Q3 2023 LCI Industries Earnings Call
And welcome to the RCI Industries Q3, 2023 earnings call. My name is Lauren and I'll be coordinating your call today.
There'll be the opportunity for questions at the end of the presentation.
I'd like to ask a question. Please press star fish Boardwalk and your telephone keypad.
Now I'll hand, you over to host that and that's going to begin. Please go ahead.
Good morning, everyone and welcome to the LCI Industries third quarter 2023 conference call I'm joined on the call today by Jason Lippert, President and CEO and Kip, Emma Heizer VP of finance and Treasurer, we will discuss the results for the quarter in just a moment, but first I would like to inform you.
Is that certain statements made in today's conference call regarding LCI industries and its operations, maybe considered forward looking statements under the security 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.
Could 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 of the forward looking statements are made except as required by law.
With that I would like to turn the call over to Jason.
Thanks, Julian and good morning, everyone and welcome to our third quarter 2023 earnings call over the last 20 years. The team has worked very hard to transform liberate from a manufactured housing chassis and roofing supplier to a diversified innovative global supplier of some of the most core and highly engineered RV marine and aftermarket products offered to Oems and their consumers are 2008.
Our business the transition from a 100% manufactured housing almost 90% of RV, we've done leveraged our talented team and created a strategy that would take us into Europe building products transportation aftermarket and marine over the next decade our.
Our successful diversification strategy is what has enabled us to experience results. This year that would not have been possible had we stayed only in our traditional markets.
This successful execution of our diversification strategy that has transformed us into a dynamic fortune 1000 company.
With respect to Q3, we continued to encounter a challenging operating environment that while pressuring the topline exhibited the durability of our diversified businesses.
Aftermarket segment and adjacent industries that OEM revenue outpacing RV OEM exceeding 55% of revenues for the quarter a trend we expect to continue as we extend our capabilities and to growing our markets outside of RV not only did these revenues outpaced the RV OEM business. We saw strong results in these businesses for the quarter when you look at our own.
Raul business in 2019, our topline was approximately $2 4 billion in sales, even with the RV business down almost 50%. This year, we have successfully grown our top line is our current trailing 12 months revenue eclipsed $3 8 billion.
Our aftermarket business has been a particular highlight delivering nearly 500 basis points of margin expansion for the quarter as we captured demand for repair replacement service and upgrade revenue opportunities in the RV automotive and marine aftermarket.
The aftermarket business in general has helped really balanced our portfolio, providing some solid counter cyclical revenues.
We also differentiate ourselves through strategic investments over the years to build high level manufacturing capabilities, enabling us to develop and bring to market solutions and products with complex engineering and manufacturing requirements.
Not a commodity supplier in fact, many of our processes require specialized teams and equipment capable of handling more sophisticated requirements are.
Our global manufacturing footprint that supports these operations and teams along with the product breadth and manufacturing capabilities cannot easily be replicated.
This coupled with our long standing reputation for quality service and deep rooted and decades long relationships with our customers have helped to establish <unk> as the leader in the outdoor recreation space.
Operationally, we remained focused on optimizing our cost structure to support our long term profitability. Our leadership teams continue to implement cost savings initiatives and continuous improvement projects to drive ongoing efficiencies throughout our business to.
Through calendar year 2023, we have already undertaken 17000 continuous improvement projects across our business platforms. We are flexible capacity in place to adjust production quickly.
<unk> constant changes in demand, even with a high level of SKU variability across the RV business, while at the same time, providing support areas of our business that are outside of typical industry cyclicality.
Additionally, we are improving working capital, bringing down inventory by $238 million year to date to bolster cash generation. These effective actions to continue to solidify our financial profile and balance sheet.
<unk> to provide a strong foundation needed to manage through near term challenges, while enabling us to capture growth opportunities as conditions improve.
Lastly, and most importantly, new business commitments for 2024 across our business total approximately $185 million. We believe these are tremendous organic and market share wins for next year.
Moving to RV OEM sales decreased 26% during the third quarter of 2023% compared to 2022 due to decreased wholesale shipments.
Dolby RV market remains pressured dealers are telling us that inventories are right sized and in many cases lower than where they would typically be at these retail volumes. It is also important to note that Oems that remained very disciplined with production rates over the last quarters as retail shipments have outpaced wholesale shipments now for nine straight months.
During the quarter content for total RV decreased 11% from prior year to 51 $192, while content per motor home RV for the quarter decreased 3% from prior year to 3700 $5.
I want to emphasize that while RV unit selling prices to decline, we do not anticipate much of an impact from any deep content trends.
The content declines this quarter can largely be attributed index pricing pass throughs versus elimination of any of our content.
Whereas our content increase in past quarters due in part to index price increases we are now seeing the reverse effect in Q3.
Also worth mentioning is that over half of the $185 million of commitments for new business for 2024, though just spoke of earlier is coming from our RV business.
Most of our RV organic growth is either innovative first to market product content that customers are excited to get their hands on or content that is completely integral to the vehicles like chassis on a furniture, a windows with new features and benefits neither of which can easily be replaced by going to another supplier.
Address our R&D highlights in a bit but as we continue to drive investment in new product development. We believe we will keep growing organic content well into the future as we have historically.
It is important to note that.
The content for total RV in late 2019 was right around $3400 per unit, demonstrating our ability to drive new organic content over the long term to $5200 per vehicle.
There has been some chatter about other players in the space potentially starting to build chassis, including Thor one of our top customers and partners I would like to get out ahead of these false reports in recent weeks I've had the opportunity to connect directly with store leadership team, including by Martin Todd Wolfer, who have confirmed that they have no plans to build global chassis in the foreseeable future taking it a step further.
<unk>.
Reiterated the importance of continuing to strengthen its long standing 25, plus year relationship with Liberty.
We are confident that demand for our chassis and the rest of our wide range of best in class products will keep us positioned as an industry leader, while enabling us to continue to capture new market share and lastly, when it comes to competition, we feel our market shares speak for themselves. We are best in class competitors and are winning because we are best in class value for our customers and at the end of the day our <unk>.
<unk> choose to do a lot of business with us based on that perceived value.
Our aftermarket revenues grew $231 million up 5% versus the prior year as channel inventories stabilized and we added new market share impressively aftermarket revenues remained near record levels on a trailing 12 month basis and operating margin grew to 15% up 470 basis points compared to the third quarter of 2022.
Our aftermarket leadership and team have done a fantastic job of growing this business along with it services products and customer relationships over the past decades, since we launched our aftermarket division.
Most of the <unk> products are front and center when it comes to the types of parts that eventually need repair and replacement of fact, which we believe makes our aftermarket strategy very viable because we have significant content on the OEM vehicles, which ultimately drive the choice of replacement products in the aftermarket.
The resiliency of the repair and replacement opportunities, particularly in the downturn should continue to support the strength of our aftermarket and overall business, helping us capture more share in a $10 billion plus addressable market.
A critical driver of our aftermarket has been our customer service and support teams and call center, giving us a major advantage over other aftermarket suppliers over 300 specialized support team members are in place to directly engage consumers dealers distribution partners and OEM customers across the globe quickly solve technical problems, helping the consumers spend more.
I'm on the road, the water and outdoors rather than in the repair shop.
Additionally in July we held our third annual Lifford getaway event for our peers. This time, an island Park Idaho.
Through events like these we are able to speak with the RV community in person and collect feedback that we leverage to fuel future innovations around products and services.
Other customer events like different Scouts campground project lipid ambassadors and product giveaways continue to benefit our relationships with our peers as we work to foster a well connected community that continues to be a solid champion in so many ways for our brand.
Turning to North American adjacent market third quarter revenues were down 14% compared to prior year, primarily due to the softness in the marine retail environment.
Although marine market has slowed we remain focused on expanding our marine product catalog with products like a shallow water anchor systems thrusters, windshields seating and electric remedies for all classes the boats, which the electric Bimini is continue to see rapid adoption and is on its way to becoming a marine industry standard.
We are also seeing strength in our other adjacent markets like transit and school bus rail utility trailer and building products, we've been able to expand into these adjacent areas by leveraging the same core manufacturing competencies, we've developed over the years in our core businesses.
We have seen great progress in our residential windows as well as our axles and suspension for the utility trailer markets. This quarter. We are also launching our first transit bus seating products for the largest transit bus manufacturer in North America. This product has a large potential addressable market over $100 million.
Within our existing bus customers all in all our adjacent market category have never had more millennium than they do today.
Moving outside of North America to our European business, we had another quarter of growth is our international business grew 7% supply chain headwinds have decreased abroad, driving increased shipments to meet pent up demand.
Our international business continues to be an innovation incubator as we design and market sophisticated products such as top top windows <unk> doors and skylights. These types of products have the potential to strengthen our competitive differentiation in the U S with easy access to a proven European products.
<unk> and our production facilities here.
When can we see a high level of adoption rate of European products by U S customers, we work to transition the manufacturing of those products stay side as we have with our Butler pop Thompson acrylic windows, we look forward to driving further growth internationally as this business continues to contribute to our overall performance and diversification.
<unk> is the key driver of our content growth engine differentiating our business by bringing new and exciting products to our customers in each of our core markets with roughly 150 team members in our business dedicated to innovation and product development, we have developed our innovative expertise and resources into a huge competitive advantage for.
<unk> peers and competitors have come close to the investments we have made into building out these R&D capabilities.
Presently, we are making significant traction with new and existing products, such as our hot water heaters, and new furnace, which has sparked high demand for <unk> continues to add to our portfolio.
So our purion refrigerators and air conditioners have seen double digit market share gains in the last 12 months. Purion is also debuted industry <unk> 18, K air Conditioner, that's completely grab the attention of our Oems as a result of the tire capacity efficiency and reduced noise levels.
Other new product. We've recently brought to market is double double paned acrylic doors for refrigerated cabinets, which are being adopted by supermarkets across Europe over the last months as I mentioned earlier, we consider the best new adjacent market product introduction in years to be our transit bus seats set to ship this year to our largest transit bus customer.
Our other innovations continue to perform well at the end or mainstream use like our biannual hydraulic leveling system won't control auto setup app independent suspension axles acrylic windows built in shade windows, perhaps one of our most pronounced in transformational product launches for the RV and utility industries as our antilock braking systems or ABS for short.
<unk> has not been readily available to the U S for RV manufacturers and to our most recent cost effective design.
We are making a compelling argument to ABS as the safest option out there for brake technology on off total armies.
Since launching we have 14 RV brands committed to are using ABS.
<unk> is engineered and built in Detroit, Michigan by our talented manufacturing and engineering teams.
We also successfully launched at the Lira offered series solar Onyx through which we created a solar array integrated with our <unk> fabric, capturing the attention of the growing number of off grid <unk>.
As we keep building out our portfolio, we're finding that each of these innovative products help us better meet a diverse range of customer needs further increasing liquids presence in the outdoor lifestyle, while continuing to grow our content per unit.
As I've said, many times a culture continuous development of our leaders and external contributions towards surrounding communities are part of the foundation that keeps us successful over the long term, we believe our strong culture starts with experienced and carrying leaders at the top we are willing to be develop themselves and worked to create opportunities for other team members. So that they can become leaders in their own right.
Our in House leadership development programs that coaches give our team members resources and opportunity to grow personally and professionally.
Through our efforts to cogent inspire our team members to reach New Heights, we have achieved an annualized voluntary turnover rate only 25%, which considering the environment. We are in puts us in the industry best retention category.
Throughout this 10 year journey, we have seen that in an effective culture leads to higher retention and higher retention proved the key metrics of our business, which are quality safety efficiency and innovation.
Our team comes to work every day ready to tackle the challenges with a heavy dose of discipline and passion really amplifying our belief that <unk> can continue to leverage its strong highly functioning culture to be an overwhelming competitive advantage.
Outside of our internal culture. We have also been greatly supporting the communities that surround us in a very meaningful and intentional way in the first nine months of 2023 Liberty team members performed over 100000 hours of community service and hundreds of charitable organizations across the globe over the course of 2023 approximately 75% of.
12000 team members participated in at least one serving event.
This quarter. In addition to the community service events, we do that take place weekly.
Collaborated with the Detroit based nonprofit life remodel at.
As part of this collaboration 40 of our current base leaders took a bus to Detroit to join us drilling heightened innovation in electronics team to repair an updated facilities like Fremont.
We are pleased to see our company make an impact in the communities, we live and work and look forward to continuing companywide impact as we hopefully inspire other companies do the same along the way.
Regarding capital allocation to maintain a strong balance sheet, we are keeping our focus on generating significant cash to pay down debt and that's challenging operating conditions, while also investing in innovation and operational enhancements such as our automation projects to drive enhanced efficiency quality and profitability throughout the business.
We're still receptive to strategic M&A and have several opportunities in the pipeline, but given the current environment. We are staying focused on keeping a strong balance sheet and making growth investments of course, if a deal is strategic enough and the timing is right. We will not hesitate to acquire as we did this year with marine trailer performance Investor Pro.
As we continue to diligently monitor our expenses, we are significantly pared back our capex, which we expect to equal approximately $60 million. This year, which is lower than last year by approximately $70 million and targeted on high return investments, including automation enhancements to our business.
All in all we expect that we will generate in excess of $440 million cash.
Operating activities in the full calendar year of 2020, we consider that an astounding when considering the challenging industry environment, we have seen this year.
In closing I'd like to extend a sincere. Thank you to all of our team members around the business for their hard work in this tough operating environment I am encouraged by the growth I see from our team both personally and professionally.
We continue to work towards long term growth, while delivering value for all of our stakeholders without our fantastic team members and leaders that contribute to the business and the way that they do we certainly wouldnt have the strong business we have today.
I will now turn the willing that garner CFO to give more detail on our financial results.
Thank you Jason.
Our consolidated net sales for the third quarter decreased 15% to $1 billion compared to the prior year, primarily impacted by a reduction in north American R&D production and decreased selling prices, which are indexed to select commodities, partially offset by acquisition.
For the month of October sales were down 1% to $344 million versus October 2022.
As Jason noted previously our operational improvement and diversification strategy, partially mitigated the impact from lower wholesale shipments in the quarter, while sales in North American RV Oems declined 27% sales an area adjacent markets aftermarket and international businesses only declined 4%.
These improvements to our overall strategy not only significantly reduce the impact from year over year declines in the RV business.
Have well positioned in all facets for sustainable long term growth.
The decline in the third quarter 2023 sales to North American RV OEM was again driven by a decrease in wholesale shipments, which was influenced by current dealer inventory level inflation and rising interest rates that impacted retail consumers.
Content <unk> RV unit decreased 11% to $5192, while content per motorized unit decreased 3% to $3705 compared to the prior year period.
Jason indicated in his remarks, the content declines this quarter are largely attributed to index pricing pass throughs versus elimination of lipid content.
We have continued to increase our organic content and market share through our focus on innovation in Q3 2023. This contributed approximately 7% year over year growth in content per unit.
Sales to adjacent industries declined 11% versus the prior year sales were positively impacted by acquisitions and pricing adjustments to our transportation products and were offset by lower sales in North America OEM.
Marine content propeller decreased 23% to $1359, primarily due to the price decrease associated with year over year declining input costs and changes in product mix.
Third quarter 2023 sales in the aftermarket increased 5% compared to the prior year period, driven by increased repairs and replacement helping to illustrate the counter cyclical nature of the business.
International sales increased 7% year over year, including an estimated 2% positive impact of exchange rates for the quarter as European Oems continue to receive the materials necessary to meet pent up demand.
Gross margins were 22% compared to 22, 4% in the prior year period, primarily due to the impact of fixed production costs and lower sales volume and the timing of sales price reductions contractually tied to commodity prices.
Operating margins decreased compared to the prior year period, but remained relatively flat sequentially in line with our previously stated expectations.
This decrease was primarily driven by lower fixed cost absorption on lower sales and decreased prices index to select commodities.
However, we again saw a year over year and sequential increase in aftermarket marriages, driven by decreased material commodity cost and effect of fixed cost leverage on higher sales base.
GAAP net income in the third quarter of 2023 was $25 million or $1 <unk> per diluted share.
<unk> to $61 4 million or $2 43, a diluted share in Q3 of 2020 to.
EBITDA decreased 34% to $78 $9 million with third quarter compared to the prior year period.
Noncash depreciation and amortization was $98 8 million for the nine months ended September 32023, one non cash stock based compensation expense was $14 million for the same period.
We anticipate depreciation and amortization in the range of $130 million to $135 million during the full year 2023.
For the nine months ended September 32023 cash generated from operating activities was $389 million.
50 million used for capital expenditures $26 million used for business acquisitions, and 80 million returned to the shareholders in the form of dividends.
Net cash flows from operations were $116 million in the quarter and as I previously stated $389 million year to date.
Operating cash flows were negatively impacted in the quarter by lower sales and partially offset by deposit changes in working capital.
Presents in working capital were led by the initiatives, we put in place to decrease inventory, which has resulted in a decrease of $238 million year to date.
We continue to focus on reducing inventory.
And as dealer inventories continue to normalize we expect further improvements to working capital and positive impact to cash flow. We expect net cash flow from operations to be positive in the fourth quarter.
We have made net repayments on our long term debt of $211 million year to date through September 30, including a $30 million repayment on our term loan principal in the third quarter.
At the end of the third quarter, we had an outstanding net debt position of $878 million three one times pro forma EBITDA. Adjusted NIM include LTM EBITDA of acquired businesses and the impact of other noncash items.
As we look forward, we are focused on continuing to maintain a strong balance sheet and targeting a long term leverage of one five times net debt to EBITDA.
In the near term, we are focusing to integrate recently completed acquisition, which we expect to positively impact our operating cash flows in the coming quarter.
For the full year 2023 capital expenditures are anticipated in the range of $55 million to $60 million.
As they look to the fourth quarter. This is historically, a seasonally softer quarter with fewer production days due to the holidays we.
We are also expecting additional downtime around the holidays this year.
With that we expect Q4 2023, RV shipments will be between 55 and 65000 units with the full year estimated range of 295 to 305000 units.
Overall, we are expecting a 10% sequential decline in total revenue in Q4 versus Q3 with aftermarket seasonally dropping about 15% sequentially. We are projecting positive net income in Q4, along with positive net cash flow from operation.
Looking ahead to full year 2024, we expect RV wholesale shipments to be in the range of 325 to 350000 unit and the marine industry to continue to experience softness.
The key takeaway for 2024 is that we will continue to grow the aftermarket and adjacent businesses, while the RV industry slowly recovers.
We believe <unk> is well equipped with the right strategy in place.
Maintained long term profitability and value for our shareholders.
We remain confident in our ability to achieve growth.
Investments in innovation, our business and our team continued to yield results.
That is the end of our prepared remarks, operator, we're ready to take questions. Thank you.
Thank you.
If you would like to ask a question. Please press star one.
Back to your question. Please stop me.
Piecing some short short line company lately.
As a reminder, stock based upon what.
To ask a question.
Our first question comes from Kathryn Thompson from Thompson Research Group Catherine. Please go ahead.
Hi, Thank you for taking my questions today.
Good morning, when we look forward and I appreciate the color that you look into Q4 results.
And a trend that we're seeing is overall less bad.
While 10% sequentially down.
It's pretty close to where we had expected.
I think the bigger picture that we would love to get a little bit more color in terms of what are you seeing from Elkhart Open house.
And what does this mean for dissipating trends of the big declines that we've seen over the past 10 years.
Yes, I think that Kathryn.
You look at where we're where we're kind of looking at.
2024 is 325 to 350000 unit run rate I think the.
The hidden gem in there for us is that we're.
Probably going to end the year actually building only about 285000 units.
So even if we hit the low end of that scale next year I mean, we're talking about adding 40000 units and you can do the math on the content plus or.
$185 million in market share on organic growth. So just on the RV side. There is a there's a good opportunity for US we think it will creep back slowly if you look at the last eight years the average wholesale unit shipments around 430000 units.
Just got a couple of years of Covid baked in there so it might be a little high but.
I think we're slowly going to creep over the next couple of years back up to that 400000 market is not going to happen all at once.
But that's kind of a color we have on 2020 before and I think the most important thing for everybody to realize is that we did not we did not if we end up at 300 or 310000 wholesale units. This year that is not what we as a supplier bill because there was a lot of flow through units that were sitting on the Oems.
Properties in November and December that got carried over and sold into the first quarter second quarter of of this year.
No.
It would be a benefit for us even if wholesale stays the same next year, because we will just build more units.
Okay and also you may have covered this in prepared commentary I apologize I missed it but could you clarify on the <unk>.
Year over year decline in content per.
Unit dose for trailer in RFP, how much of that is just <unk>.
Commodity pricing.
First is just volumes and any other factors.
And nearly 1000 it was index pricing that came down.
Catherine It's currently in from a from an organic perspective, what we're seeing on the <unk>, it's roughly about 7% organic year over year growth and that's pretty consistent with what we have been seen in prior quarters. So the content story is still there we're growing content increase.
Increasing market share it really is that commodity pass through that also as a reminder, does have a lag.
Typically a couple of quarters of a lag in there by the time the pricing does.
Hello up or down with the commodities.
Okay, great. Thanks, so much.
Thank you.
Our next question comes from Scott Searle Roth and Scott. Please go ahead.
Good morning, and thanks for taking my questions.
Good morning.
When you guys talk about.
Content when you factor in the indexing.
I guess the implied pricing on 24 units.
The OEM and dealer level and.
These $85 million.
<unk>.
For the half of the $185 million worth of content gains where do you see a total contract actually coming in within the next few quarters. Once indexing is finally worked its way through.
Yes.
Yes, that's good I think we're going to still see for the next couple of quarters, the indexing still working through.
Fourth quarter will still be pretty heavy it will start tapering off.
As we get into Q1.
Q2, Q3 next year, we will start to see some sequential.
Mitigation I guess you could say.
So it's going to take a few quarters and I'd say, probably not going to going to stabilize as you start having organic growth offsetting.
Offsetting the index pricing.
And then just to add to that we're going to we're going to see more organic content going into vehicles. I think the big question. Mark is just are they going to start they're going to start building smaller vehicles or.
Smaller units over the course of the next couple of quarters, while they drain some of the <unk>.
Higher end.
Fifth wheel in motor home inventory, all that stuff's, moving a little bit slower. So obviously, if we build more.
Parts and content for smaller units than the overall content goes down a little bit but.
Other than that we anticipate continuing to take the innovation that we have built and continue to plug it into all the new builds in the coming quarters.
Got it and what are you hearing from the Oems regarding what 24 pricing will look like obviously a lot of reports of high.
Single digits low double digit declines.
What are you hearing or is there a little bit too soon to.
To draw a conclusion.
I think thats consistent with what we've heard I think the big challenge is to make sure the dealer inventories being lower that but they start getting some product in their lives I mean, what we're hearing is that there is a lot of people showing up on lots of the dealers don't have wood.
What they want and then.
And orders are going to be backed out with the seasonality coming in the downtime and some of the backlog thats already plugged into the system.
The Oems have some decent backlogs already.
<unk>.
But they are on small run rates.
We've got we've got this downtime coming up so I think that what you've heard single digits low double digit reduction in AFP is probably the.
The same information and intelligence, we have heard thus far and is probably.
Probably likely to happen.
Okay.
Got it last question on October would be essentially flat sales.
I guess when you strip out what marine is doing in RV is doing the aftermarket, but within the pure adjacency Nan.
We're in it seems like there is some pretty big movements there for deposit side does the transit bus.
The business is that in there or is there something else that's really starting to pop up early.
In the quarter that we should be looking at.
The transit bus.
New product, we spoke of the seats that's happening in this quarter. So it wouldn't really be baked into october's numbers.
So there's a lot of puts and takes on the adjacent side with respect to all the different businesses that we operate there and we usually don't get too granular but.
But what we can say as you know.
The business on the aftermarket and adjacent side of our businesses.
It is going along at a pretty good clip and we've seen a lot of great momentum and what's probably most helpful to our business is that the performance is as high as it's good as it's ever been there so.
Our focus is on continuing that momentum into the future quarters, because it's really delivering some strong performance back to the total business bottom line.
Got it that's all I have for now thank you.
Thanks Scott.
Thank you.
Next question comes from Mike Swartz.
<unk> Securities Mike. Please go ahead.
Hey, Good morning, guys. Just a quick question on the third quarter I think.
Back when we last talked in August you had good.
Kind of implied that third quarter earnings will be similar to the second quarter, obviously that came in a little lower so I guess what were some of the things that I guess.
Against your outlook that you provided in early August.
Yeah, Hi, good morning, Mike, It's Lillian I'd say, probably the biggest delta from the outlook that we had in August as the sales came in.
And really that just drops through to the bottom line and this is the main driver of what you saw from our.
The projections and the soft guidance that we gave and I think overall the business did well.
Is that the overall performance maintaining the margin.
Aftermarket, especially strong it just was a matter that the volumes came in softer than expectations.
And we've been we've been working.
Quarter after quarter after reducing some of the higher material costs and freight clear as we've got in our in our inventories.
Obviously, the slower the volume moves along the longer it takes to get rid of rid of that but we're slowly chipping Atlanta.
Yeah.
Okay. Thank you that's helpful. And then just on the quarter as well SG&A costs were kind of in line year over year or actually in line with the last two years, yet revenue was I think about $200 million lower is that a factor of just business mix are there investments that are going through that I'm, just trying to understand why I guess it wasn't a little.
One more.
Leverage or deleverage on that line.
Yeah, No a fair question and one of the things that does run through our SG&A here are the transportation costs, the outbound transportation for the aftermarket business.
So while we have been making I'd say really good progress in terms of reducing kind of the G&A elements of the SG&A.
Various reductions and cost initiatives people initiatives et cetera.
As the aftermarket business has increased year over year and continues to grow this year, we encourage higher transportation costs and then that's it.
Really a lot of what youre seeing coming through that line.
Okay perfect edge final one for me I think you had mentioned for the fourth quarter, you expect net income to be positive.
So there is a high range.
<unk> wide range of outcomes.
But.
The expectation for the full year still to do the roughly mid single digit.
EBIT margin or is that now lower.
So what I would say, obviously with the third quarter coming in a little bit softer than we saw at the lower margins.
And we're not seeing much more to change in the fourth quarter right now to rebound there. So I'd say, we're looking at the lower end on the margin if we look at the full year.
When you think of the different business segments, and we've obviously seen some very strong performance on the aftermarket side with almost 15% margins there when we look at the OEM.
Segment.
It's in the low single digits, and frankly, we need some volume there in order to be able to convert the more attractive margins and part of it's been a choppiness to in which we're receiving orders on the core part of our business on the RV side. So it's been a really inefficient way to do business. The last couple of quarters, and we anticipate that it will be.
It's a pretty similar the same in Q4. So if you if you take a low single digit positive number for Q4 on operating margins and look at the last three quarters, you can kind of see what we're where we're at now.
But we're from.
From a G&A standpoint, and cost standpoint, we're set up really good for for next year, assuming that the Oems start to start to build just a little bit more and get more consistent on their production schedules and what they give us week to week.
Great. Thank you.
Thank you.
Our next question comes from Frank <unk> from Wolfe Research. Please go ahead.
Hey, guys. Good morning, Jason just to follow up on that sort of lack of visibility from Oems I mean are you seeing an uptick in the <unk>.
<unk> environment from suppliers, just bidding for some of these contracts given that.
Lack of visibility today.
Today has it gotten better worse sort of unchanged versus where it was last quarter and does it vary across.
Some of the core components like chassis versus some of the ancillary products.
Okay.
Yes, that's a great question I think that.
I'd say for a lot of suppliers that are in the commodities segments of the business.
On the supply side, I think that that what youre statements, probably pretty too there probably is some some elevated competitiveness but.
And a lot of our products when you look at chassis and windows or on earnings.
You look at leveling systems, and slide out mechanisms and furniture and all the complex.
Systems that we sell solutions, we sell the Oems. These things are these things are year long commitments. They are generally the decisions are made in May June July.
They last for a full year both of those commitments so on.
On commodities they'll change kind of midstream because it really doesn't impact the buyer of the consumer but.
On components like ours, where we're making bigger commitments on raw materials and things like that but they're also more integral.
<unk> solutions and components for the Rvs those tend to be at least a year long in some cases more than I would tell you that almost all the components we supply in the business are put into that.
Complex sophisticated solution category, but we're getting longer commitments on so for us it's not really.
Yes, there's always talk of competitiveness and we always have to be ready for the next season of bidding, which we will start <unk>.
Same time next year, but we feel really comfortable where we're at and we've you look historically and we've really done well growing organically, adding new innovation and that innovation is part of what.
Keeps our bundles together, because we're always coming up with new product that the Oems are interested in for the next season.
It makes sense and then just to come back to the wholesale expectations for 2024 was that 325 to $3 50 number in actual shipment number or was that a run rate comment and then what are you sort of have baked in there for retail assumption are we getting back to well under one retail wholesale.
Next year, yes, no good question.
325 to $3 50 is what we think actual is going to be next year.
It could come in anywhere in that range I think anything over $3 50 is a little bit ambitious but on the retail side, we feel that.
At least for the next couple of quarters, it's probably not going to be a one to one replacement we feel that <unk> been talking to a lot of the I mean I'm talking to dealers every week that people were talking to dealers and Oems every week and it just doesn't feel like they're ready to replace one for one yet which is good and bad.
It's going to put the dealers on the spot real soon where they need to they need to reload and order some inventory for the spring selling season, because these customers or they are coming in today and don't have what they need and the lots when they start coming in in droves.
It comes closer to spring and summer selling season, it was going to new products. So I think that.
You could probably count on.
We're counting on retail being.
Tick up from.
The 325 to $3 50.
We don't really we don't really have a firm number there. We just don't think it's going to be one for one until maybe.
Full time next year when dealer inventories are in a much tighter spot and what they are today.
So.
That's perfect. Thank you.
Okay.
Yeah.
Thank you Amit <unk> question comes from Daniel Moore from CJS Securities. Daniel Please go ahead.
Thank you good morning, Jason Good morning Lillian.
Just given kind of.
I guess, one of the longer term and one shorter term given the right sizing measures and automated investments you've made how do we think about incremental operating margins.
RV Oems specifically as shipments when they do start to recover or be it summer fall spring 'twenty five whenever it is.
But.
How should we kind of think about incrementals over.
Over the next couple of years any meaningful change versus kind of the historic algo.
Yeah, Hey, good morning, Dan I'd say, probably still pretty consistent with historical kind of in the mid twenties.
We see on those incremental.
We're still obviously looking to do the automation is great.
And take take right sizing actions.
But that really is making sure that we're staying paced with the industry and the capacity needs.
To support our customers. So youll still continue to see that conversion in the mid 20 <unk>.
Cost structure standpoint coming into next year, we've obviously been.
Working cost structure down across the business over this entire year.
We're continuing to do that through the next couple of quarters of softness, but I think we will be set in a much better cost structure position next year as business starts out and then when you look at automation specifically, we've added a lot of automation. We just finished with a $70 million window project that was the final implementation happened in September.
So obviously during a time like this when you put that kind of fixed cost structure in place with low volume, it's a little bit of a drag but when business starts to pick up and we need labor, that's where are those investments really kick in in <unk>.
We're in a cyclical business. So we're in a down part of the cycle right now and it's it's always a temporary.
Temporary blip. So we will have that fixed cost drag on some of our automation investments were really short period of time, but then it really picks up and helps add down the road. After every.
Every bus Theres, a theres a boom in this business we are preparing for the boom right now.
Helpful.
And then just trying to drill in a little bit more on the comments around Q4 and I appreciate the.
The.
The commentary on the visibility from a gross margin perspective, obviously with a little bit lower volume a little bit lower absorption.
We assume we take a bit lower any comments around what either gross or operating margin range might look like for Q4. Thank you again for the color.
Yes, so what I would say as we look to Q4 pretty consistent there.
Dan in terms of the margins might be a little bit lower again to the point that you raised just you have lower volumes because of the seasonality you have a little bit less with the fixed cost absorption so that won't be a drag on the margin.
But really nothing extraordinary I'd say in the fourth quarter aside from the.
The impact from the reduced volumes and the lower absorption.
Understood. Thank you.
Thank you.
Our next question comes from Bret Jordan from Jefferies. Please go ahead.
Hey, good morning, guys.
North American content subject.
I think you said you don't expect much impact from D content, it's more just the index pricing.
And our house in Elkhart sort of seemed like everybody. The theme was lower price point units and I saw a lot of manual leveling systems versus powered so I guess as they shift what they're making what is your offset what are you, adding thats, that's replacing what might be a manual Jack instead of an electric Jack to keep that content number.
<unk>.
Stable outside of the index pricing.
How long you got I could talk for hours about this is this is my favorite subject.
Well.
As I mentioned earlier in one of the previous questions for sure. There is theres a lot of high end <unk>.
Toy hauler and motor home inventory out there that'll just it's going to it's going to be a drag on the next quarter or two so there will be I mean, there is today a focus on some of the more entry level units with lower price points and things like that to hit the consumer sweet spot. So I would say when it comes to what are we doing to replace I would say that electric.
Leveling systems to your point.
We're putting more of those on units than we ever have if you look at ABS brakes, like I mentioned in our prepared remarks.
That's just kind of hit the scene in the last 12 months.
<unk> and dealers and Oems are all running to start putting those on units. So if you look at just the ABS system that goes on.
A small trailer because these things these ABS systems will hit.
Every unit eventually and as appropriate for any price point, but it's another.
Three or $400 of content per unit just on.
Just on the small trailers.
You look at some of our <unk>.
Jack systems are integrated blind systems, I mean, we're adding content to just about every core product that we have.
But I think with some of our highest suspensions are independent suspensions.
Customers are looking at those things were.
We're putting feature in content on <unk>. So.
So as I've always said on the call I mean, I think that the.
To create value for these brands that all seem to look alike in <unk> in the marketplace.
Hard to tell our visa part sometime when youre looking at two different brands of trailers, where they differentiate us a lot of the things that we can.
Upgrade on features and benefits on each of our components, whether it's leveling system or an axle or a window or a piece of furniture.
The chassis theres not too much to differentiate and add content on.
But when you look at literally everything else.
Cell.
Upgrade opportunities. So that's what our teams are working on and really what a big chunk of that $185 million of that.
Added content and market share growth is for next year.
Okay, and then I think you had mentioned I think specifically for saying they are not getting into chassis as anybody else pushing in that category I mean it seems.
It seems like a lot of noise around the chassis, but.
That just is your share stable there.
Yes, I think it's just a lot of false reporting or just miss reporting. So there is no noise or chatter there were launched.
Innovation tenant where they had a chassis there I think that's where a lot of the noise came from all they did was trying to show for electric vehicles. When it comes to the tooling something lighter that they've got some ideas around how to make a lighter chassis, which is obviously a big piece of the way.
But.
I think it got misunderstood from that point forward, but yes, and the chassis.
It's hundreds of millions of investment it's not a small it's not a small chunk of change so to get into it it's not just doing it right and.
Although the complexities that come with manufacturing and making a profit on it but just all the.
Equipment and facility and people resources that go in place to make it work so.
Open interest.
And then real quick final question housekeeping.
Housekeeping question I guess on the Covenant waivers you got earlier in the year, if the fourth quarter is going to be slightly profitable and then you I think you've talked about the next couple of quarters shipments probably being below retail are you. Good on current covenants going into 'twenty four or is that something you have to revisit.
Yes, we're comfortable with our covenant, obviously, that's something that we keep track of that very closely and cyclical times like this but we're comfortable with where we are with the covenants.
Okay, great. Thank you.
Thank you welcome.
Thank you.
Our final question comes from Brandon <unk>.
D. A davidson. Please go ahead.
Good morning, Thank you for taking my question.
Just first of all we picked up from dealers noted growth on some of the chassis.
Been sitting on what are our views that have been sitting on lots typically that would be covered under warranty for 12 months to us is there any warranty implications down the road, we should be mindful of.
Not that I'm aware of no.
Rossy rustling chassis with the powder coat isn't completely abnormal.
We upgraded our paint systems from our West coast system to a powder system.
Uh huh.
<unk> early two thousands so.
<unk> improved our our performance on warranty for paint specifically on chassis, but.
Yes, I wouldn't I wouldn't pay much attention to it we take care of those as they come through.
Okay, Great and just finally camping world It indicated on their call or actually called for maybe the diversification of sourcing for chassis furniture, and maybe some other items as well within the content of the RV.
Where do you see any risk to your market share and players like norco, Rev and gaining share with forest River and aggressively investing in capacity in their workforce.
Do you feel like anything could change in the chassis landscape over the next year and would you need to lower pricing potentially in order to maintain share.
Yes, I think our just to be clear our chassis or chassis shares remain neutral over the last 12 months, So I don't know where that where that's coming from.
<unk>.
With respect to camping world's comments I didn't read that and hear that but I would say Brandon.
That's something that's been in the aerospace for years and years and years I mean, there is always a clamoring for more competitive opportunities here, there's a lot of people to get in the business and get out of it.
And it and stay in a small way and that happens year in and year out whether it might be a.
Customer vertical.
But we're very very comfortable competing in all these spaces I think our competitive advantages are like I said, our people are facilities or some of our automation and really are 25 years of building a lot of these products that really gives us a competitive advantage in step above.
What other people that are new coming into I'm trying to trying to figure it out so we've had to compete on our own.
On our own two feet for for quite a long time and a lot of different areas and it's on us everyday to come bring the best value.
It would be the most competitive.
Whether it's a bundle of products or just on a singular product. We've got a we've got to come in and play that game every day and Thats part of I think what makes US who we are.
Great. Thank you.
Thank you.
That is the end of the Q&A session. So I will now hand back over to Jason to purge the closing remark.
Just wanted to thank everybody for tuning in today.
Look forward to talking next quarter.
So everybody for joining soon bye bye.
Yeah.
This concludes today's call. Thank you for joining you may now disconnect your lines.
Thanks to everybody for joining.