Q2 2019 Earnings Call
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We undertake no obligation to update these statements to reflect circumstances or events that occur. After the date. The forward looking statements are made except as required by law.
I would now like to turn the call over to Todd Cleveland.
Thank you Julie and good morning, everyone and thank you for joining us on the call today.
Fundamental execution of our organic strategic and operational initiatives. We're at the forefront of our tactical plan in the second quarter as we focused on the integration and synergies for the nine acquisitions, we completed in fiscal 2018, and driving our organic growth strategy through geographic expansion and market share gains.
Aggressive inventory rebalancing in the RV market continued through the second quarter and to date positioning the 2020 model season, beginning with the 2019 dealer shows to be significantly recalibrated from the 2018 dealer show season.
Weather issues have negatively impacted all of our markets year to date, however, demographic trends and overall economic indicators point towards potential tailwinds and strong long term potential in each of our four primary markets.
Our second quarter revenues of 613 million were up modestly from the prior year. Despite the headwinds previously mentioned and we continue to increase our content per unit in each market sector.
Our second quarter 2019, net income was $27 million or $1.18 per diluted share and our year to date revenues and net income per diluted share for $1.22 billion in $2.07 respectively.
I'll now turn the call over to Andy who will further review our primary markets and overall business outlook.
Thank you Todd as noted the second quarter and first half of the year has been marred by adverse weather conditions impacting all four of our primary markets. However, overall solid macroeconomic trends and fundamentals signal a continued positive long term outlook.
Additionally, we are optimistic about secular trends in each of our markets, which have the potential to align and offset future cyclicality.
Our diversified market presence and strategy has proven effective in offsetting volatility and our organic growth opportunities and synergies continue to blossom from the strategic acquisitions that we've completed over the past two years.
On the RV side of our business as Todd noted our second quarter 2019 financial performance reflects the impact of continued aggressive rebalancing of retail inventories with discipline to reduce wholesale production levels against the backdrop of fundamentally solid retail demand.
Our RV revenues were down $54 million or 13%, including the impact of commodity pricing concessions given in partnership with our customers against wholesale shipments that were down by an estimated 14%.
The GAAP widen between wholesale production and retail shipments in the second quarter with retail shipments down an estimated mid single digits in wholesale shipments down mid double digits.
On a unit basis. This equates to an estimated 45000 to 50000 units pull from inventory in the second quarter alone on top of approximately 36000 units that had already been pulled out of inventory over the prior 12 months as of the end of the first quarter.
Based on our touch points dealers have been working through excess inventory and have been depleting inventory levels in the field in anticipation of the upcoming RV dealer open houses and the new 2020 model year.
The RV eyes latest published expectations for 2019 project wholesale unit shipments to range from approximately 396000 units on the low end to 431000 units on the high end, representing low to high double digit declines for 2018.
We are currently assuming existing wholesale production run rates to continue through the third quarter as Oems maintain their disciplined production cadence and anticipate the channel inventories will continue to normalize even further through the third quarter in second half of 2019.
We currently expect a mid single digit decrease in 2019 retail shipment growth with potential upside based on subsiding headwinds related to interest rates commodity price declines and the potential for the end of the trade war, including tariff relief all of which benefits the end consumer.
Based on these estimates an additional 35 to 40000 units should be pulled from the channel in the third quarter of 2019, making a total of approximately 80 to 90000 units pulled out of inventory in the second and third quarters, which we estimate would result in dealer inventories being at their lowest levels that we have on record dating back the last five years and positioning the 2020 model season for a solid start.
We continue to believe that the future retail demand trajectory remains positive based on current demographic indicators, including new younger buyers and the emergence of incremental repeat buyers in the channel increased participation by millennials and ethnically diverse families. The continued shift to smaller travel trailers and overall economic conditions.
RV sales will continue to benefit from the aging baby boomers and millennials as the number of consumers between the ages of 55, and 74 will total 79 million by 2020, 515% higher than in 2015, and the number of consumers between the ages of 30, and 45 will total 72 million by 2025, a 13% increase compared to 2015.
Our marine business performance was strong in the second quarter and helped offset inventory rebalancing volatility in the RV space. Our marine portfolio companies is comprised of a high quality gross operating and EBITDA margin accretive strategic brand and product platform that is generating significant organic growth synergies.
Our marine revenues were up $25 million or 39% and represented 14% of our consolidated sales in the quarter up from 11% in the same quarter last year.
We have several product and geographic expansions in process and tremendous talent and team members with the energy capacity relationships leadership skills and deep marine experience to drive results.
Estimated marine powerboat retail shipments decreased 6% on an unrevised basis in the second quarter 2019.
And based on data from roughly one half of the states reporting.
Second quarter shipments generally represent approximately 40% to 45% of full year shipments.
Adverse weather and flooding in certain regions of the country have impacted first half 2019, marine retail shipments, particularly in the pontoon aluminum fish categories, which were down 6% and 16% in the first quarter, respectively, and down 4% and 13% respectively in the second quarter.
Channel inventories in these models in particular, we are slightly elevated as of the ended the quarter as a result, and we believe will be depleted over the back half of the year in alignment with the summer selling season, finally, engaging and alignment with OEM production rationalization, which is already be proactively started.
Scana weight categories led the growth in marine shipments up over 1% in the quarter and 2% year to date in generally represent higher ASP units.
Covenants remains high for marine in the long term and Oems are continuing to offer more value added content on boats as we head into the 2020 Marine model season, which consumers continue to desire.
Our content per unit increased 93% in the quarter as a result of both strategic inorganic growth all indicators currently point towards a mid single digit decline in marine retail units and related wholesale production for fiscal year 2019, as the Oems position themselves for the expected strong 2020 model season.
Long term fundamental demand aging boats in the water and the related replacement cycle of an estimated 1 million units over the next four years point towards a continued strong growth opportunities in the marine sector.
Turning to the housing and industrial side of our business. Our manufactured housing sales represent 18% of our total revenues in the second quarter and increased $40 million or 56% over the second quarter of 2018.
This compares to 12% of our revenues in the second quarter of 2018 and reflects an estimated 3% decrease in wholesale unit shipments.
Our content per unit is up an estimated 54% in the MH market and while weather again impacted these markets due to flooding in the southeast in the fourth and first quarters of 2018, and 2019, respectively, causing the inability to set homes the demographic trends consistent with our leisure lifestyle markets indicates strong expected demand patterns. As we are seeing both growth and population of first time buyers and the older generation looking to downsize in the multifamily housing from rural to more urban areas.
After a slow start due to the factors described we are currently anticipating low to mid single digit growth in MH wholesale shipments for fiscal 2019.
Revenues in our industrial business, which represented 12% of our overall sales mix in the second quarter and is primarily focused on residential housing where we participate in both new construction and remodel and in the hospitality high rise commercial construction and institutional furniture markets decreased $2 million or 3% in the quarter.
Based on US census Bureau reporting combined new housing starts were down slightly in the quarter after rebounding in June .
Our products are generally the last to go into a new unit and generally trail new housing starts by four to six months single family housing starts declined 6% in the quarter, while multifamily housing starts rose, 16% with most of the growth in multifamily coming from the south and North east regions at 38% and 43% respectively.
We continue to have significant runway in our housing and industrial sectors for organic and strategic growth and in particular in high rise and hospitality sectors, where we have several projects already specked in our products also have the capability to flex up and down the value chain and we have tremendous organic potential to leverage our full suite of complementary kitchen, bath and shower product offerings.
Fundamental housing demand is strong and currently limited by affordability in capacity.
Headwinds related to commodity costs interest rates in tariffs have impacted these markets and as noted our dissipated.
We are currently anticipating low single digit growth in new housing starts for fiscal 2019. After first half starts were down approximately 4%.
Overall, we're excited about the summer selling season finally, taking hold in all of our markets as well as the upcoming RV open houses in the September timeframe.
Especially based on the rebalanced inventory levels.
We have digested and integrated our nine acquisitions completed last year and 16 total in the last two years and continue to have a full pipeline of acquisition candidates as conditions and secular market factors improve.
The 2020 model seasons in each of our markets are positioning well and while we may see some second half volatility appropriately calibrating with strong potential to drive up dissipating headwinds.
We remain disciplined in the deployment of our strong cash flows during the first half of the year due to the dynamic market conditions and maintaining our flexibility to prioritize capital allocation initiatives.
We generated approximately 94 million in operating cash in the first half of 2019 up from $91 million in the first half of 2018 and over $7 a free cash flow on a TTM basis. Despite all four of our market sectors being down in the same period.
We are nimble and poised to continue to opportunistically execute on our capital allocation strategy drive incremental results and return value to our shareholders.
I'll now turn the call over to Josh who will provide some additional comments on our financial performance.
Thanks, Andy our consolidated net sales for the second quarter increased 1% to $613 million, reflecting the impact of acquisitions, which were offset by industry declines and all four of our primary market.
As we previously noted the overall revenue improvement in the quarter was primarily hampered by a double digit industry decline in the RV market, which unfavorably impacted both our gross and operating margins.
On the topline we continued to leverage our diversified market platform and strong brands to drive growth synergies and market share gains with organic revenues net of industry up low single digits for the quarter, Despite a declining commodity market and price decreases going into effect in the first half of the year.
Revenue from our leisure lifestyle markets, which is comprised of the RV and marine markets decreased 6% with RV revenues down, 13% and marine revenues up approximately 39% compared to the second quarter of 2018.
RV content per unit on a trailing 12 month basis increased 19% to an estimated $3137 per unit.
And estimated marine content per unit increased 93% to $1655 per unit.
Revenues from our housing and industrial markets increased 26% in the quarter.
With inmates revenues at 56% versus the prior year, Despite an estimated 3% decrease in industry wholesale shipments.
MH content per unit increased 54% to an estimated $3884 per unit.
On the industrial side revenues declined 3% in the quarter and housing starts were down slightly compared to the second quarter of 2018.
As discussed as we have continued to partner with our customers and have pass along price decreases and a declining commodity market.
We have worked through our higher priced inventory, which nominally impacted our gross margins in the quarter.
Our current pricing and inventory cost are appropriately aligned moving forward.
Our gross margin in the second quarter was 18.4% declining 60 basis points compared to the prior year.
Which was impacted by industry declines in all four of our end markets and the corresponding loss revenues, maintaining a balance workforce with work schedules adjusted in tandem with variations in production levels and in the short term carrying a higher overhead cost structure relative to revenues and certain manufacturing facilities. As we continue to navigate the short term RV inventory rebalancing and weather related issues. The hampered our end markets in the first half of the year.
Operating expenses were 11% of sales in the second quarter.
Warehouse and delivery expenses and intangible asset amortization increased 100 basis points, which was driven by certain 2018 acquisitions and negatively impacted our operating margins due to having higher operating expense profile relative to our overall margin profile.
We are actively executing our synergies within our 2018 distribution acquisitions and have realized over half of our $5 million cost reduction target on an annualized basis.
With the benefit beginning to take effect in the back half of 2019.
SDMA expenses were 5.4% of sales in the quarter down 20 basis points compared to the prior year and down approximately $5 million or 70 basis points from 6.2% of sales in the first quarter of 2019.
Operating income was 45 million in the second quarter, a decline of 15% from the previous year.
The second quarter 2019 operating margin of 7.4%.
Decreased 140 basis points compared to the prior year.
Compared to the first quarter of 2019 operating margins increased 150 basis points on relatively flat revenues.
For the second quarter and first half of the year. The operating margin of Lasalle resulted in a 50 basis point dilution to our overall operating margin profile the margin dilution from Lasalle coupled with the other factors previously described resulted in the operating margin decline for the quarter.
Our net income per diluted share in the second quarter of 2019 was $1.18.
Down 17% from $1.42 in the prior year.
And our overall effective tax rate as reported was 25.1% for the second quarter of 2019.
For the full year 2019, our previous all in effective tax rate estimate of 25%, 26% still remains excluding the impact of onetime tax items.
Now turning to the balance sheet.
Our total assets increased approximately $100 million as of June Thirtyth 2019.
Largely reflecting the recognition of approximately $83 million of operating lease right of use assets related to the adoption of the new lease accounting standard on January Onest 2019.
In the first six months of 2019 as Andy noted, we generated approximately $94 million of operating cash.
Compared to 91 million in the first six months of 2018.
We will continue to aggressively manage and flex our working capital consistent with demand levels. Our current flexible business model and the businesses. We've acquired over the last 18 to 24 months.
Provide flexibility and position us with the ability to generate strong operating cash flows to support our strategic inorganic growth plans for 2018.
For full year 2018, we are estimating operating cash flows in excess of $200 million.
Our leverage position relative to EBITDA at the end of the second quarter was 2.46 times and we have ample liquidity of approximately $480 million available on our revolving credit facility.
Along with our ongoing operating cash flows we have flexibility to continue to execute on our disciplined capital allocation strategy.
And we continued to put capital to work in the quarter, having invested approximately 18 million of capital expenditures in the first six months of 2019.
To support our strategic growth and expansion plans.
For the full year, we are targeting approximately 30 million of capital spending.
That completes my remarks Todd.
Thanks, Josh overall, we remain optimistic about the long term industry trajectory organic and strategic growth potential and overall economic conditions supporting both our leisure lifestyle and housing and industrial markets.
Our disciplined execution goals continue to be focused around driving our organizational strategic agenda and utilizing our capital allocation strategy to strategically grow our business increased customer awareness of the breadth of products, we buy and make investments in our workforce.
We will continue to execute tactically and strategically as we've done in the past and will leverage our solid financial talent and leadership platforms to drive shareholder value all while maintaining flexibility in our business model to support our customers.
In addition, the ongoing support we received from our customers are 8000, plus team members suppliers board of directors banking partners and our shareholders affords us the opportunity to continue to focus on our goal of providing the highest level quality service and shareholder value.
This is the end of our prepared remarks, we're now ready to take questions.
Thank you we will now begin the question and answer session.
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The first question in the queue comes from Scott Stember with CL King. Your line is open. Please proceed.
Good morning, guys and thanks for taking my questions.
Good morning.
Well, maybe just talk about the individual end markets I know this.
A locked in made of the the impact of the terrible weather in the first six months.
And there are some reports that things are starting to open up I guess in July as the weather starts to clear up maybe if you just go through the.
Starting with RBS was talking about what you're seeing.
And then marine and then the other two segments as well just how we should look at the back half of the year.
Scott This is Andy.
Well, there's definitely had an impact on really all four of our markets in the in the first half.
We're really just getting into the summer season here in July in mid July , especially in the Midwest and the northern sectors of the country and so we've seen a little little bit of mixed results I would tell you.
As we kind of move through this on the RV side of the business.
RV shipments from our perspective that Ben.
Stable and steady on the wholesale side as we noted on the retail side, we think RV retail is still strong and.
Again, where we think there's going to be a number of inventory units pulled out over the next quarter.
So we think RV retail is still solid and stable on the marine side of the business.
Really to a mixed bag as it relates to the north and the south in the northern sectors of the country. The aluminum fish in the pontoon sectors have been hit hard.
In the first half, but I would tell you that our salt water and fiberglass Powerboat center console in the south and the southeast have been very strong in the first half and so.
Again, I think overall reach from a retail perspective, we think fundamental demand is strong in both those two leisure lifestyle markets.
Our housing markets on the MH side of the business has been impacted by by cold weather and wet weather.
Again, the inability to set homes, but it is improving as we make our way through the year here and on the residential housing side in particular as well.
Really a little bit of weather on the west coast is impacted.
Some of the building out there.
But overall again I think I think we still feel like Theres fundamentally solid demand really across all four sectors and improving as we head through the back half of the year and I think what we're most excited about is the positioning for 2020. So it feels like all of our for all four of our markets are calibrating with Sony appropriate Tailwinds.
As we noted related to commodity costs interest rates.
Potential tariff reduction.
Pushing with some tailwinds heading into the back half of the year and into 2020.
Thats, great. Thanks, and just going back to our views on your comments about the third quarter I guess still seeing some pressure from declining.
Hi shipments are we just talking in absolute terms or should the rate of decline.
Decrease because of the natural log numbers in last years.
In the back half of the year when things started to fall off particularly in August .
Yes, we think the rate of decline will decrease and shipment levels have remained steady really through the full second quarter and into the third quarter.
There is tremendous discipline.
Taking place right now on the wholesale side.
From and from our perspective really appropriately balancing in position for the 2020 model season and for the upcoming dealer shows.
Got it and the last question before I get back in the queue at last quarter, you guys had anticipated or predicted that the.
Operating margin would be up about 100 basis points and 50 basis points of that was related to Lasalle.
Could you, maybe just update us for the year, where you're thinking.
Operating margins are good.
Yes Guy. This is Josh we had we had communicated operating margins will be down 100 basis points with 50 of that related to the impact of the dilution of Lasalle.
We're pretty much on track to achieve that depending on how Q3 shakes out as you just outlined we expect the declines to narrow substantially in Q3 from RV wholesale shipment perspective, but as dealers continue to deplete inventory.
It's really some uncertainty on what Q3 looks like from that perspective and so.
Depending on how Q3 shakes out I would tell you 100 to maybe 110 120 basis points on op margin.
But still we still feel like we can achieve minimizes the narrow loss of 100 basis points to the on mortgage line.
Got it thank you.
The next question in the queue comes from Daniel Moore with CJS Securities. Your line is open Sir. Please proceed.
Thank you good morning.
Todd Andy Josh I appreciate the time.
As you mentioned in the prepared remarks and.
You are still carrying.
Higher operating overhead structure relative to current levels of demand any way to quantify the impact on on that.
Operating margins in the quarter.
And I guess, what would cause you to.
Be more aggressive in reducing cost structure, what would you.
So I guess, how long of a sort of.
Depressed shipment levels or any changes that might cause you to be more aggressive there and a quick follow up thanks.
Yes, Dan its Josh.
The depressed shipment levels early driven our secular base, not really macro or demand based and so.
As we look at the outlook for the back half of the year and positioning us for 2020, we've made significant investments in our talent organization and so we've chosen to maintain a relatively slightly higher cost structure at these revenue levels.
Through the first half of the year as we progress to the back half of the year. If we would soft if we use the fundamental changes from a macro environment, we could look to pull levers relatively quickly a pull cost out of the business. If you look at the operating expense line in Q2 down 5 billion from Q1.
I would say we focused on expense control from the Sta perspective, we continue to be surgical from that perspective without completely.
Points significant leverage in the business from a cost cost perspective.
But in the quarter, if we were to quantify it it's easily treated 20 basis points based on what revenue levels. We're at today.
Very helpful. Bob then Todd I, just I'd just add that you know.
More specifically I would say.
Theres a lot that's going to come out after the September show season, and depending on what type of feedback and.
And just.
Dealer orders that come out of it obviously, that's going to be a telltale sign for the balance of the year and really early 2000 twentys. So.
Huge you can count on probably some additional.
Takeout.
Depending on what happens in the fourth quarter.
Very helpful for sure Todd.
And then.
The great colors as I appreciate the color on the wholesale side.
Expectations for retail in the near term.
Very stable, but problem.
Would you expect kind of trending similarly down low to mid single digits.
At least between now and say the show in September .
Or do you see that getting is stable more of a flat year over year, just trying to get a sense and I know, it's a crystal ball question.
Dan This is Andy Thats accurate, we think low to mid single down on the retail side consistent and stable.
Perfect and then lastly.
Just in terms of capital allocation.
It's a good chunk out of debt this quarter.
While still growing cash.
M&A slowed a little bit are you, taking it and you alluded to it in the prepared remarks, but taking a little bit more of a sort of cautious approach to M&A.
Is there a leverage ratio you'd want to get down to or are you.
Yes, just given the choppiness here near term.
Any changes in the Smith, maybe rank ordering priority of capital allocation near term at least.
Dan This is Andy.
As it relates capital allocation, we've stayed very disciplined really throughout the first half of the year.
We focused pretty heavily on the organic side of the business from the acquisitions that we've done in the last two years.
And really generating a lot of great opportunities there on the M&A side, we've still got a full full pipeline and we're just staying disciplined I think we are poised.
And remain poised to be able to execute so its not due to a lack of opportunity we're going to be opportunistic about the way we think about it.
As we've watched kind of the volatility in the RV space again, we've stayed very disciplined there.
Marine as well.
Our housing markets you know, we still feel strong about and Weve got acquisition candidates.
On our housing industrial side that were kind of positioning I would say.
But we want to make sure that we stay opportunistic and so we're not chasing deals.
That being said.
We still believe in these markets and apps, absolutely want to deploy capital to continue to strategically invest in the business. So nothing's really changed other than we're watching.
The markets play out and want to make sure that.
We are driving the appropriate value for our shareholders in the investments that we make and Dan I would just add.
Regarding the leverage profile, we were not deploying capital from an M&A perspective, we can deliver very quickly.
As evidenced as you just talked about taking a chunk out of debt.
We generated $100 million of cash flow first first six months of the year.
And so as we continue to let things play out as Andy Andy described we can de lever the balance sheet very quickly positioning ourselves.
To have plenty of capacity and runway on once we kind of see a little bit more clarity going forward.
Very good solid execution as always appreciate the color.
Thank you.
Thank you. The next question comes from Brett Andrus with Keybanc. Please proceed sir.
Hi, good morning.
Larry just to two quick ones I guess, Josh could you first just.
The comments about your low single digit.
Growth net of industry growth I guess, how much did price impact that.
Or any other factors within that and then.
Todd and Andy I, just wanted to dig a little more into your comments about retail demand I think you said it remains.
Fundamentally strong I think your.
Assuming you are talking about excluding weather impacts.
But I guess, what specifically are your contacts seen here in June and July just in terms of the retail trends any any color there would be helpful.
Yes, Brett I'll first talk about the organic side.
We've seen lower commodity cost and pretty much all of our major commodities and so thats led to reduce prices to the Oems.
During the first half of the year in overall reduced prices the lower commodity costs is good for the overall industry and good for the consumer but it does create a short term organic headwind from our perspective, and so organic growth net of industry was positive for the quarter at at low single digits plus 2%.
But we were negatively impacted on organic basis related to pricing in that 4% to 5% range.
Brett This is Andy on the retail side correct on fundamental retail demand call. It net of whether we absolutely think weather has been a headwind.
In the first half of the year, but overall, we're still seeing again fundamentally strong retail demand. Our touches are indicating that units are still moving off dealer lots, they're still selling at the shows and they're still excitement about you know the RV industry and RV unit. So we absolutely think it was a headwind.
But again net of that we are touches are saying that units or movement in the marine space as well.
The marine industry continues to content up their boats.
Consumers are still excited about one thing that content and so again, we're seeing fundamental demand there like I said, it's really bifurcated between the north and the south at least in our and what we've seen in our business as we talked to all the customers in the marine space. So we've got a nice mix across that platform. So like I said our southern.
Operations have been very strong in the north and the Montana and aluminum fish, that's where we've seen primarily weather, but there's still strong demand for for for products in that space and then more specifically Brent I guess.
Our touch within our own company the transportation company that we've alluded to a number of times in the past.
And had an outstanding shipment level in.
In July .
Timeframe and so to us that's an indication that.
Dealers are continuing to.
We have strong demand and bringing the need to bring units on the lots. So a lot of good positive.
Indicators.
Particularly in late June and July is the weather clears.
Understood. That's helpful. Thank you and if I could squeeze in one more about.
Marine.
Im just is there any way you can either bucket or parse out how much of your marine business I guess goes into because a lot of it's based on content how much of your marine business goes into aluminum fish pontoon versus some of the other kind of.
I want to say more growing or stable categories here recently.
In the boat industry.
We're probably we're very little aluminum fish theres, just not a lot of content on those boats Brett.
When you think about that really did a lot of content on the ski wake boat. The center console saltwater bodes Andy talked about and then the pontoon boats and I would say.
Call. It 60, 40, maybe southeast region of ski way fiberglass Powerboat center console salt water and 40% pontoon. If you had if we truly had to break it out.
Understood. Thank you.
Thank you. The next question in queue comes from Steve O'hara with Sidoti. Your line is open. Please proceed.
Hi, good morning, Thanks for taking my question.
What is the.
Hi, just curious about the.
Comments within marine.
And it was up year over year pretty good down sequentially.
I mean for the back half of the year you know.
What's the seasonality typically so.
I know you had some acquisitions last year.
But I'm just kind of wondering maybe in terms of sales profile. What would you typically expect from first half second half.
Within that business.
Yes, Steve its Josh probably 55, 45% first lap versus.
Versus the second half it follows the RV seasonality for the most part with Q3 being the softness with model year changeover.
But they easily ramp up pretty quickly in Q4.
The kick off the new model year, and Q2's, obviously, the strongest fees and traditionally.
With 40% oppose retailed in Q2.
In wholesale you know flex that pretty significantly in Q2, but 55 45, thats not terribly off from the normal seasonality from the RV side as well.
Okay.
And then just on the cost side.
I know you talked about margins and I think your comments were.
I think you'd said that.
Operating margin would be down about 100 basis points year over year. It looks like most of that occurred in the first half of the year.
You should get some I guess modest improvement or at least decline should get less I'm. Just wondering on SGN, Amy looks I guess GDP was down 3% in quarter.
It was up significantly in the first quarter and Im just wondering is that stock based comp or.
You know what drove that lower given sales were up and you're talking about cost as being in line with.
Or keeping costs high.
Expecting maybe things to pick up.
Yes.
The majority of the elevated overhead cost that we referenced is related to overhead and the gross margin line in our distribution overhead with our distribution.
Business units.
As far as the FDA, it's available highly variable cost component on that was it related to any stock compensation are relatively onetime item its focus on expense control during the environment that we're in right now.
And then flexi and other variable cost components within the DNA line, but really no anomalies in there. We did you did see it come down versus Q1 on where we're continuing to.
To monitor and focus on expense control within the Sta line, but from the overhead structure component that's going to be above the line on the gross margin on the distribution side and so that's the area where were slightly elevated relative to revenue levels at this point in time.
And as Todd alluded to we'll get a lot more clarity here coming out of the show season here in the fall and Steve. This is Andy on the overhead piece a lot of that is related to labor above the line. So we're maintaining.
Call it certain standard hours to make.
Maintain our workforce thats very flexible that can flex up.
As we see things improve so again thats, what we are hearing a little bit of the excess overhead.
Okay and.
Just.
Got it relative to the comments for the.
Commodity costs and things like that.
Do you have I guess I would assume improving commodity cost profile going forward.
You have the negative from.
Lasalle I guess year over year that it may be more of a threeq using than a fourq you given the timing acquisition, but.
What are the other pressures in there.
Other than that it's just the.
Overhead that you alluded to or you know obviously.
Lower sales center.
Yes, I think the revenues.
And the volatility in the space right now probably first and foremost.
And and balancing that with England, Andy talked about our workforce and maintaining the investment that we have in our workforce and the overhead structure balancing that with volatile markets and from the revenue on the revenue side.
As we said we've seen declining commodities really across the board and we partner with our customers are passed along pricing associated with that.
So there's really not a headwind or tailwind from that from a cost perspective moving forward.
Okay. Thank you very much.
Yep.
Thank you and as a reminder, please press star one to enter into the question queue. If you have a question.
The next question comes from Tim Conder with Wells Fargo. Sir Your line is open. Please proceed.
Hey, Good morning. This is actually more currently on for Tim.
I appreciate all the color on each of the end markets outlooks.
But just wanted to clarify some of these market headwinds subside in 2020.
Normalized weather and inventories are corrected you were actually expecting the market to stabilize or grow next year.
Yes, we would expect growth are so mark yes, if you look at RV. If you look at RV retail you know down mid single digits. This year wholesale being down low double digits. There is a big gap as Andy talked about in his prepared remarks with wholesale inventories at retail and what's coming out of the pipeline and inventories and so.
Even with retail flat to slightly down in 2020, we would.
We expect a pretty substantial bump on wholesale just to get back to producing on a one for one basis on wholesale and retail and so retail could be flat to down mid single digits again next year, and we would still expect an increase in wholesale shipments.
Okay, but on the retail side are you expecting.
That to be flat or actually out next year then.
We would expect it to be up.
Okay with all the macro and with the macro environment, all the Tailwinds Andy alluded to.
Okay, Great and then how much was the inventory cost bases impact in Q2, you had called that on Q1 and potentially having some carryover and then is there anything remaining into Q3 on that side.
Nominal in Q2, Mark we work through it and so far from where we sit today I know, we do not expect it to be a headwind or an issue moving forward.
Okay, Great and then looking at margins into 2020 can we see a rebound of the typical 30 to 50 basis points that you target each year.
And that Harris, Okay, Okay, and then the tariffs were lifted.
How much of a benefit would you expect to see from that.
Well on the margin profile, our 30 to 50 basis points and call. It stable to modest growth environment is our expectations for our business.
This has been extremely choppy volatile year for us we've maintained certain cost structures as we navigated through the RV rebalancing.
The weather that hampered us the first half of the year. So what I would say is 30 to 50 basis points will be at a minimum for 2020.
If we're in a stable to growing environment.
We our expectations would we could exceed that.
Okay. Thank you guys.
Thank you. The next question the Q comes from Scott timber with CL King Your line is open Sir.
Just a follow up question on the.
You gave what the net of.
Industry decline was could you just tell us what the what the industry decline was.
Within that so we just come up with a.
Yes, you guys have organic sales decline for the quarter.
Yes, Hi, this is Josh is around 12%.
That was the organic or for you guys or that was the net are dealing with in our organic was 10 all in all good.
Scott.
And where's the the leverage ratio at the end of the quarter.
2.46 times.
Perfect. Thank you.
So.
We do have one more question the Q comes from Craig Kennison with Baird. Your line is open. Please proceed.
Good morning, Thanks for taking my questions as well.
Seems like we are in the later innings of the RV destock, but based on what Brunswick had said this morning, maybe in the early innings of a marine destock, how have you kind of prepare the business for that sounds like you're not as exposed to some of the weak areas, where a destock maybe more necessary but.
And is that a risk on the horizon as you run the business.
Greg This is Andy we believe that's a short term situation the marine industry adjust very quickly.
Again, it's really split between the kind of the two regions, we would say.
But there they are reacting and we expect kind of second half marine adjustment on the wholesale side, but we don't expect that to last you know to the extent that we've seen the RV.
Ministry Destock, so they've already proactively adjusted.
In June and so we're seeing a little bit of that kind as we head into the third quarter, but overall like I said, we've got a mixed business model through the marine industry in certain sectors are still performing very well.
But again I wouldn't we don't feel like this is.
And extended the stock we think that they're out there proactively reacting to the inventories that are there and we really think they missed.
The retail season, with the weather and we've already seen and noticed some.
Call it inventory reduction.
Activities are taking place because retail has been strong as the weather's been much much nicer here towards the latter half of <unk>.
The latter part of July and Craig I'd, just add this is Todd that.
Much like the rest of our industries as as they flex and move we're going to do the same internally.
The marine industry has been operating at very high level the last.
I'm going to say year to year, and a half two years and.
We've been working long hours. So we're very we can very easily flex our labor force and some other things to accommodate take costs out.
As as things do recalibrate themselves.
Thank you and then with respect to your content per unit opportunity in marine.
Maybe frame where you are today is there a good metric we could anchor on.
And where could that go in particular is there some white space or a category or two where you think.
You could move the needle through acquisition.
Hi, Greg its Josh on the content per unit.
Who are over $1600.
On a per year basis up over 50% year over year, and if we look at the product categories that we're in today that we're selling into we have over 7000 $7500 a potential content per unit. So still really in the early stages from a market share perspective.
And from growing content organically.
Craig This is Andy as it relates to.
Opportunity there, we love our product categories in the marine space.
We love the the talent that we've acquired and there's a tremendous amount of white space as Josh noted from a content perspective, both organically and strategically so we're excited about about marine potential.
And just to follow up on that as you've established yourselves in the marine category in the last couple of years.
Has that changed the nature of some of the opportunities that come your way.
I guess, yes. It has I mean, we we again believe we have a pretty compelling platform I think we've partnered with some phenomenal companies.
And we're again, we're excited about our presence and looking forward to it I think we continue to see opportunity in the marine space.
Okay. Thank you.
Thanks.
We have no further questions at this time I will turn the call over to Ms., Julie Ann Kotowski for further remarks.
Thanks, Michelle we appreciate everyone for being on the call today and look forward to talking to you again at our third quarter 2019 conference call.
A replay of today's call will be archived on Patrick's website, Www Dot Patrick I envy dotcom under Investor Relations.
I'll now turn the call back over to our operator.
Ladies and gentlemen, thank you for participating this concludes today's teleconference.
You may now disconnect.
Okay.