Q2 2023 Patrick Industries Inc Earnings Call
Greetings and welcome to the Patrick industry second quarter of 2023 earnings Conference call. At this time all participants are in a listen only mode. A brief question and answer session will file a formal presentation.
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Pleasure to introduce your house.
<unk> Vice President of Investor Relations.
You may begin.
Good morning, everyone and welcome to our call. This morning, I'm joined on the call today by Andy Nimitz C. E. O Jeopardy, you know president and that file or interim CFO certain statements and today's conference call regarding Patrick industries in its operations may be considered forward looking statements under the securities laws. There are a number of factors many of which are beyond the company's control.
Which could cause the actual results in events differ materially from those described the forward looking statements. These.
These factors are identified in her press releases are Form 10-K for the year ended 2022 and in our other filings with the Securities and Exchange Commission. We undertake no obligation to update these statements to reflect circumstances or events that occur. After the date. The forward looking statements are made I would now like to turn the call over to any Nevis.
Thank you, Steve Good morning, ladies and gentlemen, and thank you for joining us on the call today.
Before we begin talking about the second quarter and first half of 2023 I want to take this opportunity to express my sincere gratitude to our incredible team members and their unwavering commitment to excellence, especially during these dynamic times.
Their dedication empowers us as we strive in our pursuit to consistently deliver exceptional products and provide the highest level of service to our customers. They are the foundation of our company and their hard work is one of the reasons, we are increasingly optimistic about and well positioned for the future.
As we reflect in the second quarter and first half of 2023, we are pleased with our performance, especially against the tough comparison to last year's record sales and earnings.
This period is seen some of the most significant declines in Harvey production in over a decade as a result of the incredible discipline exhibited by industry Oems as they managed field inventories in response to macroeconomic uncertainty.
Our strategic diversification inventory management and disciplined capital allocation of played out largely as we intended and health partially offset the impact of the declines in production on a quarterly results.
A marine business has been more resilient and help bolster our margins while diversifying our business model and our teams are prudently managed our balance sheet and working capital generating significant free cash flow.
As we prepare for the marine industry to calibrate to retail now the inventories are believed to be replenished, we're becoming increasingly optimistic and starting to sense Tailwinds building on the horizon for the RV industry is our estimates suggest dealers have reduced unit inventories is weeks on an even further in the second quarter from the first quarter, which Jeff will discuss.
We remain confident in our company strategic navigation, a short term uncertainty and longterm growth for three key reasons first we have a business model and veteran team that have been tested and proven as we successfully responded to uncertainties and market volatility.
Along with our proactive approach to strategically diversifying our business, we are well positioned both operationally and culturally to adapt and thrive when faced with dynamic macroeconomic and industry conditions.
Second the <unk> in the markets, we serve are making discipline decisions and thoughtfully adjusting output to meet consumer demand, which fortifies the longterm health of each industry and.
And third demographic trends, including new and younger buyers entering the leisure lifestyle markets and heightened interest in the outdoors remained promising and we believe these trends will drive higher normalize demand and our leisure lifestyle markets than what we're estimating pre pandemic.
Matt will give a full overview of the quarter a little bit later, but first let's look at the second quarter of 2019, the last second quarter before the pandemic and compare it to the current quarter, which shows the meaningful transformation of our company, it's resilience and earnings power.
In the second quarter of 2023, RV wholesale unit shipments were 26 per cent lower than the same period in 2019 <unk>.
Despite the sharply lower unit volumes total revenue in the second quarter of 2023 was 50 per cent higher than in 2019.
Gross margin was 440 basis points higher and operating margin was 80 basis points higher helping drive a 64% increase in E. P. S versus the same period in 2019.
In addition, this quarter, we generated $163 million, a free cash flow versus $58 million in 2019.
We believe these data points are a testament to the fact that the strategic diversification of our business model that we've orchestrated is working <unk>.
Additionally, the entrepreneurial spirit and the customer focus values that drive Patrick our brands and our team members have not changed.
We have undergone a significant transformation, where the Patrick of today has a more balanced mix of business across the leisure lifestyle and housing markets.
Today, we are a more dynamic company, but we ran anchored to our better together values with a commitment to grow the breadth and quality of the solutions we provide.
Structurally we have a deep bench of talented and energize leaders with experience and thorough product knowledge or experts in the industry today, Sir <unk>.
Strategically we've established a solid foundation for success their strategic diversification organic growth and acquisitions.
Over the past few years, our investments in the marine market I've proven fruitful with these businesses now accounting for 29 per cent of our sales.
Our housing and market, which is also 29 per cent of our sales has a promising future as Americans path to affordable housing continues to have a long runway.
Financially are strong balance sheet capital structure and growing liquidity in tandem with our leadership team leave us with the confidence that we can apply navigate near term challenges as we remained focused on delivering longterm value for our customers team members and shareholders.
Time and time again, our team has risen to meet challenges head on keeping us nimble and continuously physician who has to take advantage of opportunities that can drive our strategic plan forward.
As we look towards the back half of the year the rate of retail the client appears to be decelerating in both our leisure lifestyle markets based on the first six months of 2023.
R V dealer motto mix and balance appears to improved the marine mixes healthy and inventory weeks on hand, and leisure lifestyle markets and inventories in the housing market are poised for stabilization and growth.
And finally, turning to the numbers and compared to a record 2022 year, our second quarter revenues decreased 38% to $921 million and on a trailing 12 month basis, a consolidated revenues, where approximately 3.9 billion or.
Net income in the second quarter decreased 64% to approximately $42 million and net income per diluted share with $1.94.
We continued to exercise prudent working capital inventory management, reducing inventories by $113 million in the first half of 2000 $23 million to $555 million and buy more than 184 million from the second quarter of 2022.
I will now I'll turn the call over to Jeff will highlight the quarter and provide more detail on our end markets.
Thanks to Andy and good morning, everyone.
Our second quarter, RV revenues, which represents 42 per cent of our consolidated total decreased 54% from $837 million to $384 million.
R. R V content for Ya increased 6%.
On a TTM basis to $5051 per unit compared to the same period in 2022 <unk>.
Driven by market share gains, partially offset by pricing.
Our view wholesale unit shipments of 86200 decreased by 44% or 66000 units from the second quarter of 2022.
We currently estimate.
Second quarter retail registrations of approximately 124000 units and estimated decline of 16% from the second quarter of 2022.
The metrics, we have outlines imply a net decrease of over 37040 2000 units the dealer inventory in the quarter and year to date, respectively R.
Our estimates indicate the TTM dealer inventory weeks on hand at the end of the second quarter of 2023 had declined to approximately 16 to 18 weeks on hand from.
From 19 to 21 weeks on hand at the end of fiscal 2022 and in the first quarter of 2023.
This is below historical pre pandemic levels of approximately 26 30 30 weeks.
As we outlined in our last call demand and the RV market has continued to normalize over the past 12 months or touch point suggest dealers have nearly work through a less than optimal mix of model year 2022 units and we continued to scale our production to ensure parity with OEM an industry needs.
A marine revenues, which represents 29 per cent of our second quarter 2000, twenty-three consolidated sales decreased 8% to $268 million Angel wholesales shipments that estimated to have declined 19% in the quarter.
The declining revenues was due to lower shipments, partially offset by acquisition and market share gains.
In concert with our marine business, we have a strong and growing aftermarket portfolio approximating $200 million on an annualized basis.
That allows us to offer solutions not only the <unk> building new units, but the significantly larger used boat market.
These aftermarket solutions are typically higher margin and center around customization upgrade repair and replacement and further diversify Patrick's marine platform.
As noted.
We estimate marine wholesale unit shipments were down in the quarter to approximately 42 to 46000 units on retail unit shipments that were down an estimated 4% to 6% to arrange a 70 to 75000 units.
Are estimated marine content for wholesale unit increased 15% on a TTM basis to $5330 per unit compared to the same period in 2022.
We estimate overall marine dealer inventories are at approximately 16 to 18 weeks on hand, decreasing from the first quarter levels of approximately 23 to 25 weeks on hand, and thoughtful caution by odm's to ensure alignment with retail demand.
Pre pandemic average weeks on hand, approximate 35 to 40 weeks based on our estimates.
Revenues and our housing market decreased 23% to $269 million and represented 29 per cent of Arkansas Dude sales.
Are estimated MH content for you to increase 11% to $6411 per unit on a TTM basis compared to the same period in 2022.
We continue to believe that manufactured housing with a significant price point advantage serves as a viable cost effective alternative to Seinfeld housing emits an affordable housing prices compounded by an elevated rate environment.
The housing side of our business is primarily tied to manufactured housing single family in multifamily housing.
With manufactured housing, making up approximately 54% of the total.
MH estimated wholesale unit shipments were down 30 per cent in the quarter. While total residential housing starts for the second quarter decreased 11% with single family housing decreasing 14% and multifamily starts decreasing 6%.
Although consumers continue to adjust to inflation and higher interest rates. We believe our housing businesses are primed to.
To succeed over the long term given the structural supply and demand imbalances that remain.
On the acquisition front this quarter, we expanded our transportation capabilities.
With what is now Patrick Marine transport based in Elkhart, Indiana.
While this marks are entering into the marine transportation business, it aligns incredibly well with our RV transportation business.
And solidifies our presence as a leading provider of transportation services to leisure lifestyle market and further increases the set of solutions Patrick provides for the marine industry.
We continue to see organic and inorganic opportunities in our end markets and other adjacent markets and continued to monitor valuations and this <unk> dynamic environment.
Our liquidity provide the flexibility to be selective and we look forward to partnering with great management teams and flexing, our M&A execution capabilities and all of our end markets.
Further related to capital allocation that Patrick industries. Our team members are continually exploring cutting edge technology and processes to improve our efficiencies and.
And the utility of the solutions, we offer while seeking new ways to innovate and expand our product offering.
An example of this is a roll out of carbon fibre and continued investment in other composite materials recent.
Recently, we leveraged our internal market relationships with industry knowledge experts to formalize a new brand name X T carbon.
Which utilizes advanced composite methodologies and manufacturing carbon fiber components, beginning with ski in wakeboarding towers, and tops for our marine and markets, providing our customers with alternative <unk> components.
Components that offer increased durability decreased weight and simplified installation or just a few of the reasons. We continue to invest innovations like X D carbon.
This is just a small sample of the new high quality products solutions <unk>.
And innovations that our teams are working on and will continue to rollout in the markets we serve.
As we looked at the back half of the year, we're confident in our ability to manage our business in any environment that arises.
Towards through decades of building relationships and experience, we have expanded our organic growth through strategic acquisitions, creating a family of stellar brands, each bringing valuable solutions innovations an experienced team members to the table.
This strategy of working together has made patrick more resilient than ever.
Before I turn the call over to Matt I would like to highlight several philanthropic projects that are part of the fabric of who we are as an organization and culture and that we hold very close to our hearts, especially in these dynamic times.
Well not an all inclusive list by any means as it relates to our philanthropy and culture. The Patrick team takes great pride in being supporting sponsor of military makeover with montel for the third consecutive year and.
And we maintain major partnerships and sponsorships with care camps will provide healing and support by sending children with cancer to medically supervised summer camps.
And Logan community resources, which serves and provide support.
For adults and children with intellectual and developmental disabilities.
Our partnerships with these culturally aligned organizations demonstrates the heart and soul of our organization and our team members spirit to engage ensuring we're giving back to the communities.
I will now turn the call over to Matt will provide additional comments on our financial performance.
Thanks, Jeff and good morning, everybody are consolidated second quarter, net sales decreased 38% where $555 million to $921 million is.
As Jeff noted RVO iiams maintain discipline production schedules in the quarter and in June we began to see similar inventory management strategies from a number of our marine Oems.
R R V and marine and market revenues declined, 54% and 8% respectively, while our housing and market revenue decreased by 23 per cent.
Gross margin increased 60 basis points to 22.8% is our strategic diversification efforts helped offset the impact of the significant decline in RB shipments and lower levels of production in our housing market.
Additionally, we benefited from recent acquisitions cost reduction initiatives and production and Labour efficiencies as a result of our automation initiatives.
Operating expenses for the second quarter declined 12% to $134 million or 14.6% of sales representing an increase of 420 basis points versus the prior year period, primarily reflecting our investments in recent acquisitions, which tend to your generate higher.
Gross margins, but also carry a higher SG&A mix.
Warehouse and delivery expenses declined $8 million.
To $36 million in Q2, 2023, but increased 90 basis points as a percentage of sales are lower revenue.
SG&A expenses declined 13%, but increased 240 basis points as a percentage of sales on lower revenue.
On an annualized basis, we have taken out approximately $35 million in total fixed costs. Some of the work. Our teams have done on fixed cost is obscured by the impact of acquisitions. We have made but we expect these cost reductions to be durable when our business has flex.
The higher production levels in the future.
Operating income decreased $98 million, an operating margin decreased 360 basis points to 8.2% primarily driven by the factors previously described.
Net income decreased 64% to $42 million, which equates to one dollar and 94 cents per diluted share.
Adjusted EBITDA, and adjusted EBITDA margin, where $114 million and 12.4% respectively for the second quarter of 2023 compared to $212 million and 14.4% in the second quarter of 2022.
Our overall effective tax rate was 26.1% for the second quarter compared to 26.8% in the prior year.
We continue to estimate our overall effective tax rate for 2023 to be approximately 25% to 26%.
Looking at cash flows cash provided by operations for the first six months of 2023 was approximately $178 million, an increase of $104 million or 140% compared to approximately $74 million and the prior year period.
Working capital monetization with a significant source of cash and more than offset the decline in net income year over year.
Our team remains focused on working capital management and were successful in driving our inventory down, 25% or 184 million year over year, two $555 million and down $113 million or 17% Premier in 2022.
This quarter, we invested $16 million in property plant and equipment is Jeff noted our continued investments and automation technology and software initiatives are meant to improve operational efficiency and enable our team members to deliver exceptional value to our customers.
We continue to expect to spend $65 million to $70 million on capital expenditures in 2023.
During the quarter, we generated operating cash flow of 179 million, implying free cash flow and a quarter of $163 million for the trailing 12 month period, we generated $444 million a free cash flow.
And Q2, we paid down a revolving credit facility by $115 million.
At the end of the second quarter and after paying a total of $117 million on our debt. We had approximately $670 million total net liquidity comprised of $34 million cash on hand, and unused capacity on a revolving credit facility of $573 million.
Total net leverage was two six times.
Are strong liquidity profile and long-term capital structure are the result of years of diligent effort to proactively manage cash flows secure diverse funding sources and strategically allocate resources to support our business growth and stability with no major debt maturities until 2027, we are poised and ready to navigate.
Right the current macroeconomic environment.
We repurchased approximately 125200 shares for a total of $8 million in the quarter and returned $10 million to shareholders in the form of quarterly dividends.
Moving to our end market outlook, we continue to be in a period of macroeconomic uncertainty, which will likely continue to impact shipments in consumer demand. However, we remain optimistic regarding the long term future and we see many opportunities to profitably grow our business.
R V wholesale shipments in retail registrations are down through the first six months of the year, but as Jeff noted retail registrations have exceeded wholesale shipments, meaning Oems have remained disciplined in their production and dealers are removing inventory from their lives both positive signs.
Just on recent trends, we currently estimate for your RV retail registrations will be down approximately 20% to 24% <unk>, implying approximately 335 to 360000 units.
Assuming consistent dealer weeks on hand levels as current as Jeff discuss we continue to estimate full year 2023, RV wholesale unit shipments of 310 to 325000 units, implying a decline of approximately 35% to 38% from 2022.
And our marine market, we estimate 20, twenty-three wholesale and retail shipments to be down 15% to 20% pre.
Pre pandemic production seasonality was generally spread between approximately 55% of units produced in the first half of the year and 45% of the units produced in the back half of the year.
We currently expect a slightly more dramatic decline in 2020 threes cadence to 60%, 40% first have 2023 versus second half of 2023.
Marino M's have reacted quickly and continue to work with dealers too aggressively keep inventory levels in balance with consumer demand.
As noted we believe dealer inventories are generally calibrated with retail and believe inventory is largely reached equilibrium for many categories.
On the housing side of the business, we expect MH wholesale shipments to be down approximately 20% to 25% for 2023 with retail sales absorbing available wholesale production on a real time basis, and our residential housing and market. We expect 2023, new housing starts will be down approximately 10 to 15 person.
Sent.
To wrap up we've fine tuned our outlook based on the most recent trends in our end markets and continue to estimate are operating margin will be between 7.5 and 8.5% for full year 2023.
We expect to generate operating cash flow at or in excess of 400 million. This year as working capital lines with revenues.
Implying a free cash flow of 330 million or more based on our Capex estimates.
That completes my remarks, we are now ready for questions.
Thank you you will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tylenol vacate your line is into question <unk> you May press start to if you'd like to remove your question <unk>.
Participants anything speaker equipment may be necessary to pick up your handset before pressing the star Q1 moment. Please while we pulled up for questions.
Thank you. Our first question is from <unk> with Roth Mmk Yeah.
Please proceed with your question.
Good morning, guys. Congrats on the better than expected results and thanks for taking my questions.
Good morning, good morning, good morning.
Can you hear me talk about what you're seeing well what the net result is as of right now with the dealers regarding.
22 product I think last quarter, you might've, given an update like a percentage of what you thought the average dealers inventory new inventory was accounted for by 20 twos.
[noise] Yeah go ahead.
That's got this is Jeff Uhm, Yeah last time, we were thinking that was in about the 30% range, but we felt like it was kind of moving moving down pretty quickly and I think they really did.
Refocused on the 22 units in the in the second quarter, where we saw some of that retail action. So we feel pretty good or touch points are saying.
They've gotten him down into a manageable range and really are are looking forward to the 24 units now and and where they're at with the 2002 seems to be in good shape.
Okay what percentage.
That you think you're probably as we're talking to the 15 per cent 20 per cent or lower.
This is Andy that's where we think things are at and we also think that pricing at the dealer level is matched up with with a lot of partnership there to make sure that they moved out the 22 unit. So we think theres equilibrium and pricing and we also think that the 22 mixes come down to that you can call. It an average 15 per cent range of 10% to 15%.
Got it okay.
And if you were to to look at I guess I know that July is the.
July 4th week shutdown, and we know that.
Dealers and everybody was.
Making sure I guess, a race to the finish before the 2004, it's come out maybe to talk about what do you expect production what you're hearing from the Oems for July .
July August September heading into open house.
Yeah. It's got this is Jeff coming out of the fourth of July shutdown of.
We we see some.
Pretty consistent production levels from where we left in June I think we're gonna still see some some shutdown weeks between now and the show to try to continue to manage the inventory levels of the dealers going into that show with the hopes that puts.
Puts them in a little bit more of a buying position come to show certainly we see that the 20 fours are coming up the the assembly lines now and going to dealers. So there's gonna be some activity of getting those 24 is out there for the dealers to see and for the and consumers to see so we feel like it's been pretty consistent.
With what we've seen so far this year may have.
Saddam weeks like we've seen throughout the year between now and the show and leading into the show really just to continue to manage that inventory at the dealer level, Scott I want to add a little bit to that as we look at at the the decelerating retail declines I think as we look at as we mentioned.
Dealer weeks on hand, they're very lean right now our touch points across our sectors, whether it be with our individual transport yards or whether it be with lenders in the space indicate that not only is their capacity on floorplan lines, but that we've seen in the inventory in the field as it relates to our transport yards are are are down from kind of historical average.
<unk> and even kind of normal run rates and so we feel like the channel is very very clean right now and solid as we go through the next quarter in anticipation of the the show in September you know, we think that production will be scaled as it is you know is and has been and there's been tremendous discipline, but we were encouraged and optimistic as it relates to really.
Cleanliness of the inventories in the weeks on hand that are sitting there today and and we think it's well positioned so right now production levels are very very disciplined but again, the inventories are lean and clean and what we would say.
Got it and then lastly could you give the usual flushing out of the components of the sales declines of 38 per cent. So it was a quite of the court.
Hi, This is Matt.
So they have that 38% decline.
We're seeing about 34% of that driven by industry and that's obviously led by the RV decline as we noted.
Acquisitions are actually up 1%.
And from an organic growth standpoint <unk>.
We're down in net 5%.
That includes seven per cent down on pricing, but two per cent on organic growth.
Yeah. This is perfect. Thank you so much.
Thank you.
Thank you. Our next question is from <unk> when it's Keybanc capital markets. Please proceed with your question.
Hi, Thanks for taking my questions just real quickly, hoping you could provide some color on what you're kind of hearing or seeing in terms of retail demand on the marine side July to date, and then second maybe maybe just drilling out a bit.
You know you continue to post kind of <unk> strong Cpus across and market suggest maybe some color around the drivers behind your ability to kind of continue to show strength there. Thanks.
Sure. This is Andy I think as we think about retail at the marine level right now what we're seeing as we do see that marine is feeling a little bit of the impact as inventories have calibrated and tell you that we are again encouraged by the the the rate of deceleration a retail declining on the marine side in.
Ocular and again encouraged by what we see as it relates to the inventories in the field and saw that Marino Em's have reacted extremely quickly to kind of what I think was anticipated once the inventories were rebuilt and so we feel like again the inventories are lean as we position into that does it relates to our contact per unit across our various market.
Sectors, you know I think our teams have done a great job.
And really working hard to manage our inventories work with our customers. We've we've given back pricing, where we've needed to and with customers in partnership with customers as we've been able to bring certain inventories down and so that's been there but overall I think is you know when we think about a two per cent net organic gain in the quarter.
Net of pricing again, it's in line with our expectations and where we feel like we want to be so again, we're not losing business. You know caught that content declines are are really specifically related to pricing and the team's doing a great job of managing your efforts with a lot of different solutions and options that are out there today for our customers.
Thanks, and maybe maybe just one more I know you touched on this a bit but in terms of kind of the the M&A opportunity set that you guys are seeing out there right now maybe just comment I'm kind of where valuations are maybe where your appetite might be from an AD market perspective, just any.
You can tell they're it'd be helpful. Thanks.
Sure. This is Andy again, I think as it relates to M&A, it's part of our let's just call. It DNA in that we are constantly cultivating an acquisition pipeline, whether it's organic or or deals that are being brought to us and right now what I would say is that we've certainly got opportunities in the pipeline, we don't buy broken businesses.
Now and so as we look at the the opportunities that are there valuation expectations really haven't changed too much I would say that multiple expectations. You know are in alignment with with where we think you know businesses are at that being said with the the volatility and kind of the the lack of certainty just today to find a normal.
<unk> run rate the valuation expectations with the multiples aren't necessarily matching up today, but as Matt noted you know with our liquidity position the strength of a balance sheet and the strength of our casuals, we're well positioned to execute and continuing to cultivate a pipeline.
Thank you.
Okay.
Thank you. Our next question is from Craig Kennison with Bird. Please proceed with your question.
Yeah. Good morning, Thanks for taking my questions I wanted to start with marine.
Do you see a need at all for the marine industry to destock in the same way that the R. V industry went through a destocking cycle or are we in a situation where no one to one going forward would be sufficient even that would lead to a decline in shipments, but I'm I'm curious, what you're you're seeing that.
Marine inventory and they need to <unk>.
Sure Craig This is Andy I think as we look at the data and we spend a lotta time with data matrix on retail and wholesale in weeks on hand, as we talk about on a call. You know we feel like the inventories are lined up right now on a one for one as we look at Murray and I think the manufacturers have prudently and thoughtfully paused very <unk>.
Very quickly to make sure that that one to one alignment stays the same and so we just look at kind of weeks on hand, as Jeff match, and you know <unk>.
16 to 18 weeks on the marine side in total in general across that space beings and I'll tell you again, that's down from Q1, and certainly down from where historical levels have banned the data is certainly as we look at it points towards you know balance in the space and we're at that one to one so destock as we kind of look at the.
The seasonality of the business, we could see a little bit of that I think as we go forward, but you know our hope would be as we look at things right now and say that the inventories are in line an imbalance on a one for one so.
I think the the manufacturers are very very disciplined in that space as well and again, we've seen them react very very quickly.
Thanks, <unk> and do you have a perspective, Andy I'm Marine affordability. It just feels like from our checks that dealers in the marine space really concerned about the higher price of boats and.
Feel like bad has done a lot of damage to volume and demand in that way.
Is there an outlook, where you know inflation comes down and were your input costs, maybe start to fade, a little bit such that affordability ultimately approved or.
For consumers.
Sure I certainly can't speak for for the manufacturers and the dealers, but the one thing that I can I can say is that in the marine space. There's tremendous focused on innovation in engineering and technology and as we look at that you know in that space. We just look at that.
Continuing to be forward leaning in the way that the marine industry thinks about bringing those innovations to the consumer and so you know I don't know what their their overall strategic plan say, but what I would tell you is is that we view that that pushed horse technology innovation, you know maintaining a level of pricing at the marine level it probably.
Does constrain overall unit sales and an aggregate basis, but I think I would also say that you know is on a normalised run right basis I think the marine industry continues to look at you know kind of capacities and where they're at today and really focus on that innovation, you know and those those those technology, leading efforts and so our view you know I can't.
Talk to pricing like I said as it relates to where their heads are at but as we look at it we think the innovation push that the marine industry continues to use is focused around kind of that normalised run rate you know that they've kind of historically seen over the last several years, so and I think that that again, it's industry industry forward and forward leaning on innovation.
Great. Thank you Andy.
Okay.
Thank you. Our next question is from like Sport extra security. Please proceed with your question.
Hey, guys. Good morning, just wanted to touch on I think maybe Jeff you were you were talking about some of the structural or fixed cost reductions that you made this year I think you quantified though is it.
It's about $35 million, maybe a couple of questions here I guess, one where where are those costs predominantly being taken out of the system and then too if it's 35 annualized how much of that have you gotten year to date, how much do you expect you know the.
At 35 to kind of slow into 2024, I E incremental versus 23.
Hey, Mike This is Andy I'll take that one when we look at the $35 million an annualized fixed costs. Our team has been a really aggressive and moving and I would say that there's probably a third of that in the first half as we kind of look at where things rat R. V Group has done a fabulous job of managing that side of the business.
Ah Marine teams are certainly working as they've been making sure that were taken care of the customer and so we do expect someone to come in the back and and it's really split you know above the line and below the line almost almost equally as it relates to the fixed cost reductions and certainly fixed costs that are sustainable on a go forward basis in total as we look at it you know look at the <unk>.
<unk> <unk> <unk> materials and Labour SAR direct labor you know, we will on a variable cost basis in totality, we're estimating about $100 million of total cost taken out amongst the categories across the spectrum net of materials and labor. So the teams done a fabulous job really reflecting the.
Flexibility and nimbleness of our of our variable cost model.
Okay, and just to clarify that 35 million is is out of the system, even when volume comes back in an RV.
Correct.
Okay.
<unk> <unk>, we think about the the RV content and it sounds like a lot of what we've seen just in deflation their quarter over quarter is pricing and some of the give back that you've talked about.
In prior calls and I think it was down 7% of that is what I think I heard you say I guess, how do we see that playing out through the through the balance of the year. When this was down seven in the second quarter kind of the peak number and then it kind of starts to smooth out in the back half of the year or or kind of highschool digit declines to come going forward.
Yeah. This is Jeff so the way we look at it as you know we're we're looking at the second quarter is it being down a little bit is really driven by pricing and primarily we see that pricing, starting now and kind of spread out through the rest of the.
Here. So we used it we'll see some additional declined based on pricing, but feel like the commodities I've come down and they've stabilized we work with our customers very closely to pass those commodity decreases along as they get through our inventory kind of in a real time basis. So we've got some pretty good visibility on where we.
Think that'll take us throughout the year and feel good about where we're at with the with the pricing that we've been able to pass along and what that how that will affect our our content per unit. We do believe that we still have opportunities for market share gains in growth on the organic side, which will give us the ability to offset some of those pricing.
Changes.
Okay, and then and then just one final question if I if I can just on the acquisition the transport acquisition that you've made during the <unk> I think it would be T. I.
I don't remember you can call me without any way to size that business from a from a revenue or.
Any other kind of metric standpoint.
Sure My ex this is Andy it's we've re rebranded it is Patrick Marine transport as you know we've got some some expertise in the transport industry certainly on the RV side and this was a very cohesive opportunity for us to take advantage of it's about a 20 million dollar business today with a lot of opportunity for outside.
Okay awesome. Thank you so much.
Thank you. Our next question is from Daniel Moore with gas Securities. Please proceed with your question.
Good morning, Matt, Jeff and be thank you very much for taking the questions and old color, putting together you know what you described in terms of production levels. How should we think about revenue by segment and overall for Q3 relative to what we just reported that's all thank you too.
So in total you know as we're looking Dan. This is Andy I think is <unk> were looking at the back half of the year and certainly by segment, we think that that shipment levels, you know going across the space are gonna be pretty consistent on the R. V side of the business, where they can <unk> going to be down a little bit in the <unk>.
Can happens we mentioned we were kind of 60 40, 60%, 40% first half the back half and marine so a little bit little bit stronger to climb on the on the on the overall production side and marine that being said like I said the inventories are at a very low level out in the field. So you know we're thinking as we see the deceleration in the in the retail declines I think there's there could be some potential for some.
Uptick in that but overall as we're looking to cross our market's pretty consistent with Q too as we look at just in in general revenues on a on a Q3 basis and then we'll see what happens after the after the third quarter as we see the RV shows and into the fourth quarter.
Very helpful at on the margin aside gross margins holding up extremely well despite the decline in shipments, especially they are beside in terms of your guide unchanged for operating margin.
Are you leaning toward the kind of higher and lower onto the range at this point and how do we think about the cadence. Thank you. Thank you for.
Sure Dan Azande again, I think as we look at at seasonality is from our perspective is really kind of come back into the business and so Q2, and Q3 are our strongest margin opportunities, especially in light of the costs that we've taken out of the business and also in alignment with some of the efficiencies that we've gained from a pricing and margin perspective, you know.
We note our acquisitions have certainly done a great job of bolstering our gross margin profile, we've got a higher opex on a lot of those but a better margin as well that's accretive to Patrick overall, and so yeah and Q2 Q3 are the strongest so we would expect you to to kind of kind of come back in from of seasonality perspective, but really kind as we look at the model overall.
Hattie wise and from a margin perspective, we see that you two and Q3 remain you know kind of those strong periods for us, especially in light of what we've taken out so as it relates to our guidance.
Seven have 8.5% today I've done a great job things I've done a fabulous job of managing our business and so I really don't want to get into higher low end of that but again, we still feel like that's a relevant range for us to be able to be very successful and.
Perfect glass for me and I'll jump out you know if I look back the last few years operating margins peak to just over 10% fiscal 22, given a diversification you know and some of the cost reduction initiatives described on the call today as demand normalizes over the next few years you know what do you think.
So reasonable longer term target another.
Words that they're upside the that that prior peak level given some of the changes in the business. Thanks.
Sure Dan This is Andy I think again, it's a highly leverageable model. We continue in our teams continue to do the right things as it relates to cost stakeouts managing inventory levels, managing our pricing to make sure and working in partnership with our customers to make sure that we're being good stewards and good partners with them and so we certainly think theres upset.
Add to those numbers as we continue to leverage in and volumes can get back to normalize levels.
I appreciate all the call US thanks, good luck in Q3.
Thank you thanks.
Thank you. Our next question is Griffin, Brian with da Davidson. Please proceed with your question.
Yeah. Thanks, So a lot of stuff covered here today. So I'll just do one question here regarding the new while you're 24 is that are hitting the market.
You just kind of talk about the comparable unit pricing, you're seeing Britain and all your 23 is I mean.
When I was pregnant on everyone's mind, given the environment, so any color that would be great.
Sure. This is Andy I think I'll I'll touch on that and we have just a little bit but right now at least from what we're hearing and we can't start I can't speak for for the dealers and the manufacturers, but all of our Touchpoints indicate that pricing is let's equalize, let's see let's say it across model model. So.
Appropriate levels of discounting on the 22 to match up with 20, threes and match and as well match up with 24. So we believe there's equilibrium at this point in the model years based on at least what we're hearing from our platforms.
A boston.
Thank you. Our next question is from <unk> with Bank of America. Please proceed with your question.
Hi, Good morning, Sir Thanks for taking my my my questions here I thought that the comparison to 2019, which was really helpful and kind of show you some of the the stickiness of the the market share. So thanks, thanks for breaking it up.
I wanted to follow up on the pricing question, that's not on the retail side, but just what are you expecting krieger pricing in the second half of the year and then maybe how does that compare to what's happening in terms of labor costs and raw materials.
<unk> I think as we look at pricing just in general as Jeff noted materials have pretty much stabilised across the commodity space and so again, we're continuing to work with customers and making sure that we're we're managing that and making sure that we're giving back pricing.
You know as we get it as well and so we're not expecting a lot.
Of significant pricing erosion going forward, but we certainly are gonna partner with our customers in light of any commodity changes that we see on a TTM basis. We do expect to Jeff noted as well are are are overall contact per unit you know of.
Especially in the R V space to come down on a TTM basis, just because of the pricing that we've given but as he noted as well we do expect some organic contact gains and then as it relates to labor you know and just general cost.
Labor costs of stabilized as well and so that is being managed really effectively today, we're not seeing a lot of labour inflation.
Across the space and so we're not expecting a lot of volatility as it relates to those those to those too.
Okay, great. Thanks, and then.
Obviously, the the marine and housing mix has continued to rise in some of that has to do probably with the with the RV destock, it's going on right now, but how should we think about the mix longer term.
Is there a specific target or or or corporate strategy that you have out there in terms of how you expect that to involve.
Sure. It is Dan again, I think as we look at kind of a longer term. We're certainly encouraged by the diversification that we've been able to to execute upon we certainly see opportunity and the marine space and we certainly see opportunity even in the housing space as well to continue to drive that model and then I would tell you honestly as well as Rv's, we see some opportunity.
The mix, we liked the diversification in the way that it's played out I think this is a <unk>.
Great result from our perspective as it relates to the current mix and we think about the leverage ability the the cost model, especially as R. V comes back you know, we're very excited about the potential. That's there. So we looked to continue to stay diversified and continue to improve on that to make sure we maintain stability of our business model.
Okay, and then the last one for <unk> the.
Gave the the outlook on retail and wholesale buh, bye bye and market, which is.
It's really helpful. It seems like the channel inventories have fallen below where they were in 2019 is your expectation that is are we going to next year, we start to see like a rebuild of those channel inventories or are there reasons to cut her breathe like going forward.
The dealers are just gonna operate with lower than historical levels of club inventory.
Sure I think that's a that's a really good question and that's something that you know everybody's kind of looking to get their arms around I think the dealer certainly have learned to operate with lower levels of inventory, but as well you know we've seen retail on the decline you know across the sectors for for for quite some time now so once things start to.
To violence and rebuild you know it certainly looks like you know as we look at kind of weeks on hand at the inventory level. It would look like there is definite opportunity for a build there when you look at kind of the cost of capital and where where everybody sits today certainly with the interest rate environment. Thank everybody staying disciplined to managing inventory levels and so smart.
Perspective, I think there's upside potential too you know a little bit of inventory build would be we're kind of our heads are at but certainly we've seen a lot of discipline in the space and were encouraged by the fact that the weeks on hand or at the levels that they are out across the space. Today. So if anything I think it's we feel like it's it's one to one and stabilize with some opportunity for some rebuild you know.
Depending on what happens with rates in the overall economic environment.
Pretty clear thank you.
Thanks.
Thank you there are no further questions at this time I'd like to have a sore back over to Andy minutes Friday closing costs.
Thank you.
I want to again wrap up the call today by thanking all of our team members.
Your hard work and dedication has been instrumental to our success, we will continue to support our valued customers as a leading supplier to the lose your lifestyle and housing markets, while growing in our mission to be a reliable partner supporting Oems in addressing retail demand and driving mutual success than ever evolving marketplace.
As we look ahead I remained optimistic about the future our business model has a proven track or go to a success Odm's remained disciplined and many demographic trends point towards sustained longterm growth.
With a strong foundation, a talented team and the right strategies in place we're confident in our ability to navigate short term challenges and deliver value to our shareholders over the long term. We thank everyone who has joined us on the call today.
This concludes today's conference.
Disconnect your lines at this time, thank you for your participation.