and contributing to the successes we are having around the business.
As we move toward the end of 2022, we remain focused on driving growth, while generating long term value for our customers shareholders and stakeholders I will now turn to Brian Hall, our CFO to give more detail on our financial results.
Thank you Jason.
Our consolidated net sales for the third quarter decreased 3% to $1 1 billion compared to the prior year period impacted by a reduction in RV demand, partially offset by growth in our other end markets.
October sales were down 24% to $345 million versus October 2021, due to the continued declines in wholesale RV shipments, partially offset by continued strength in aftermarket and adjacent industries, including marine.
Q3, 2022 sales to RV Oems decreased 13% compared to the prior year period.
Driven by a decrease in wholesale shipments, partially offset by record content expansion and tolls and further growth in motor homes.
Intent per towable, RV increased 55% to a record $5853, while content per motorized unit increased 39% to over $3800 compared to prior year.
Total content growth can be attributed to organic market share gains of 15%, while the acquired revenues contributed 7% of the year over year growth.
We saw positive performance from our other end markets, which helped to mitigate the negative impact from softened RV demand in the quarter North American Marine sales increased 22% with content per powerboat, increasing 46% to $1792 driven by market share gains.
Overall sales to adjacent industries grew 20% versus the prior year period supported by the aforementioned growth in marine sales as well as meaningful growth in our manufactured housing business, which remains at elevated levels.
Aftermarket segment sales were flat due to a decrease in automotive sales that was entirely offset by an increase in RV and marine sales the automotive.
Aftermarket continues to be challenged by declines in new and used vehicle sales, which traditionally benefit towing and other accessory sales.
International sales increased 6% year over year in spite of exchange rates negatively impacting results by approximately 14% due to the strengthening of the dollar compared to the euro and British pound <unk>.
Excluding the exchange impact organic growth would have been 20%.
Gross margins were 22, 4% compared to 21, 6% in the prior year period.
Courted by effective operating leverage and efficiency and partially offset by price reductions related to declines in steel aluminum and freight costs that went into effect July one of this year.
SG&A cost as a percentage of sales increased year over year due to fixed cost spread over a lower sales base operating margins remained nearly flat, increasing roughly 10 basis points compared to the prior year period.
GAAP net income in Q3, 2022 was $61 4 million or $2 40 per diluted share compared to $63 4 million or $2 49 per diluted diluted share in Q3 2021.
This decrease was a reflection of lower RV demand slightly offset by effective cost management EBITDA.
EBITDA increased 2% to $119 8 million for the third quarter compared to the prior year period.
Noncash depreciation and amortization was $96 million for the nine months ended September 32022, while noncash stock based compensation expense was $20 6 million for the same period.
We anticipate depreciation and amortization in the range of $130 million to $140 million during the full year, 2022%, primarily due to increases in capital investments to enhance production capacity and enable further manufacturing efficiencies.
For the nine months ended September 32020 to cash generated from operating activities was $486 million with 104 million used for capital expenditures 56 million being used for business acquisition and $76 million was returned to our shareholders in the form of dividends.
Operating cash flows were again positively impacted by increased earnings and as inventories continue to normalize we anticipate a further reduction in the impact of working capital on cash generation.
Driven by our strong operating cash flows we further pursued our capital allocation strategy of deleveraging our balance sheet, making net payments of 222 million on outstanding borrowings through the first nine months of 2022.
At the end of the third quarter, we had an outstanding net debt position of $1 billion $1 two times pro forma EBITDA adjusted to include LTM EBITDA of acquired businesses.
As the greater macro environment remains uncertain, we are focused on maintaining a strong balance sheet and continue to target a long term leverage of one five times 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 as we ended fiscal 2022.
Full year 2022 capital expenditures are anticipated in the range of $110 million to $130 million.
As we move forward towards the end of fiscal 2022 as a result of decreased RV demand when comparing the recent historic highs Oems continue to balance inventories to align current retail demand with industry production output.
Given the relative softening of RV demand, we anticipate RV production levels to remain suppressed for the remainder of 2022, partially offset by growth in the other markets we participate in.
Due to the decrease in RV production, we anticipate net sales to decline year over year, approximately 20% to 25% in the fourth quarter.
Further given the aforementioned expectations, we anticipate year over year margin contraction.
In Q4, 2022, we anticipate operating margins to decline consistent with our traditional incremental margins of 25% to 30% as we absorb fixed costs on lower sales base. In addition to the negative effect of consuming high cost inventory layers.
We are hard at work to generate strong profitability as efficiencies are driven throughout our business and.
And we will continue to utilize our leverage of fixed cost with second and third shifts.
We believe we are well equipped with the appropriate levers to maintain long term margin expansion our investments in innovation, our facilities and our teams have and will continue to drive our long term vision, we remain confident in our ability to further drive value and expand content in the quarters to come.
Lastly, I would like to thank Jason and the leadership team the board and the entire lipid organization for demonstrating the grit and commitment to drive forward in our transformation over the last 10 years I cannot be prouder of what we've achieved together and I know there is so much more to come it has been a pleasure to work with each and every one of you and while it.
A difficult decision. The time is right for me to spend more time with my family and embark on a new chapter in my life as we announced this morning I am fully committed to ensuring we have a smooth transition for the company I look forward to seeing what lies ahead for liver.
That is the end of our prepared remarks, operator, we're ready to take questions. Thank you.
Thank you.
Like to ask a question. Please press star followed by one on your telephone keypad.
For any reason you would like to repeat that question. Please press star followed by two again to ask a question that is star followed by one.
As a reminder, if you are using a speaker phone. Please remember to pick up your handset before asking your question.
Our first question today comes from the line of Kathryn Thompson from Thompson Research Group. Please go ahead. Your line is now open.
Alright, Thank you for taking my questions today, and Brian Best of luck pleasure working with you.
Catherine.
I'm wondering if first yes.
Wanted to first focus on.
What you're hearing from dealers.
About production pace and.
Just a typical seasonal shutdown that you had going into the holiday season.
Great and we understand that they're going to be some brands that are more popular than others, but just looking on balance.
Are your expectations this year versus last in terms of seasonal shutdowns in Q4.
Hey, Catherine it's Jason.
And we don't have complete visibility in December but we're not.
<unk> businesses is really really good theres usually.
Or are we maybe a little bit more than a week shutdown in December and when businesses.
Lesson, great. It's usually two to three week shutdown in December so we don't anticipate anything more than normal the the abnormalities of been coming really since June and the just the regular months, where they've taken about a week off a month in terms of in terms of production and then obviously scaled back production rates.
<unk>.
Industries working it but if you annualize today's run rate. They are working at about a 350000 plus unit run rate.
Which we expect to change first quarter with some of the production forecast we have.
Coming up next year.
More of a 400000 unit run rate.
So that kind of tells you where.
We're at where we're at today and we don't really expect that 350000 run rate to go lower over the course of the next couple of months of the year.
That's helpful and then your opinion, yes, yes, and then in your opinion based on your.
Youre experiencing past do you feel that we are at a one to one replacement alright, the telco segment in particular.
I mean, it's my opinion that we're close to it.
It feels like were.
It feels like the dealers are going to continue to sell <unk>.
All through more than what we're what we're going to be building in the next couple of months, but unexpected to be more probably one to one come first of the year.
If not after first quarter.
Catherine This is Brian you've probably heard me say that before.
When you look at overall dealer inventory levels and I always tend to take things back to pre Covid and if you step back to January and February of 2020, I think the industry was coming off of a.
460000 type retail year inventories felt really really good at that.
Point.
I'd tell you that.
And the cumulative change in inventories from that point forward. Obviously, they were all depleted during the part of those parts of Covid that the worst and then as we ramp back up we replenish most of them today I think we're sitting under those levels of inventory by maybe 30000 plus units or so.
From early 2020, so it seems like from a unit perspective things are in pretty good shape, which I think would lend itself to more of a one to one retail to wholesale ratio as you move forward.
I think the biggest challenge for the dealers are probably the dollars that are sitting in those inventories, though is they believe that off that will that will improve as well but.
From a unit perspective, I think it's in reasonable shape.
Yes.
Great point, Brian at least a follow up question just on with rates moving up.
Historically, it's impacted dealer inventory levels much sooner than it does.
Given the buying patterns.
What are you hearing from dealers in terms of.
How interest rates are impacting.
Levels.
And then how they manage that inventory.
Yes, I can't say that I've heard a great deal coming from dealers in the days when you can chime in too, but my sense would be.
They've been somewhat cash flush for the last couple of years and I would hope that most of them managed their balance sheets pretty well during that so.
It certainly helped to mitigate some of the impact of that but certainly going to be a challenge for them as rates are expected to continue to decline.
I don't have anything to add to that.
Back to the dealer, Yes go ahead.
Oh, yes.
Just a follow up.
Just a cleanup.
The other is just on inflation.
Our price increase is still being passed on.
And.
What are your thoughts in terms of that.
Rising actions, given where we are in an inflationary environment.
Well I think theres going to be a couple of things to happen over the next few quarters as youre going to see some of the deflation happen in some of the commodities certainly.
You look at just.
Clipper, we're heavily weighted toward steel and aluminum and we've seen steel drop in most of our pricing to customers or index. So we've been giving back some price over the last couple of quarters.
You need to do that into next year.
And ultimately that's going to be reflected in the price to the consumer and so I think we will we will start to get back toward a healthy level I know not every suppliers in the same position we are with respect.
Where there where they're giving back price and how theyre, giving back price, but with respect to margins on our end indexes allow us to continue to control margins pretty effectively and way up on the way down and on things that arent indexed.
We're just we're looking at inventories and how healthy our inventories are before we start to.
Let me get back price on some of the inventories that have escalated.
Great. Thank you so much I appreciate it.
Yes, Thanks Scott.
The next question today comes from the line of Fred Wightman from Wolfe Research. Please go ahead. Your line is now open.
Hey, guys, Brian I, just wanted to follow up or maybe it was Jason just sort of on the 'twenty three outlook commentary I think you guys mentioned a 400000.
<unk> thousand type run rate number or assumption for 'twenty, three that's a little bit below the Rbis would love to just sort of have you guys reached.
Bridging the gap on maybe where you are a bit more conservative.
Right.
Hey, Brad.
We would tend to be a little more conservative on our outlook certainly there is a ton of uncertainty in the macro macro.
Environment and so for us I think today, knowing what we know today, which is changing so quickly.
Looked at 2023 of the $3 85 to $4 15 type run rate 400, being somewhat of a midpoint there so.
That's at least what we're looking at today, but obviously a lot of unknown as we look forward in the next 12 months.
It makes sense and.
Just sort of summarize your commentary throughout the call understand the caution on the RV OEM side of the business, but it seems like you guys are still pretty confident in what youre seeing on the marine side. So could you maybe just unpack that a little bit.
<unk>.
Why would we not see similar behaviors, either retail or wholesale level.
Level for some of the marine guys a quarter or two down the road similar to what we've seen in the RV space and maybe just give a little bit of confidence.
Why that might be more sustainable where you should expect.
Yes.
Or is it different.
<unk> has a backlog on different types of boats on the marine side.
We are hearing retail start to slow down with some of the dealers on the marine side. So we're expecting a little bit of wholesale slowness, while they fill inventory pipeline.
<unk> is up.
Maybe first quarter next year, but the marine businesses.
Expect to see relatively strong compared to where we were last year.
Look at the big problem or issue that marine had trying to scale up and the reason whether they're wholesale numbers were not big time. This year was just because of engine production and chip shortages there. So.
They're kind of we think of them as a little bit more smoothing out.
The.
<unk>.
The graph demand over the last last year in this upcoming year.
And on the RV side, the 400000 units, where there were 415 or 385 I mean, that's we can still scale the business and a real healthy way to produce really great results at 400000 units. So.
And it's going to be a much.
Reduced.
We're not going to see.
The heavy peaks and valleys, we saw this year, where it was a stiff ramp up in a very quick rapid slowdown. We expect next year to be a lot more calm with respect how production flows quarter to quarter.
It makes sense, Brian all the best.
Thanks, Brett.
Thank you.
The next question today comes from the line of Craig Kennison from Baird. Please go ahead. Your line is now open.
Hey, good morning, Thanks for taking my question and Brian Best wishes to you as well.
Getting back to Catherine's earlier question is there a way to look at content per unit on a basket of major components.
Like for like component to understand how those pricing.
Trending.
Just feels like you could see a period of disinflation, Jason. Thank you mentioned.
Great question, Craig and I'm not sure we have a perfect answer for that but obviously I think most would understand that a big part of our.
Overall dollars on our content per unit basis are going to be within the chassis.
And Thats a lot of steel and a lot of where our index pricing resides so between steel leveling slide outs.
Those are going to be a lot of your steel components, so youre going to get in the aluminum youll have a lot of our doors a lot of our windows.
On <unk> things of that nature of that contain a lot of aluminum content. So those would be the bulk of the items that you would see moving with these commodities.
If I were to take a stab of it.
Those types of items might be half of our content and then the rest is a lot of you're going to get into appliances and electronics was certainly youre going to have some some of those commodities in them, but it gets a bit more.
Muddy as you dig into those components and I would just add that so many of R. R.
Content is core I mean, you look at furniture or you look at Windows you look at chassis as you look at leveling stabilization. If you look at the axle and suspension.
All of those all of those pieces and slide outs you look at all those pieces are all significant parts of the AUM and while they've seen some inflation on those parts. They are never going to come back down to probably where they were pre COVID-19, but.
Most of those most of those <unk>.
Next half steel aluminum in them. So there is going to be some some deflation on those and the other pieces, we added about $575 million in organic growth last year. So.
We took considerable market share.
And a lot of different product lines. So it just demonstrates our ability to continue to add content on their.
In terms of tougher weather winter times are really good.
Youll see youll see a little bit of <unk> and <unk>.
Over the over the next.
Months I think before the next model year change, but as we've stated in past calls the content generally doesn't affect our product lines because there is so core.
Core to what the what the RV makeup is when you look at furniture and you look at chassis in the actuals in Windows.
Things to build the units.
Thanks is there a way to think about the dynamic in which.
The unit cost to build a unit let's.
Let's say six months ago may be much higher than the actual cost to build the unit.
Today, and Youre going to have a lot of inventory at that all the higher price and youre going to want to sell product into the channel at lower prices I am sure dealers wanted to avoid mass discounts, how do you manage that against price transition.
I think it's a I think it is a little bit of a mix. So again, a lot of our a lot of our raw materials.
We're not in raw materials, but our products that we sell to the Oems there.
We're priced on an index is that move quarter to quarter. So some of that's already baked in but the stuff that isn't that index as I mentioned earlier.
Those products that we do have our inventories on our OEM partners have been really good about working with us on those.
Those components and have higher inventories so that we can at least worked through some of that in.
Not have to.
Race to the bottom on price, while we've got these elevated inventories so we feel pretty comfortable that that will work out favorably.
Great. Thank you.
Thanks, Craig.
Thank you.
The next question today comes from the line of Scott <unk> from MK and partners. Please go ahead. Your line is now open.
Good morning, guys and Brian Congrats on the next chapter in your life and it wasn't pleasure working with you and look forward to working with you for the next six months or so.
Thanks Scott.
Could you guys dig into the aftermarket order, but the automotive stuff you talked about was weaker than I guess, the RV side can you maybe give us what each side of the business did and then I have a few other questions. Thanks.
Yes, Hey, Scott so definitely within our earlier remarks, Theres certainly been a divergence between the automotive side in the RV and marine side for this last quarter. The automotive side was down about 12% in the RV and marine side was up about 12%.
Which is pretty close to our long term, our long term growth expectations for the RV and marine side of the business.
And expect that while the autumn automotive production and unit sales are somewhat depressed in some of the supply chain challenges that we've experienced over the last couple of years I expect that to continue some so I think that will continue to hamper the automotive side of our aftermarket business.
While the RV side again, we will can just continue to grow as we see more units out there with our products that are going to go through the repair and replacement cycle over time.
That's a big part of our and the next question.
Okay, sorry about that on the RV side.
How would you characterize that business isn't more attachment driven or is it more.
Break fix.
Kind of demand.
It's a good it's a good mix of both.
It's close to 50 50 on the stuff thats getting upgraded versus the products that are getting repaired and replaced because maybe they're worn out or broke or need to be repaired for one reason or another.
Okay and my last question for now just on the Adjacencies It seems like most of.
The demand there is holding up but maybe you can flesh it out a little bit we know about marine.
Talk about MH, but how about what European RV and some of the other pieces.
Well first off.
We are most excited about our diversification strategy is playing out nicely here and we really get to test that out and the tougher times.
Marines up 20% Housing's at 40% or adjacent other adjacent markets are up 20%.
Like buses and cargo trailers, and while Europe's a little bit flatter right now, it's largely because of the the third of our business over there that's involved in the caravan and motor care event market and the only reason thats down is because of the chip shortage, because 60% of those units and our <unk>.
Europe for our visas are motor homes.
So we expect that that chip shortage situation to correct itself sometime hopefully middle of next year and when it does there's dealer inventories are low.
There should be a nice long tail of demand once that that once that comes back.
They have they have chassis again, so like we just talked about the RV aftermarket.
Really solid when new vehicles for autos.
Start to start to come back in for the same reason motive from chassis a short in Europe .
There is a.
Lesser production of new vehicles here in the U S for the same reasons.
That's where our new hedges go for automotive aftermarket side of things. So we should see revitalization on those product lines as well once new vehicles coming back.
Okay.
Got it that's all I have thank you guys.
Thanks Scott.
Thank you.
Question today comes from the line of Daniel Moore from CJS Securities. Please go ahead. Your line is now open.
Thank you very much good morning, Jason Good morning, Brian .
For taking the questions.
Again, it's been a great run, Brian and best of luck with everything else I'm sure it will be fantastic.
Just quickly.
Q4.
Good color as far as Decrementals would you anticipate that to be the trough in terms of operating margin.
RV shipments bump up sequentially towards that 400000 run rate by Q1.
Do you see mix and raw materials and different things, making that a little fuzzier, if you will.
No definitely.
That's what we're forecasting that we're expecting.
Maybe some typical seasonality within the markets that we participate here during the winter months.
Along with the continued adjustments the inventories, but by the time, we get into the first quarter and second quarter of next year, we're anticipating those markets to continue to grow.
So with that we would expect the fourth quarter to be the low point from a volume perspective, and then also as we've continued to talk about price and materials, it's a bit of a headwind for us here right now.
I would anticipate that as we get into some of these high cost layers in the next quarter and maybe into the first quarter as well, we'll be absorbing some of that but certainly then things look to be much more favorable as we move into the second quarter and the remainder of 2023.
Very helpful and you touched on this but.
Do you anticipate further unwind of working capital, mainly Q4 or that to continue to be a tailwind for cash flow into kind of early 'twenty three.
Yes, I think it will definitely be a tailwind throughout much of 2023.
We're still sitting around about $1 billion in inventory today.
It's come down about $75 million in the last three months, which is good.
Even though we started pulling some of the levers much sooner than that there was still a lot of inbound inventory that we've had to absorb and now we're starting to turn the corner and bringing inventories down so I would suspect as we get into the first and second quarter of next year, we will be able to move through a lot of that.
So I think the first half probably frontloaded with a lot of the cash benefit.
Got it and then good color on Marine and your views. There you did give the kind of 400000 range for RV do you have a similar outlook for either wholesale or retail for marine in 'twenty three.
I don't yes, I don't think we didn't look at the we're looking at the pontoon market, mainly because thats, where most of our sales come from we do do do a bunch of glasses steps for some of the big drop in water boats, but we.
Because of that.
Reporting as kind of choppy, it's hard to follow.
But we expect it to be we expect it to be flattish, it's just they're kind of.
They are kind of just bouncing along slowly because of engine engine volume and they build more boats right now, but you could get more engines.
I guess said another way at least for the pontoon market you don't see inventories kind of leveling off of right sizing through much of 'twenty threes is that fair assessment.
I think they'll start to I think they'll start to right size.
Whether it's second quarter, two three or maybe a little bit earlier, but.
We'll start to get in a better spot I think.
Got it okay. That's it from me thanks for the color again.
Thanks, Dan.
Thank you.
The next question today comes from the line of Mike Swartz from <unk> Securities. Please go ahead. Your line is now open.
Yes.
Hey, guys good morning.
Maybe just first question touching on the October trends that you alluded to in the press release. This morning, I think you made the call.
Meant that.
As you went into the fourth quarter Youre seeing positive trends, so maybe give us a little more color what exactly positive trends means.
Well I think I mean, certainly in our diversification and a lot of our other markets. We're seeing some some favorability there but from an RV perspective.
As Jason mentioned I think rates have been pretty consistent here over the last couple of months.
Certainly the holidays will have its normal seasonal shutdowns and potential to be on the more aggressive side of those that we've seen so.
We'll certainly look at October is from from our viewpoint that these kind of volumes on the RV side, I think both topline and from a margin perspective, we're pretty confident in what we were able to turn in there.
I think that that that year over year growth rate somewhat indicative as well as what we're expecting to see across the fourth quarter.
How we guided so hope that helps Mike, Yes, I mean, just to add to what Brian said, we are seeing continued positive trends in some of our diversified markets, but with respect to RV.
I think it was positive as we saw the massive pullback in early June late May and we spent a couple solid months adjusting to that because we were on a 600000 or so run rate unit run rate and pulled back to $3 50 within a couple of months so.
It's a massive feat to pull off and we've got an experienced leadership team as we keep talking about that's been through this a few times.
<unk>.
Heading into the last couple of months of the year. It feels like things have at least stabilized at the volume levels are running today.
Okay, great great. Thanks for that.
And then just a follow up on the commentary just around your kind of.
Guidance or directional guidance for the fourth quarter, if I'm doing the math correct I just want to put a sharper point on this just so we understand.
Am I thinking about EBITDA margins in kind of six ish percent range is that generally how we should be thinking about that based on what you said earlier.
Yes.
The guidance I was given was certainly at the EBIT line, but given what I would expect there yeah, I mean, 6% on EBITDA wouldn't be too far off.
6% EBITDA, okay, great. Thank you.
In Q4, and Q4, I assume thats, what youre talking about right.
Yeah, Yeah yeah.
Great. Thank you.
The next question today comes from the line of Patrick Mooney from da Davidson. Please go ahead. Your line is now open.
Good morning, Thank you for taking my questions Brian Congrats on the move was a pleasure working with you over the years.
Couple of questions one from your view.
How did you think open house played out for the RV industry, we've heard some commentary from one OEM.
But you guys probably have a better top down view on how that played out versus.
Maybe your expectations and maybe.
Comment on.
Dealers appetite for additional inventory in this environment.
Yes, I think that the real real play for open house and it was no surprise to the dealers and the Oems are us.
So it was a time for them to come and check new product out they had been here in a couple of years.
We showed a lot of new product, it's the time to get dealers excited and continue to work on relationships.
But there wasn't any big expectation that there was going to be a lot of buying happening just because of where dealer inventories were and where we know they need to get to so and the good news is everybody agrees that the Oems of the dealers agree the Oems degree we agree that the Oems.
Really done a great job right sizing the levels of production a day to get the dealer inventories to a point, where they're going to be ready to order first quarter for spring selling season.
So.
Hope that answers your question.
Thank you.
Also on our promotional activity right now could you talk about how the promotional environment as.
Evolved from the summer to now and then maybe.
At the retail level and also maybe from the OEM to dealer level as well. Thank you.
Yes, I think the Oems from the OEM levels speak to that first they tried to hold on to the price as long as they can.
Usually the dealers the first wanted to give it and we know that there is a lot of discounting to retail customers out there which is good that's that's getting customers continue to buy.
Coming off some of the most highest highest prices and highest inflation that <unk> seen.
And Oems.
They've started to.
They started to look at things the same way and probably do a little bit of discounting, but it's still not what we've seen historically so that's that's that's a positive sign they won't do that until they they absolutely feel they have to so.
And then like I said earlier, the supply side pricing will start to.
See some deflation in cost savings back to those Oems, which will eventually turn around back to the dealers in terms of lower prices and you'll see some de contenting, which helps.
As they continue to work through through all of this so.
It is positive.
Great. Thank you.
Thank you.
As a reminder, if you would like to ask a question. Please press star followed by one on your telephone keypad.
The next question today comes from the line of Bret Jordan from Jefferies. Please go ahead. Your line is now open.
Hey, Good morning, guys. This is Patrick Buckley on for Bret Jordan, Thanks for taking our questions.
Good morning, if we could circle back to the.
Marine side, specifically on engine supply.
Have we seen any improvements recently and how far from normal are we there.
I think there are like the auto like the <unk>.
Auto manufacturers. They are just the engine suppliers are continuing to struggle with <unk>.
<unk> and sensors and all the things that are in the electronics world that would cause those delays on our side. We built we have electronics division we do.
$100 million in that division, where we build electronics and smart technology for a lot of our components and where we're 80 weeks lead time still with a lot of those specialized components in the electronics world. So that's what they're dealing with.
It's a tough go of it probably is going to relieve itself till middle part of next year, maybe at the earliest.
But I don't think Thats, a horrible thing moderates the supply and consistency of the production of boats.
That part of our business has certainly been easier to handle.
Over the last.
Year, and a half two years of boom compared to the RV business, where we.
We literally took off like a rocket ship and one from <unk>.
Several hundred thousand units almost almost double that.
Okay.
Got it that's helpful. Thank you and then I believe you also mentioned Outdoorsy early on in the call.
It seems like there's been a growing peer to peer market. These days.
Have you guys felt any changes on forecast any changes in your aftermarket side.
<unk> utilization rates increase given increased peer to peer market.
We're counting on it.
These rvs.
It appear marketplace, it's not going to go away.
We love it because it just makes arby's, even more affordable they are affordable enough as it is.
Average price being about 25000, but when you you talked about selling to a consumer and saying Hey look you can pay for half year half year yearly payment with.
Just jumping on a peer to peer marketplace rental like outdoorsy or RV share.
That's a huge that's a huge benefit to the RV consumer. So we're super excited about that and then obviously that means if the army is going to get used eight or 12 or 25 weeks a year.
Parts are going to wear out faster and thats going to create more repair and replacement opportunities for us we are already working with outdoorsy on repair parts and replacement parts programs because they are struggling like everybody else to get there their owners groups serviced appropriately. So they can get units back on the road to get them right and so I think it's a huge positive for us and that's only going to continue to increase.
<unk>.
Great. That's all I had very helpful. Thanks, guys.
Thank you.
There are no further questions registered at this time, so I'd like to pass the call back over to Jason for closing.
Remarks. Please go ahead.
Well I want to remind everybody, we're not going to get real Brian just yet he is got maybe a couple more quarters yet on call. So save your goodbyes.
Again, the real story is diversification I think that since 2008 2009, when we came out of that and realized that we needed to be more than just an RV supply company, we were really strong.
Strategize and came up with a great plan and executed over the last 10 years to come up with a business that's highly diversified and really protects us in times like this when our corn markets down.
EBITDA of $818 million over the last 12 months, which is phenomenal.
A direct result of the diversification and other strategic initiatives. We've implemented so I appreciate everybody on the call. We'll talk to you next quarter. Thank you goodbye.
This concludes today's conference call. Thank you will feel participation you may now disconnect your lines.