Lci Industries Q2 FY2020 Earnings Call

Good morning, everyone, and welcome to LCI Industries Second Quarter 2020 Conference Call. I am joined on the call today by the members of LCI’s management team, including Jason Lippert, President, CEO and Director; and Brian Hall, Executive Vice President and CFO. Management will be discussing their results in just a moment. But first, I’d like to inform you that certain statements made in today’s conference call regarding LCI Industries and its operations may be considered forward-looking statements under the securities laws and involve a number of risks and uncertainties. As a result, the company cautions you that there are a number of factors, many of which are beyond the company’s control, which would cause actual results and events to differ materially from those described in the forward-looking statements. These factors are discussed in the company’s earnings release and in its Form 10-Q and in its other filings with the SEC. The company disclaims any obligation or undertaking to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made, except as required by law. With that, I would like to turn the call over to Jason Lippert. Jason?

Good morning, everyone, and welcome to LCI Second Quarter 2020 Earnings Call. We delivered better than expected results in the second quarter, despite suspended production at the majority of our facilities across the U.S. and Europe due to COVID-19 for the first five weeks of the quarter. As we resumed production in early May, retail demand recovered rapidly, driven by increased demand for RVs and outdoor recreational products as consumers sought safe alternatives to traditional vacations and getaways. This rebound in retail demand allowed us to deliver strong results in the second quarter, including record high revenue in the month of June and July, as well as a profitable and cash flow positive quarter. Revenues for the quarter were down 16% to $526 million compared to the prior period, driven largely by production shutdowns in the beginning of the quarter. That said, the strong recovery in retail demand in RV and Adjacent Markets in the latter half of the quarter combined with the exceptional growth in our Aftermarket and International businesses helped to offset this decline. There's little doubt that RVs and boats have become the 2020 summer go-to vehicles of choice. The long-term fundamentals of the RV and boating industries remain strong and the need for consumers to find safe alternative outdoor activities and vacation options that also allow for social distancing is likely not going away anytime soon. While a recent report from AAA said 97% of American vacations will consist of a road trip this year, many people are hesitant to stop off at restaurants, hotels and even gas stations while on the road. With an RV, all of these amenities are made available in the vehicle, providing both safety and convenience that consumers are looking for. The addition of current travel restrictions, along with favorable gasoline prices and low interest rates for consumer financing, have led many people to make the decision to start using RVs, with a solid uptick of first-time RV buyers in recent months. To highlight this trend, a recent RVIA survey reported that 46 million Americans said they will likely take an RV road trip over the next 12 months, an incredible and encouraging statistic for us. Leveraging our reputation for high-quality innovative products, we are confident that we'll be able to capture a significant amount of this demand as people are increasingly drawn into the RV lifestyle in both the near term and beyond. As a result of the temporary production shutdowns and weaker consumer demand at the start of the quarter, RV OEM sales were down 38% year-over-year to $237 million for the quarter. We've been more than encouraged by the recovery in retail demand, with RV sales in June, up 17% year-over-year for LCI. Our run rates in June and July would place us at an all-time high output rate for 2020. And in addition, these were the two biggest revenue months ever in company history, with July 2020 sales over 53% higher than July 2019. On the wholesale side, OEMs are adding capacity to keep up with increased demand and are reopening facilities that had been closed prior to the outbreak of coronavirus. Despite operating in a lower production environment in the beginning of the quarter, content per towable RV adjusted to remove Furrion sales from prior periods, increased 4% year-over-year, to $3,371. Our sustained content increase in towable RVs is driven by continued new product innovation and market share gains. Content per motorhome RV decreased 4% year-over-year to $2,308, driven by a shift in wholesale mix towards smaller entry-level Class C units. Our diversification strategy continues to gain momentum as our Adjacent, Aftermarket, and International markets grew all together during the quarter. On a combined basis, these markets now make up more than 48% of our trailing 12 months sales, keeping us on track to reach our target of having these markets make up 60% of our total revenue by 2022. The continued execution on the strategy through both acquisitions and organic growth positions LCI to outperform the broader RV industry, even in challenging market conditions like this last quarter. We remain focused on further advancing our diversification strategy and developing our leading positions in markets outside of RV OEM to drive incremental growth. As part of our long-term diversification strategy, we work towards strengthening our business across various adjacent markets. Revenue in our Adjacent Market category for the second quarter declined 23% year-over-year to $131 million, driven by the temporary production shutdowns in marine, which resumed production in the latter half of April and early May. Marine, which has benefited from the same secular trends driving demand for RVs, is a focused area of growth both organically and through acquisitions as we strengthen our presence in this market. The integration of the SureShade acquisition brand of electric marine awnings and biminis is also progressing as planned. As the predominant player in North America and Europe, the marine shade solutions will be a substantial growth opportunity for LCI going forward, as shade solutions on all types of boats continue to become more popular and standard on a majority of boat types. For the second consecutive quarter, revenues in our Aftermarket segment more than doubled year-over-year. Total revenue in Aftermarket grew to $158 million, up 109% year-over-year, primarily driven by our acquisition in late 2019 of the CURT Group. We're very pleased with the integration of CURT today. CURT had an all-time high sale in June and July, selling a record number of hitches and is continuing to gain market share with an exposure to a wide variety of products. CURT’s extensive dealer and distribution channels and innovative product portfolio, which includes products like BetterWeigh, RockerBall, and Echo, continue to generate new cross-selling opportunities and will help support growth in the Aftermarket. Our RV and marine business will continue to grow share in many different categories as well. The counter-cyclical nature of the Aftermarket business, underscored by steady growth since the outbreak of COVID-19, has proven to be a key competitive advantage for LCI as it mitigates the cyclical impact of our exposure to our OEM businesses. As a result of consumers taking to the outdoors in unprecedented numbers, there has been a subsequent increase in demand for Aftermarket parts. Our International business also grew substantially, with sales rising for the quarter 40% year-over-year to $44 million. Polyplastic, a premier manufacturer of acrylic window products that we acquired in January of this year, was one of the handful of business units that continued to operate without significant disruption to production from COVID-19. In a normal operating environment, Polyplastic primarily manufactures windows for the European caravan industry. However, there was an increase in demand for acrylic panels as stores worldwide needed acrylic separators at registers to serve as protective barriers between cashiers and customers. As a result, Polyplastic was able to dedicate some of its acrylic production specifically toward COVID-related uses. Despite these near-term impacts, these operations are now growing above their pre-COVID levels, and we remain confident in the outlook for marine, rail, and caravan markets in Europe and are positioning in these spaces as we work towards further integrating our latest acquisitions Polyplastic, Lewmar Marine, Lavet, Femto, and Ciesse. After implementing temporary suspensions in production at the majority of our facilities at the end of the first quarter, our plants have been operating above pre-COVID levels since late May. The health and safety of our team members have remained our top priority, and we have implemented heightened cleaning and sanitization protocols across our manufacturing sites to help ensure team member safety. Our teams have done a fantastic job executing on areas within our control. These efforts have showcased our agility as an organization, as we quickly and effectively shut down, then restarted production, which we then ramped to exceed pre-COVID production levels, to meet record demand for product. We've continued to manage our supply chain and manufacturing extremely well, delivering quality products to customers with minimal disruption as some other suppliers in the space have struggled to gain footing, creating an opportunity for us to really gain market share. I'm incredibly proud of our team’s exceptional communication, dedication, and execution exhibited during one of the toughest periods in our company's history. To come out of this crisis as we did is an exceptional testimony to the leadership displayed by the men and women leading our teams. Our success through this very tough time further highlights LCI’s strong culture and leadership models. We feel strongly that our teams were able to maintain solid communication and navigate through the pandemic due to the consistency of our values and leadership. While many companies froze during this time, our leaders reached out weekly to our thousands of team members to keep them aware of each step we were taking as we brought operations back online. The years we have spent developing our culture, values, and leadership have been the sole reason we were able to quickly get production up and running as effectively as we did as demand rose to record levels. We're maintaining constant touch points with our OEM and dealer partners to ensure we can continue to react quickly to the changing environment and stay ahead of the curve. In addition, continued success with operational excellence initiatives has helped us achieve profitability far beyond our expectations for the quarter, enabling us to drive efficiencies while we work to meet these increased demand levels. We are continuing to turbocharge automation opportunities as we executed and finalized a large window project over the quarter. Additionally, we have many continuous improvement projects ongoing as well as labor initiatives to help with the quality and labor challenges that come with an all-time high demand environment. Our R&D expertise and innovation is a critical piece of our long-term growth strategy, also serving as a key competitive differentiator for LCI as new consumers increasingly look for innovative products to meet a variety of needs. While we are operating in an unprecedented environment, we will continue to invest in technology and develop new industry-leading products as well as new features to existing products to drive market share and content growth. Our OneControl technology is becoming more frequently requested and adapted among consumers and is poised for continued growth. We also see more OEMs adapting our push-button upgrades as more consumers shift from manual to electric jacks and other manual to electric products. We are also excited to announce the upcoming launch of our newest product, a tire pressure management system called Tire Linc. This product has the potential to improve safety across the RV space due to its ability to alert the RV owner about temperature and air pressure, similar to current auto technology. Since 2008, automobiles have been mandated to have a standardized tire pressure management system, but today, there's no similar regulation in place for RVs. This is an important safety feature that we believe should be a requirement on all RVs and which we are working alongside our OEM partners to standardize. Our R&D teams are also working on further innovations for windows, shade systems, and awnings, not to mention, the many new developments within the CURT Group. After aggressively executing on acquisitions in 2019, we spent the first half of 2020 focused on integrating these new businesses and paying down debt. Since then, we've been able to generate solid cash flow to enhance our already strong financial position. While we are beginning to resume conversations around our current acquisition pipeline and remain open to small and strategic tuck-in acquisitions, our priorities continue to center on integrating and realizing new synergies from recent acquisitions, continuing to pay down debt, and preserving cash. In closing, I want to thank all of our LCI team members once again for rising to the occasion this quarter, and stepping up in a way we never could have anticipated, navigating what turned out to be the most challenging environment in our company's history, and tackling unprecedented challenges while also driving the business forward.

Thank you, Jason. And good morning, everyone. Our consolidated net sales for the second quarter decreased 16% to $526 million compared to the prior year. The decrease in year-over-year net sales was driven by the impact of temporary production shutdowns in response to the COVID-19 pandemic, partially offset by strong growth in the company's Aftermarket and International markets, as well as a recovery in RV OEM retail demand. Q2 2020 sales to RV OEMs declined 38% compared to the prior year, as a result of the previously mentioned production shutdowns in April, but demand for RVs quickly accelerated, resulting in record sales months in June and July. In an effort to provide additional color during these unusual times, North American RV sales declined 99% year-over-year in the month of April, while May sales declined 32%, and June concluded with an increase of 17% year-over-year. Content per towable RV unit increased 4% to $3,371 and content per motorized unit decreased 4% to $2,308 compared to the prior year, excluding the impact of Furrion in 2019. The content increase in towables was driven by organic growth and new product introductions, partially offset by the increased demand for entry-level products, which traditionally have less content per unit. The content decrease in motorized units was the result of the continued trend of wholesale mix shifting to smaller units. Product innovation remains a critical part of our strategy as we look to further introduce leading-edge products that add value for our customers and help to drive content growth targeted in the range of 3% to 5% for towable RVs. Q2 2020 sales to Adjacent markets declined 23% to $131 million compared to the prior year, primarily due to the production shutdowns in marine and other adjacent businesses at the start of the quarter. Sales to North American adjacent industries, which represent 83% of our adjacent industry sales declined 30%, while sales to international adjacent industries increased 67%, primarily driven through our recent acquisitions in the space. The same trend driving demand for RVs has led to improved retail demand in marine, which has helped offset the decline in the Adjacent Markets. Aftermarket segment sales increased 109% to $158 million in the second quarter compared to the prior year, while International sales increased 40% to $44 million. The increases in Aftermarket and International sales were also primarily driven by revenues from recent acquisitions, which contributed $103 million towards total sales during the quarter as we continue to drive our diversification strategy forward. As we have previously mentioned, Aftermarket performed very well during the entire quarter. Excluding the impact of acquisition, sales only declined 44% during the month of April, increased 7% during May, and then concluded the quarter up 52% during the month of June. Operating margins were 4% for the second quarter, decreasing roughly 640 basis points from the second quarter of 2019, primarily driven by the impact of disruptions from shutting down production. During the quarter, our team worked diligently to overcome a tough operating environment in April, and we look to continue to advance operational excellence initiatives and identify new opportunities to drive margin expansion in the second half of the year. The quarter concluded with margins improving over the prior year, driven by strong growth margin improvement, as a result of fixed cost leverage and labor efficiencies. Selling, general, and administrative expenses were $108 million during the quarter, slightly higher than previous guidance, as a result of additional SG&A costs from acquisitions, including CURT warehousing costs, intangible asset amortization, and engineering costs, partially offset by a decrease in organic SG&A costs. We anticipate SG&A costs in the third quarter to be between $115 million and $120 million. Adjusted EBITDA decreased 46% to $45.6 million for the quarter. This decline was driven by the weaker demand environment at the start of the quarter and temporary production shutdowns related to COVID-19. Non-cash depreciation and amortization was $24.2 million for the second quarter, while non-cash stock-based compensation was $7.4 million. GAAP net income in Q2 2020 was $13.2 million or $0.52 per share, compared to $47.5 million or $1.89 per share in Q2 2019, partially due to the year-over-year decline in net sales. Adjusted net income for Q2 2020 was $13.7 million or $0.54 per diluted share. For the six months ended June 30, 2020, cash generated from operating activities was $102 million, $95 million was used for business acquisitions and $15 million for capital expenditures, and $33 million was returned to shareholders in the form of dividends. We are operating with a strong balance sheet, as we continue to pay down debt and generate strong cash flow, maintaining available borrowings of $251 million under our current credit facility. At the end of the second quarter, cash and cash equivalents totaled $62 million, up from $35 million at the beginning of the year. As of July 31st, 2020, we maintain a total liquidity position of $272 million, enhanced by the strategic cost management actions we put into place during the quarter to mitigate the impact of COVID-19. For the full year 2020, we are targeting capital expenditures between $40 million and $50 million, as we continue to delay non-essential expenditures in the wake of uncertainty around COVID-19. At the end of the second quarter, we had an outstanding net debt position of $640 million and remain in compliance with our debt covenants. As a reminder, we have no significant debt maturities until 2022. Currently, our leverage position relative to pro-forma EBITDA, which includes the EBITDA of acquisitions, stands at just under 2.3 times, and we will continue to prioritize paying down debt as we work towards meeting our long-term leverage target of 1x to 1.5x net debt-to-EBITDA. Our financial position remains strong with ample liquidity and flexibility to manage through a variety of environments and continue executing on our strategic initiatives. That is the end of our prepared remarks.

Our first question comes from Craig Kennison with Baird. Please go ahead, your line is open.

Hey, thanks for taking my question, Brian. Starting with you, really impressive execution in a very dynamic quarter. From a margin standpoint, curious, how should we think through Q3 EBIT margin in the balance of this year, given what you're seeing on the demand side and how you've chosen to manage costs?

Hi, Craig. A couple of points. First, I provided some insight on SG&A in my prepared remarks. Regarding gross margins, I'm pleased with our performance for Q1. The margin is significantly better than what we saw in June. Year-over-year, we are benefiting from labor efficiencies, contributing about an additional percentage point to our gross margin. Additionally, we have operating leverage on our fixed costs at these volumes. We've previously mentioned a target gross margin of around 25% to 26%, and I believe we are within that range, likely at the lower end for Q3.

That's great. Thank you. And then Jason, maybe just comment on your view of the RV market, in particular, whether you think some of this incremental demand that has come in since the pandemic creates some sustainable growth or maybe some challenges next year as you try to comp all of it?

Well, in terms of the record demand, we're sitting in a spot where we're limited with respect to total capacity in the industry. You know, we can't go out and build our facilities quick enough. Obviously, dealer inventories are extremely low, and the OEMs are responding as quickly as they can to meet the demand that we're seeing right now. So, I mean, given the post-pandemic lifestyle and limited travel and vacation options out there, it puts us in a position for the foreseeable future. Anyway, you know, people are going to make different decisions, and it just feels like it's got a pretty long runway. So we're planting our feet right now, trying to figure out how to add a second shift and how to increase capacity where we can. We don't want to go out and buy a bunch of buildings and add capacity from a CapEx standpoint. We want to look at some of the options that we've got right now, and then the biggest challenges are going to be quality customer experience and sustaining those things with all the flood of new buyers both on the marine and the RV side.

Great, thank you.

Our next question comes from the line of Kathryn Thompson with Thompson Research Group. Go ahead, please. Your line is open.

Hey, good morning. This is actually Brian on for Catherine. Thanks for taking my questions. I wanted to ask about I guess, July trends, and you said sales company-wide are up over 50% and the RV segment was up 17%, I think and yeah, obviously impacted by the OEMs working through the holiday season, as you guys mentioned. Do you have any sense of what those numbers might be, on kind of like-for-like basis, excluding that holiday bump?

I would consider a few different aspects, Brian. We are discussing growth in the double-digit percentage range from July onwards. I believe Jason will provide more details, but by the end of July, their run rates have slightly increased into August and September. We anticipate this trend to continue at least through the third quarter. To help put this in perspective, you might consider looking at daily wholesale shipments. These numbers appear to be on par with levels we saw in the latter half of 2017, which were some of the highest the industry has recorded, and they seem to be quite similar to what we are seeing currently.

All right, that I guess was helpful. And I mentioned at the Aftermarket segment, can you guys talk about maybe specific trends in July in that segment, and how to think about margins for that segment in Q3?

Yeah, I think so for Aftermarket, I mean, as we've said, and we even talked about that a little at the end of the first quarter, you know, at that point in time, we knew how they were. They performed during the month of April, gave pretty good color on that from at least an organic growth perspective during all of Q2. Pretty fantastic results when you think about up 52% organically during the month of June. That would, in a typical year, you would start to see that slow from this point forward. I think what we're certainly seeing within the CURT business and our existing Aftermarket businesses is that it’s going to run a little bit longer as the season has extended. But it should start to taper off definitely when you get into the later months of the year. But we're still, from an organic perspective, I'd say July is up over 40 plus percent.

Organic?

Yeah, organically. Yeah, so it’s still performing and is expected to continue with that pace during at least the third quarter. So and you know, from a margin perspective, and we've talked about CURT, which is a significant addition to our Aftermarket segment. You know, originally we talked about that margin being more comparable to our overall consolidated margins, but as you've heard me say a few times, we've certainly made tremendous progress on synergies. Certainly looking at 2% to 3% of sales as opportunities and I would tell you, we're close to 2% already landed. So you know, we've progressed nicely working through the synergies and still have a little bit more to go but hopefully that gives you a little bit of color on margins there.

It does. Thank you.

Your next question from the line of Scott Stember with C.L. King & Associates. Go ahead please, your line is open.

Good morning, guys. Very nice quarter and thanks for taking my questions. Maybe just touching base again, you're kind of pinning some of the growth rates in the industry to back in 2017. Obviously, there's been a lot of capacity that's been added. But could you maybe just talk about as we approach those levels, go through it, what your expectations are from the industry being able to handle this kind of volume? And plus, on the labor side, what you're seeing now and what you would expect to see as growth continues to accelerate?

Sure, Scott. I believe there's more capacity available in the industry right now overall. Currently, supply chain and labor are the main challenges. It will take some time for supply chains to normalize. As you may remember, back in April, we instructed our supply chains to nearly shut down, and then by the end of May, we needed more than 100% of pre-COVID levels. Supply chains are currently under some stress, and in Elkhart County, when the industry heats up, especially at these record levels, we quickly find ourselves facing labor shortages. These two factors are working against us, but the industry is known to adapt and overcome challenges, especially with our close-knit community. Over the next few months, I anticipate that supply chains will recover, labor conditions will improve, and we will become more resourceful. As mentioned in our earlier comments, we are continually adding automation, and each of these projects contributes to ongoing improvements that allow us to reallocate team members to other areas. We are trying to enhance our efforts by holding job fairs and attracting talent from outside the area to join our business.

Got it. And you quickly talked about automation, can you give us an update on the chassis automation project, whether it's up and running and when that will start to get your attribute to earnings?

Yeah, so you know, we started running production there a little bit earlier this year and because it's such a big project, we're just working through the program debugging now. It is producing upwards of a couple hundred beams a day for us. So we need to get it to a much higher level than what it is today. But it's just one of those things where it's not a million-dollar project, obviously. Some of those smaller projects we can implement have product ranking to a smaller extent pretty quickly. But on the larger projects, they just take a little bit longer, but we're pleased with how it's progressing. And it's timely because it's going to help us add capacity in our chassis divisions in a short period of time.

Got it. That's all I have now. Thanks. Thanks, guys.

Thanks Scott.

Our next question comes from the line of Fred Wightman with Wolfe Research. Go ahead please. Your line is open.

Hey, guys, good morning. Jason, you just mentioned supply chain and labor were two of the bigger bottlenecks, but some other OEMs have talked about delivery and transportation challenges. So, I just wonder if that is still an issue. And what do you think that means for reported shipments for the industry over the next few months?

I think that's a valid point. While it's not a direct issue for us as a supplier, in this industry, whenever demand surges at this level, it typically takes a couple of months for companies to allocate the necessary resources to meet this record demand. However, they will eventually manage to find the resources needed to ship the units to dealers. Dealers are highly motivated, as most of these units are already sold, and they will look for creative solutions to expedite the delivery of these units to customers.

Okay, great. And then you guys had mentioned some market share opportunities, just given capacity challenges or ramping issues at your competitors, what segments specifically do you think you could see the biggest benefit?

Well, I don't want to get caught into the segments, but there's a few big opportunities right now, in the way some of our key components or what we call our core components, where suppliers have just fallen down and we've been able to pick up some pretty good market share in a short period of time. So normally, when things are busy like this, we don't rely on market share gains. Typically, we gain a little bit of market share here and there. But we've had some pretty significant sizable pickups over the last few months where supply chains for competition, even supplier peers and products we haven't been in, especially on the Aftermarket side, they'll call us up and say, as long as you can procure this component, we're buyers. So both Aftermarket and OEM, we've seen some pretty good movement there.

And I would add, you know, you just think about our total content per unit. You know, we've been guiding the 3% to 5% growth for a while and, certainly during this pandemic, we've seen a strong shift towards entry-level products, and we're still turning in 4% year-over-year growth on a trailing 12-month basis. So I think there's an opportunity for that to continue to run here in future quarters.

Great. Thanks, guys.

Our next question comes from the line of Bret Jordan with Jefferies. Go ahead, please. Your line is open.

Good morning. This is Mark Jordan on for Bret. Just thinking about the Adjacent OEMs, it looks like the RV OEM seems in really strong demand, but I'm wondering if you can talk about the current trends among the different Adjacent OEMs?

Sure. We'll start with marine. We're experiencing historically high demand in the marine segment of our business. We've recently consulted with our dealers and OEMs, and they are facing capacity constraints as well as supply chain and labor challenges similar to those in the RV industry. As a result, we are increasing capacity and adding second shifts in the marine area. Meanwhile, Europe is recovering at a slower pace since they did not receive the same level of financial support from the government as the U.S. However, the demographics for RV and marine still look promising. Regarding the Aftermarket, the sales channels are performing exceptionally well. The CURT business we acquired earlier this year has benefited from record outdoor demand for outdoor products, particularly hitches. Many first-time buyers are now purchasing hitches for their cars, SUVs, and trucks. In some of our commercial sectors, such as buses and the housing market, growth isn't as pronounced but remains steady compared to the other outdoor leisure segments. Additionally, cargo trailers, an essential part of our business, are experiencing significant growth, including landscape trailers and other types of cargo trailers. The components we supply to that market are also performing very well at this time, which covers most of the relevant areas here.

Okay, great. Thank you very much for taking my question.

Thanks Mark.

Our next question comes from the line of Shawn Collins with Citigroup. Go ahead, please. Your line is open.

Hey, great. Thank you. Good morning, Jason and Brian. Hope you're well?

Good morning, Shawn.

Hey, I wanted to circle back and ask about labor again. You obviously talked about the constraints there and second shifts and whatnot. You know, I wasn't covering the sector in ’17, ’18, but could you compare this period of constraints and how you're dealing with it compared to the late 2017, 2018 period, please?

I don't think we're at that point yet. We're definitely noticing some wage pressure out there. We've organized a couple of job fairs ourselves and have been quite successful in hiring team members. So far, we've done well in adding to our team, and I believe we haven't encountered the same level of inflation we saw during that past period. There's still an opportunity for that to happen, and we're keeping a close eye on it. However, at this moment, we haven't faced the same issues we experienced back then.

Okay, great that's helpful. Thank you, Brian. And just my second question if I could ask about the M&A environment. You know, you guys are obviously very experienced acquirers. This is obviously a very unique, different environment. So I'm just wondering what you're seeing in terms of M&A in terms of communication. Are you seeing less frequent dialogue because of this unique environment? Or are you possibly seeing greater dialogue and greater opportunities because of the uncertain future kind of that people are now dealing with in the future? So any commentary on that would be helpful? Thank you.

Certainly. Last year, we achieved a record $575 million in acquisitions. Our plan was to spend a significant part of this year integrating those acquisitions, even before COVID. April and May were quite slow regarding pipeline activity and acquisition discussions. However, since I joined, we've completed around 65 acquisitions, primarily by targeting businesses that are strategically important to us. We don't rely on brokers; we actively seek out companies that fit our strategy. We resumed our efforts in June after a couple of quieter months, and currently, we are having many productive discussions, exploring not just strategic acquisitions, but also addressing capacity issues. There are important product lines and components that our customers urgently need, which some suppliers are struggling to provide effectively. Therefore, we will be looking at companies in both the marine and RV sectors. Although we've been quiet in the RV space recently, we expect to see more activity there as well. We are committed to our diversification strategy, aiming for 60% of our sales to come from outside the RV sector by 2022.

Okay, great. That's helpful commentary. Appreciate it.

Our next question comes from the line of Brandon Rolle with Northcoast Research. Go ahead, please. Your line is open.

Good morning. Thank you for taking my questions.

Brandon, how are you doing?

First, could you comment on the used inventory environment or capacity there within the RV and boat industries? And then as a follow up, I was also hoping you could comment on the potential impact of retail shows closing down or you know how minimal the impact it would be for both the RV and boat industries? I saw The Hershey RV Show is already cancelled. And you know, maybe if there's any implications for open house as well? Thank you.

There are several factors to consider regarding your comments. First, regarding retail shows, we don't anticipate much happening there as the dealers already have more sales than they can manage. Their focus should be on acquiring units, conducting pre-delivery inspections, and ensuring a positive experience for customers, especially with the influx of new buyers. Therefore, we don’t expect significant outcomes from retail shows. The same can be said for open houses; it’s unlikely we'll see much activity there either. However, we've heard that some larger dealers are organizing private showings of their product lines at the OEMs. This is beneficial for the industry as it allows us to maintain momentum. We typically observe model year and product changes that can slow operations significantly, especially in August when we prepare for new product launches in September. This year, with fewer of those changes happening, we've been able to maintain a strong pace in August, achieving high volumes. While open houses may be limited, the positive aspect is that there are many orders to fulfill. We'll leverage our capacity to keep production steady without the need to stop for daily prototyping at our facilities, focusing on increasing volume for OEMs with last year's designs.

And Brandon, the first part of your question on used inventory, you know, from our touch points, there isn't much in the way of used products out there. So you're not. I mean, there's been such a tremendous shift towards first-time buyers, so you're not getting trade-ins and it's basically non-existent.

At the end of the day, there are many factors we won't be able to fully understand from the numbers and feedback we're receiving. However, we believe that the retail figure will surpass 475. We also anticipate that registrations will be significantly affected for the remainder of the year, as some states have closed their DMVs, resulting in delays in obtaining registrations. This can mean months of lag time between purchasing the unit and receiving the registration. I advise you to pay attention to the low inventory levels in the market and how the industry is performing compared to the actual retail registration numbers we are getting from the DMV.

Okay, great.

Our next question comes from line of Steve O'Hara with Sidoti & Co. Go ahead, please. Your line is open.

Hi, good morning. Thanks for taking my question.

Hi, Steve.

Hi, I wanted to revisit something you mentioned earlier. Given your outlook on retail and wholesale, could you share what that means for dealer inventories as we approach year-end? Also, do you think dealers will feel more at ease holding larger inventories going into winter compared to last year? I understand that dealers might currently be optimistic, but as we move into fall and winter, they may start to have concerns about the economic situation.

Yeah, Steve, I think that well we're expecting based on the retail number that Jason threw out and kind of what we've talked about from a wholesale perspective, I would expect us to end this year still down from an inventory perspective. You know, OEMs all remain ramped up to try to bridge that gap that's there. So during the late fall and winter, there will be some chance to build that back up. But based on capacity constraints, etc., I think in the year, it could be 35,000, 40,000 units additionally in the hole from where we started the year so. So I would say I would expect that to continue to carry into the first quarter as they try to ramp up and build inventories for next year selling season.

Okay, that’s helpful. Can you talk about the current state of OEM backlogs and how far out they extend? How much clarity do you have on that? Thanks.

Well, it's all anecdotal at this point in time just using our OEM touch points and what they're telling us. But, I mean, you can, we've got some brands that are out easily a few months and some that are out seven. So if you think about going into a dealership right now and ordering an RV, and they tell you that it's going to be March, I mean, that tells you how sizeable the demand level is. I mean, so, and we'll work through that and get some of those backlogs down as we all ramp up capacity. But all the suppliers need to get up to speed and get some second shifts running, get their supply chains up, get labor where it needs to be, as do the OEMs. It’s a really good position for us to be in, obviously.

Okay, and then maybe just lastly on labor. I mean, I think in 2017, 2018 labor really started to hit the industry hard in terms of inflation. I mean, would it be different this time, just because of job losses kind of across the board in other industries and, there should be a bigger pool available to you guys and the industry, in the regions you're in, or maybe the economy's in those areas weren’t hit as hard as New York City? So, you know, so to speak.

Yeah, so certainly this area is hard-hit, because, you know, 40% of the economy is marine and RV production. So, we're pulling all the labor we possibly can that's available in this area for these specific skilled industry jobs. As a component supplier, it's a little bit easier for us to work outside of the Elkhart County range. I mean, obviously, we've got 40 or so facilities outside of Elkhart County, so we can utilize some of those areas and some of those areas are in labor markets that have been impacted the opposite way Elkhart County has. So we're looking at all those options. And you know, that’s going to be helpful to us in the long run as we continue to design a capacity strategy to deal with the record demand here.

Okay, thank you very much.

Yep.

And there are no further questions at this time. I'd like to turn the call back over to Jason for some closing remarks.

Well, everybody, we appreciate everybody tuning in on this conference call. Obviously, it's exciting times for us and especially the next couple quarters look great, but it's setting us up for a fantastic 2021. We're excited to report next quarter’s earnings. See you in a quarter. Thank you.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.