Q3 2024 LCI Industries Earnings Call

© transcript Emily Beynon

Adam: Good morning all, good afternoon all, and welcome to the LCI third quarter earnings call. My name is Adam and I'll be your operator for today. If you'd like to ask a question during the Q&A portion of today's call, you may do so by pressing star followed by 1 on your telephone keypad. I will now hand the floor to Lillian Etzkorn to begin. Lillian, please go ahead when you are ready.

Lillian Etzkorn: Good morning, everyone, and welcome to the LCI Industries 3rd Quarter 2024 Conference Call.

Lillian Etzkorn: I am joined on the call today with Jason Lippert, President and CEO, along with Kit Emenheiser, VP of Finance and Treasurer. We will discuss the results for the quarter in just a moment.

Lillian Etzkorn: But first, I would like to inform you that certain statements made in today's conference call regarding LCI Industries and its operations may be considered forward-looking statements under the security laws and involve a number of risks and uncertainties.

many of which are beyond the company's control.

Lillian Etzkorn: which would cause actual results and events to differ materially from those described in the forward-looking statement. These factors are discussed in our earnings release and in our Form 10-K and in other filings with the SEC.

Lillian Etzkorn: The company disclaims any obligation or undertaking to update forward-looking statements.

Lillian Etzkorn: to reflect circumstances or events that occur after the date of the forward-looking statements are made, except as required by law.

Lillian Etzkorn: With that, I would like to turn the call over to Jason. Good morning, everyone, and thank you and welcome to our third quarter 2024 earnings call. We continue to execute well during the third quarter, improving margin and increasing share as we navigate some continued headwinds in the RV and marine sectors.

Lillian Etzkorn: Over the past six decades, Lippert has been established as a leading global supplier of highly engineered components for the outdoor recreation, transportation, and building products industries.

Lillian Etzkorn: We feel that our diversified product portfolio, combined with the results of our continued focus on innovation, customer satisfaction, and strategic acquisitions continue to help us win with our OEM and aftermarket customers.

Lillian Etzkorn: With these advantages, particularly our innovative, high-quality content, we've been able to gain our VOEM market share year-to-date in our top five product categories, appliances, awnings, chassis, furniture, and windows.

Lillian Etzkorn: These products made up roughly 71% of our total RV OEM business so far in 2024.

Lillian Etzkorn: Despite continued industry softness in RV and marine, net sales declined only 5% during the quarter to $915 million. The quarter also benefited from increased automotive aftermarket sales, underscoring the success of our growth strategy as we track organically toward $5 billion in revenue for 2027.

Lillian Etzkorn: We also delivered meaningful profit growth this quarter, operating margin increased 100 basis points, and operating income dollars grew 18%, driven primarily by operational improvement and cost management initiatives.

Lillian Etzkorn: Supply chain improvements help lower material costs, while product quality and technical training initiatives reduce warranty costs $10 million during the quarter. Furthermore, we continue to consolidate facilities and reduce our overall cost structure and footprint while maintaining scalable capacity.

Lillian Etzkorn: We believe there is further opportunity to execute on these types of cost savings initiatives and business unit consolidations to support enhanced profitability in the coming quarters. Lillian will talk about this in more detail shortly.

Lillian Etzkorn: I will now move on to our results by business. Our VOEM net sales were $419 million, down roughly 2%, versus prior year as the impact of lower motorhome shipments and mixed shifts towards smaller tollable units offset the market share gains we delivered across our top product categories.

Lillian Etzkorn: Based on industry reports, RV production is now closely aligned with wholesale shipments and dealers are reporting low inventory levels, which should position us well when the industry begins its rebound.

Lillian Etzkorn: Content for towable RV was $5,131, down slightly versus prior year, while content for motorhome RV was $3,739, up slightly versus prior year.

Lillian Etzkorn: For totals, organic content was up 1%, driven primarily by gains in our top 5 product RV OEM categories. This growth was more than offset by the mixed shift to single axle trailers, which were up 38% over the same period in 2023.

Lillian Etzkorn: Based on feedback from certain dealers, there should be a return to higher content trailers in early 2025. Furthermore, as new LCI components are added to 2025 model builds, we should see an acceleration in organic content growth, which we believe should begin in the fourth quarter.

Lillian Etzkorn: We supply the top RV brands with what we believe to be premium innovative content. These new product introductions should remain a key driver behind content expansion and help accelerate long-term content growth as retail demand and industry production recover.

Lillian Etzkorn: We have already seen a strong response from customers to the products we showcased at the RB Open House in September.

Lillian Etzkorn: These innovative products include our Touring Coil Suspension, or TCS, our Anti-Lock Brakes, larger windows, new glass doors, and our new ChillCube air conditioners, all of which are resulting in new business wins for 2025.

Lillian Etzkorn: Our new Touring Coil Suspension, or TCS, the first towable suspension of its kind cuts road vibration on towable units by about 50%, which should extend the life of the RV and drive share gains by lowering maintenance costs and increasing customer satisfaction.

Lillian Etzkorn: As consumers add more sophisticated content like this to their vehicles, TCS should fuel even greater demand.

Lillian Etzkorn: We are projecting positive net income in Q4, along with continued positive net cash flow from operations for the full year of 2024 capital expenditures are anticipated to be in the range of $35 million to $45 million.

Lillian Etzkorn: Looking ahead, we aim to continue to utilize our balance sheet to pursue strategic opportunities to help us capture profitable growth and deliver shareholder value, while maintaining our long term leverage target of one five times net debt to EBITDA, we continued to strengthen our financial profile by making consistent operational improvements to our business.

Lillian Etzkorn: While capturing demand for innovative products, which is resulting in market share expansion across the business, we expect to see industry recovery across the markets. We serve over the next several years. In addition to organic growth fueled by our market share expansion.

Lillian Etzkorn: Look forward to continuing this progress driving sustained profitable growth as we advance towards our $5 billion revenue target in 2027.

Speaker Change: jumped up over 20 here in the last quarter. So we feel it's going to go back down. I don't know if it goes back down to 15 to 17, but.

Lillian Etzkorn: should get a little bit better than what it is today. But as far as the wholesale outlook, we're looking at $335 to $355, somewhere in that range. We'll tighten that up next quarter. But there'll be a single-digit increase off of...

or high single-digit increase off of this year.

Speaker Change: And, Fred, to your question in terms of the commodity pricing pass-throughs, we've been seeing that mitigate as we've gone through 2024 calendar year.

Lillian Etzkorn: We're still putting together our plans clearly for next year as we're in the budget season right now, but I would not expect pricing pass-throughs to be anything material as we're looking into next year, as we really have mitigated that at this stage. Definitely more stabilized.

Speaker Change: Makes sense and then I'm wondering just post-election if you could remind us the the import exposure that you guys have to China specifically and maybe how we should think about that potentially impacting COGS going forward.

Speaker Change: Well, without giving you the actual numbers, I can tell you that since 2020, when we first started dealing with a lot of the tariff activity that happened, we've mitigated a lot of our risk in China specifically. So we've had some company directives since then to de-risk out of China.

Speaker Change: We've mitigated a lot of our risk in China, specifically, so we've had some company directors since since then to de risk out of China. So.

Lillian Etzkorn:

Lillian Etzkorn: It is still.

Lillian Etzkorn: Still a significant portion of our spend but much less than what it was a few years ago.

Lillian Etzkorn: It's still a significant portion of our spend, but much less than what it was a few years ago.

Lillian Etzkorn: And we're going to.

Lillian Etzkorn: Tariffs activity happens like it did last time, we assume we will have a few months to respond in and plan.

Lillian Etzkorn: And we're going to, you know, if the tariff activity happens like it did last time, you know, we assume we'll have a few months to respond and plan, and those plans include, you know, taking more offshore Asia, nearshoring here, and then, you know, obviously bringing some of the production back to the U.S. for manufacturing.

Lillian Etzkorn: Those plans include taking more offshore Asia near shoring here and then obviously, bringing some of the production back to the U S U S for for manufacturing so.

Lillian Etzkorn: And then what we can what we can't mitigate.

Lillian Etzkorn: And then what we can't, you know, what we can't mitigate, we, you know, we work to pass through. So those are kind of our, it's kind of our playbook.

Lillian Etzkorn: We work to pass through so those are kind of are.

Lillian Etzkorn: It's kind of our playbook.

Speaker Change: Okay. Thank you.

Lillian Etzkorn: Okay.

Lillian Etzkorn: Yeah.

Okay, thank you.

Speaker Change: The next question comes from Craig Kennison from Baird. Craig. Your line is open. Please go ahead.

Speaker Change: The next question comes from Craig Kennison from Baird. Craig, your line is open, please go ahead.

Speaker Change: Good morning, Thanks for taking my question just to follow up on Fred's topic there.

Speaker Change: Good morning. Thanks for taking my question. Just to follow up on Fred's topic there.

Craig Kennison: Tariffs are you able to share what your.

on tariffs. Are you able to share what your...

Speaker Change: Tariff tax was or has been in the last few years.

Speaker Change: tariff tax was or has been in the last few years.

Speaker Change: Craig I don't have that in front of me I can take that back and see if we can find something and follow up with you separately.

Lillian Etzkorn: Craig, no, I don't have that in front of me. I can take that back and see if we can find something and follow up with you separately.

Lillian Etzkorn: And obviously, we're getting questions on it so thank you and.

Lillian Etzkorn: And obviously, we're getting a lot of questions on it, so thank you.

Speaker Change: Maybe wanted just to ask you Jason weather.

Speaker Change: Maybe I want to just ask you, Jason, whether, you know, in the context of tariffs, whether you feel like you have competition that might be more disadvantaged than you and you look at it holistically, maybe there's a different perspective on it.

Lillian Etzkorn: In the context of tariffs, whether you feel like you have competition that might be more disadvantaged then you and you look at it Holistically, maybe there's a different perspective on it.

Speaker Change: Yeah, I feel that way for sure around some of our product lines. I mean, we obviously build a lot of products and even have products like chassis, which which is our largest.

Speaker Change: Yeah, I feel that way for sure around some of our product lines. I mean, we obviously build a lot of products and, you know, even have, you know, products like chassis, which is our largest...

Speaker Change: Product line in the company for RV.

Speaker Change: Almost 100% of the components are sourced domestically. So that's not an issue for some product lines, but like I said a minute ago, we're derisking out of China, we have been for several years and.

Speaker Change: product line in the company for RV, you know, almost a hundred percent of the components there are sourced domestically, so that's not an issue for some product lines. But, you know, like I said a minute ago, we're de-risking out of China. We have been for several years and several of our competitors are still firmly planted there.

Speaker Change: Several of our competitors are still firmly planted there.

Speaker Change: And that gives us a huge advantage because we're already we're already out on some products like appliances, and furniture and things like that where we can continue to bolster.

Speaker Change: Some of our import importing partners that are not in China, specifically not to say that some of those other partners won't get tariff as well, but likely not as much as China.

Lillian Etzkorn: Some of our importing partners that are not in China specifically. Not to say that some of those other partners won't get tariffed as well, but likely not as much as China.

Speaker Change: And then maybe a big picture question, if I look prior to the pandemic shutdown.

Lillian Etzkorn: And then maybe a big-picture question, if I look prior to the pandemic shutdown...

Lillian Etzkorn: Just looking at four or five years prior to that your average EBITDA margin was in that 8% to 10% range maybe 9%.

Speaker Change: just looking at four or five years prior to that, your average EBITDA margin was in that eight to ten percent range, maybe nine percent. What are the ingredients to getting you back to that level?

Speaker Change: What are the what are the ingredients to getting you back to that level.

Speaker Change: Yes, so I'll answer a couple of different ways I'm sure will it has a couple of thoughts on that as well, but if you go back to 2018 2019, we we were much more heavily concentrated from an RV perspective, there. So we've diversified the business significantly since that period of time, which has caused some of the added cost structure.

Speaker Change: And we've got mature businesses. There now I think we've talked about that the last couple of calls our margins in those other businesses are starting to mature and become better and become additive to that double digit margin that we've been shooting for.

Speaker Change: And then as soon as we have done so much cost work around the business just cost structure work.

Speaker Change: Putting ourselves in a great position for when we see this inflection point in that.

Speaker Change: Couple of quarters and RV. It will it will start to really show up but we feel we're going to get back to double digit margins as soon as the business normalizes on the RV side specifically.

Speaker Change: We kind of consider normalization that 400 to 425000 unit wholesale range with arby's, where.

Speaker Change: Kind of averaged over the last 10 15 years.

Speaker Change: Great. Thank you.

Speaker Change: The next question comes from Daniel Moore from CJS Securities. Daniel Your line is open. Please go ahead.

Daniel Moore: Yes, good morning, Jason Good morning, and thanks for taking questions.

Speaker Change: Reducing some of the footprint, which will also take some cost out of the system.

Speaker Change: Focusing on some of the overhead costs to reduce as well so really trying to attack. It on several different fronts first and foremost being volume benefits and then also focusing on continuing to improve our cost as we move forward.

Daniel Moore: I double.

Daniel Moore: Double down on the cost improvement comment there, we're going to we're going to probably come up we're not going to probably in Q4, we'll talk on the call a little bit about where our cost structure is headed based on some of the improvements. We feel we can still make I mean, we've been talking about bouncing along the bottom of the industry here for.

Daniel Moore: A couple of years now, especially in the last few quarters.

Daniel Moore: As we've kind of felt that I felt the bottom, but we do feel that we've got momentum on cost structure improvement.

Daniel Moore: I would also say that with.

Daniel Moore: Some of our top innovations that we've talked about along with some of our chassis and window. Another top five product categories that we've got a significant market share to gain there.

Daniel Moore: Say that over half of $1 billion in total addressable market and some of those categories. When you look at chassis windows, our ABS and Tcs, we talked about not only appliances actuals and slide out that's a pretty big market share opportunity. There that we're going to continue to go after and depending on where mix ends up next year that can just be a nice tailwind for us is mix.

Daniel Moore: Kind of normalizes with just a little bit.

Speaker Change: That's really helpful last one and I'll jump back, but you mentioned M&A and obviously with the significant cash generation.

Speaker Change: Over the last 12 months leverage has come down nicely.

Speaker Change: Hopefully ebitdas bottoming here or so it takes two to tango, but talking about the pipeline.

Speaker Change: Your outlook.

Speaker Change: The outlook for M&A over the next kind of six to 12 months relative to the last six to 12. Thanks again.

Speaker Change: Yes, yes, we've obviously been fairly and after the last couple of years is to preserve cash in and do the right things and the smart things there.

Speaker Change: We have had a lot of conversations with a lot of different targets in the last several quarters. So hopefully starting to get closer on some things and definitely expect more.

Speaker Change: Activity to come about the next couple of quarters, but.

Speaker Change: We're hoping that M&A is more active in the next in the next calendar year than what we've seen this year obviously.

Speaker Change: I feel good about it.

Speaker Change: Thanks again.

Speaker Change: The next question is from Mike Swartz from <unk> Securities. Your line is open. Please go ahead.

Mike Swartz: Hey, guys good morning, maybe.

Mike Swartz: Maybe to start just Lillian I think you had mentioned and Jason you had mentioned that organic content.

Mike Swartz: The total total business was up about 1% and reported content was down one can you help us bridge the gap on what pricing mix some of the other.

Mike Swartz: M&A some of the other variables might have contributed to the quarter.

Speaker Change: Sure, Mike I'd say, the biggest contributor to the downward pressure this quarter.

Mike Swartz: Is mix.

Mike Swartz: As I mentioned in my prepared remarks are.

Mike Swartz: The percentage that we saw in the quarter for <unk>.

Mike Swartz: Axle trailer came in at about 23%.

Mike Swartz: Typically we'd see anything from 17% to 19% as what we had seen historically.

Mike Swartz: That that headwind alone pressured the content number by about three 5% in the quarter.

Mike Swartz: Trailing 12 month basis.

Mike Swartz: From an organic perspective that was actually a positive for us in the quarter again, it was up 1%.

Mike Swartz: The commodity prices at this point to pass through really is pretty mitigated at this point. So really what we're dealing with is predominantly that mix number that I was referring to.

Mike Swartz: Offsetting a good chunk of the the organic growth that we're seeing and as we think about the content on a go forward basis, we will start seeing in the fourth quarter more of a pickup on some of the innovative products that Jason has been talking about.

Mike Swartz: That we highlighted at the open house, we will start seeing that organic content come up as we progress into the fourth quarter and then as we move into next year again, presuming that production production picks up as well.

Mike Swartz: We will still need to be watching that.

Mike Swartz: Mix number because I think that is going to continue to be a headwind as we move into 2020 scientists as Jason was commenting on that.

Speaker Change: Do you feel good about the organic pick up at this point and just to just to kind of.

Speaker Change: Go early in his comments on the single actual trailers I mean.

Speaker Change: It's up 38% from from last year.

Speaker Change: Kimberly Kimberly was a big driver of that that unit.

Speaker Change: It will be timing, I would expect CapEx to tick up next year.

Speaker Change: Yeah, so to that extent, I'd say we're spending where we need to spend, and it's more of a timing that we'll see that uptick a little bit more into next year.

Okay, great. Thank you.

Thanks.

Speaker Change: The next question comes from Scott Stember from Roth. Scott, your line is open, please go ahead.

Good morning and thanks for taking my questions.

Good morning.

Speaker Change: Jason, maybe we talk about the aftermarket. Obviously the business on a net basis is doing what it's supposed to do, right, in these tough times.

How do you view this business for next year? Specifically...

Speaker Change: on the RV side, assuming that the, I guess the attachment side of the business starts to flatten out and then maybe on the break-fix side of the business as all these RVs that have come into the market since the pandemic.

Speaker Change: wear and tear. Just trying to get a sense of what we can look for in the next year or two there.

Speaker Change: Yeah, on the automotive and truck accessory side, just real quick, we anticipate we'll continue to grow nicely like it did this past year. We've had a lot of good tailwinds there. But with respect to the RV, I'm glad you asked the question because it's a good one. If you look at.

Speaker Change: You know, the amount of RVs that are coming out of the warranty cycle, you know, out of warranty, you know, it's about a million and a half from 2020 to 2022, a million and a half RVs. So, that's a lot of RVs that are, that warranties are going to be completely expired on those in 2025.

Speaker Change: So what that means is it's going to drive a lot of customer pay opportunities as those continue to age.

Speaker Change: So, and then you've got, you know, from a warranty standpoint or cost standpoint, you've got 23s and 24s starting to enter the warranty cycle now compared to the high volume years we had in 2020 to 2022. So, you know, warranty should, you know, have some downward pressure where we're not going to see the kind of warranty we saw when there was just a massive amount of RVs being built. So it's a really good dynamic for us as you're looking at our.

Speaker Change: you know our aftermarket business for repair and replacement and upgrade it's uh it's a you know it's those million and a half RVs that are completely coming into the customer pay cycle which is you know where we make our our warranty opportunity dollars on on repair and replacement and upgrade.

Make sense?

Last question also on the aftermarket. When you guys were...

Speaker Change: aggressively you know advancing this back in I guess three or four or five years ago.

The narrative was that this business could be 2x.

Speaker Change: on the margin versus the OAM business. Is that still the case and would that suggest that the margins in aftermarket could go into the high teens pushing 20%?

Speaker Change: depends on the mix I mean if you look at our we've said in the past quarters that our automotive aftermarket margins are less and you know it's about 60% or 54% of our total aftermarket revenues

Speaker Change: So as long as we keep that mix, I mean likely, you know, that's not going to happen, but we're still going to have nice margins and great opportunity. Like I just mentioned, with the units coming out of warranty into the customer pay cycle, it's a huge opportunity for us over the next two to three years. We're going to start seeing all those come in to play, and we've obviously demonstrated over the last 10 years since we started the aftermarket division that we know how to run this business, and it's mature now, and we're driving really good margins.

Got it. That's all I have. Thank you.

Thanks, guys.

Speaker Change: The next question comes from Tristan Thomas Martin from BMO Capital Markets. Tristan, your line is open, please go ahead.

Good morning.

Good morning.

Speaker Change: quantify a potential tariff impact? I think last year you called out about 30% raw materials and components as imported. And Jason, I think you said 80%.

Speaker Change: was a significant amount from China. So does that mean north of, so like 15-ish plus percent?

Speaker Change: of Raw Materials and Components Imported from China, or am I not thinking about the right one?

Potential is...

Lippert, Lillian Etzkorn

Speaker Change: time that we we had this because we we took action right away and again those actions are you know offshoring China more than what we are today and we're already in process because we started that process a few years ago.

Speaker Change: and then nearshoring here more in the U.S. and then bringing some of the products back for U.S. manufacturing, which we're actively considering all three of those right now. I think we'll be fine when it comes to tariff. And the fourth option, obviously, is to pass some of that cost along, which we did in...

Speaker Change: You know, we did, you know, when the last tariffs came out, so I think the way to look at it is we know how to, you know, we've actually had a lot of practice dealing with that the last go-around, so I think we'll be fine this time.

Speaker Change: Okay, so do you think that, are you going to proactively try to take some of those steps, or? I just, we've already, yeah, we've already been doing that. We've been, once, once we started the

Speaker Change: you know, offshoring China program, you know, a few years ago. We've been actively continuing to do that and have some company goals around that to move product out of China.

Speaker Change: So that's one way to look at it, I think, is that we're in practice of doing that today.