Lci Industries Q3 FY2021 Earnings Call

Good day and thank you for standing by. Welcome to the LCI Industries Q3 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speakers today. Please go ahead.

Good morning, everyone, and welcome to the LCI Industries third quarter 2021 conference call. I am joined on the call today by Jason Lippert, President, CEO and Director. We will discuss the results for the quarter in just a moment. 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 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 our earnings release and in our Form 10-K and other filings with the SEC. The Company disclaims any obligation or undertaking to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made, except as required by law. With that, I would like to turn the call over to Jason Lippert.

Good morning, everyone. We delivered another quarter of strong results, driving both substantial top line and market share growth as consumers continue to gravitate toward the outdoor lifestyle in record numbers. Despite operating in an environment riddled with supply chain challenges, material and labor shortages and rising input costs, our teams powered through these headwinds to meet our customer commitments and fulfill record demand in the recreational markets we serve. During the quarter, we achieved $1.2 billion in sales, up 41% year-over-year or up 99% compared to the third quarter of 2019. This great achievement by our teams has been supported by great organic growth and success of our recent acquisitions of Veada, Challenger, Polyplastic, and CURT, which underscores the strength of our diversification strategy. In addition, we continue to increase our RV content per vehicle growth, further solidifying our position as a global leader in the recreational space. Before getting into segment results, I'd like to address our recent acquisition of Furrion, which we announced beginning of August. Furrion is a premier distributor of a range of appliances and other electronic products for RVs in a wider transportation market. The addition of Furrion with $230 million in forecasted sales for 2021 will help us tap into a $1.5 billion addressable market in North America alone through its robust catalog of innovative products, complementing our OEM product lineups with kitchen appliances, AV appliances, and observation camera systems, just to name a few. Because of the teams, products, and innovative mindset, we believe that we have a real opportunity to double this business in the next few years. Beyond North America, we plan to utilize Furrion in broadening our offerings in the international markets by leveraging our existing global customer relationships. This will enable our company to unlock further market share, especially in the European and Australian caravan industries. Additionally, Furrion brings a strong aftermarket business with both an online and brick-and-mortar presence, further accelerating our company's aftermarket division, which is one of our fastest-growing segments. Investment and growth in our aftermarket help accelerate our proven diversification strategy to support the long-term growth of LCI. The Lippert teams have been working closely with the Furrion teams for several years through our distribution partnership and have longstanding ties with its strong management and R&D teams. Since the acquisition closed, we've already kicked off a few exciting projects, which we'll be able to discuss in further detail in the coming quarters. We're incredibly excited to welcome Furrion to Lippert family, and I look forward to them helping us turbocharge innovation to further transform the industries we serve. Turning to our performance by segment, beginning with RV OEM, sales increased 44% year-over-year to approximately $667 million for the third quarter, driven by strong demand across both North America and international markets. Our preliminary results showed record sales for October, indicating continued industry strength carrying over into the fourth quarter and demand remained strong, while dealer inventories are still at an all-time low and not to mention campgrounds remaining fully booked nationwide. To mitigate the margin pressure we've seen all year, stemming from a combination of historically high steel and aluminum prices, skyrocketing freight costs, and widespread labor shortages, our teams have focused on driving continuous improvement and automation initiatives across the Company. These efforts will also help us to create capacity without the need to put up many new buildings and we've allocated a record amount of capital towards these automation and continuous improvement projects with over 15 larger automation projects set to go live in 2022 and the first part of 2023. Long term, we will continue to implement more projects like these to support margins, while also positioning our production to be agile, repeatable, and scalable in any environment. RV content per unit ramped significantly during the quarter, driven by our continued strong organic growth as our teams continue to bring new products to market and take market share while some of our competitors couldn't supply well during this last 12 months. Content for towable RV increased 10% year-over-year to $3,786, while content per motorhome RV increased 14% year-over-year to $2,732. Our teams are focused on continuing to take advantage of content growth through innovation and continued new and existing product development. Innovation remains one of the cornerstones of our success, and we are committed to meeting the demand for our technically sophisticated products to create a best-in-class experience for consumers as well as to meet the demands of the new tech-savvy customer. In line with recent consumer trends, we're also focusing more on developing our safety suite of products to bring safety-related components of the RV space that have already existed in automobiles for years. Our ABS brakes are a prime example of one of our newest safety innovations for RVs. We're already seeing substantial demand for the product as it comes to the market. To add, our safety products are designed to be compatible with one control, further extending the capabilities for platform and ecosystem, while providing more flexibility and technology for the customer's recreational experience. Turning to our Aftermarket Segment, total revenue grew to $219 million in the third quarter, up 18% year-over-year. The Lippert aftermarket teams in automotive, RV, and marine continue to work through very extensive backlogs. Demand for our aftermarket products is significant as units being serviced are at an all-time high because used RVs continue to enter the repair and refurbishment cycle in record numbers. With the record number of RVs currently on the road and a million coming into the repair and replacement cycle every two years, the trend should be nothing short of fantastic for aftermarket products and service businesses that assist the RV consumer with repair, replacement, and upgrades. As we look to serve this growing group of existing users and those brand-new to the lifestyle, customer experience initiatives like Lippert Scouts program and the Campground Project remain top priorities. These innovative initiatives allow us to collect valuable feedback directly from the RV users themselves, which we can utilize to improve our current and future offerings and services to RVers everywhere. This quarter, we engaged over 200 families through our Lippert Getaway which is our company's first RV rally, meeting with owners, groups and hosting our first ever all Lippert influencer summit at a wonderful campground in Pigeon Forge, Tennessee. For four days in Tennessee, we listened to the RVers loyal to our brand and based on their comments and testimony, it's become abundantly clear that we are doing more for this group than just about anyone out there with respect to listening to these customers in order to more favorably impact the RV customer experience. Turning to our adjacent markets. Revenue for the third quarter increased 55% year-over-year to $281 million. With marine and other related markets being driven by the same secular trends for towing RV and aftermarket segments. Marine demand remained strong, but industry production has also been impacted by supply chain. That said, we are successfully growing market share, which we delivered with the support of our Lexington, Veada, and Taylor Made marine businesses. As you may recall, we purchased an electric Bimini product about a year ago, and we are just now starting to transition much of the industry away from manual Biminis to electric powered Biminis, while creating an aftermarket option for this as well. We launched our seating division for TRACKER Marine earlier this year in Missouri, and we believe it's been a great success with a lot of additional opportunity now that we are located near and supplying the largest pontoon and boat builder in the country. Other notable progress continues to be made in our utility and trailer axle businesses. It has now eclipsed sales in our RV axle suspensions and continues to outpace the industry growth significantly. We are winning new accounts in this space monthly due to our relationships and product offerings. Due to the success of similar programs in RV, we've also launched customer experience initiatives for boaters and other users in the marine space. We look forward to these findings to fix existing customer pain points and elevate the customer experience in the boating world while bringing more attention to the Lippert brand. Our international business has showed strong performance with revenues increasing 47% year-over-year to $88 million. From what we've seen, it is clear to us that European consumers continue to turn towards the outdoor lifestyle. In fact, caravan and motor caravan retail was up 70% for the month of September. The European RV industry seems to be reacting a little slower and catching consumer demand than the U.S., so we believe that this could be a nice tail for us as Europe's run could extend longer than that of the U.S. We continue to see a rise in interest in European products in the U.S., and U.S. RV OEMs are increasingly adopting Lippert's European components, including our Euro pop-tops, steps, doors, windows, and bed lists. Five years ago none of these European products were even being sold in the U.S. This strategy further helps establish our brand reputation as a global innovator. At the moment, pop-tops for B vans made in our European facilities provide a large opportunity for growth as we work towards building these in the U.S. like we have the other products that the U.S. manufacturers that we've adopted from Europe. Our European products and R&D continue to be steady secret weapons for our sales teams as they allow us to offer products to our customers that would otherwise not be possible without Europe businesses and creative product teams. Next, I'd like to highlight the recent progress we've been making with regards to sustainability reporting. Over the past year, we've taken a focused effort to understand the impact of our operations on the environment and in communities in which we operate, exploring sustainable business practices that can drive value creation over the long term. Through these efforts, we have made real operational improvements, including the establishment of an environmental management system to monitor and reduce waste and updates to our safety training requirements. To highlight these and many other advancements, we'd like to announce that we'll be publishing our inaugural corporate sustainability report in late Q4, which we'll use to report on our ESG performance and track improvements into the future. Together with operating sustainability comes the support of our team members and communities, two key pillars of our cultural foundation that's instilled Lippert in the Company that it is today. Just four weeks ago, I had the opportunity to chair, along with the support of a large group of Lippert volunteers, an auction for the Boys & Girls Club of Goshen, Indiana, through which we raised $2 million to benefit the local youth. I could not be prouder of our volunteers who helped out those benefits, illustrating our ability to give back to the community through the support of Lippert since our earliest days. This event was one of almost 100 events, our team members across the globe took part in the month of October. Last week, we had over 2,000 team members participate in our company's annual volunteer week during which our philanthropy team created serving events daily for our teams to take part in. Switching gears to capital allocation. We are focused on integrating our recent acquisitions, but remain receptive to strategic M&A opportunities as we pay down debt. As I mentioned earlier, we are investing heavily in the automation of our manufacturing footprint to ensure we maintain the appropriate capacity and quality to meet the heightened demand for recreational products, while identifying cost efficiencies where possible. In closing, I'd like to thank our dedicated team members that work so hard to overcome challenges while cultivating a culture that supports sustainable growth and continuous improvement. We could not consistently deliver these results without this dedication, along with the strength and guidance of our dedicated leaders all over this company. We look forward to continuing our incredible momentum as we deliver value to our shareholders in 2022 and beyond. I will now turn the call over to Brian Hall, our CFO, to discuss in more detail our third quarter financial results.

Thank you, Jason. Our consolidated net sales for the third quarter increased 41% to $1.2 billion compared to the prior year, driven by continued strength in market performance, along with strong operational execution. Acquisitions contributed $78 million or 10% growth to our quarterly results, with organic growth contributing the balance or 31% of the improvement. As Jason mentioned, October sales were up 52% from October 2020 to $441 million, an implied growth rate of over 50% for Q4 when seasonally impacted. We expect to see continued elevated demand into the remainder of the year. Q3 2021 sales to RV OEMs increased 44% compared to the prior year due to heightened wholesale and retail demand. Current North American RV industry production rates also remain high, implying 2021 wholesale shipments of approximately 577,000 to 587,000 units, an all-time record for the industry. We substantially expanded content in towables and motorhomes during the quarter. As Jason mentioned, content per towable RV unit increased 10% to $3,786 and content per motorized unit increased 14% to $2,732 compared to the prior year. The content growth can be attributed to organic growth, such as several new product introductions in addition to the impact of price increases enacted during the quarter. We continue to see robust performance in the marine market, driven by similar tailwinds bolstering RV. North American marine sales increased 119% in the quarter as production further increased to support elevated demand, which we expect to continue through the fourth quarter. Acquisitions contributed $23 million or 49% of this growth. Sales to adjacent industries grew 55%. Aftermarket segment sales increased 18%, and international sales increased 47% as strong secular trends continue to drive consumers into the recreation space. In our continued execution of our diversification strategy, we closed the acquisition of Furrion during the third quarter. As Jason had stated previously, this addition will not only open doors for us as we continue to expand on our OEM offerings with their innovative products to help drive long-term content expansion, but also help us grab further market share by leveraging Furrion's existing distribution channels. Approximately 40% of Furrion's sales are to the aftermarket with the remaining 60% being OEM. Gross margins were 21.6% compared to 26.8% in the prior year quarter, pressured by headwinds, including elevated freight, material and labor costs. The cost of steel again rose, increasing 23% during the quarter, partially offset by the aforementioned price increases. As we have mentioned previously, many of our price increases are passed on to our customers on a two-quarter lag, which is the primary contributing factor to the margin pressures we have experienced. Price increases, which were effective during October have now surpassed the bottom of the curve, and we are beginning to see some margin expansion when compared sequentially to Q3 results. We are anticipating Q4 margins to improve 100 to 150 basis points from Q3. SG&A costs as a percentage of sales decreased from the third quarter of 2020 as well as sequentially due to a decrease in fixed costs paired with higher sales, offsetting increases in freight and transaction costs. Operating margins decreased roughly 375 basis points compared to the prior year period, again driven by increased labor expense to meet heightened production requirements and the increasing cost of steel, aluminum, and freight, partially offset by lean manufacturing and automation initiatives we have continued to introduce. GAAP net income in Q3 2021 was $63.4 million or $2.49 per diluted share compared to $68.3 million or $2.70 per diluted share in Q3 2020, declining due to the previously mentioned cost pressures, partially offset by strong sales growth across all of our business channels. Adjusted EBITDA decreased 1% to $118.1 million for the third quarter compared to the prior year. Non-cash depreciation and amortization was $80.2 million for the first nine months ended September 30, while noncash stock-based compensation expense was $20.3 million for the same period. We continue to anticipate depreciation and amortization in the range of $110 million to $120 million during the full year 2021, primarily due to increases in capital investments to enhance production capacity and enable further manufacturing efficiencies. For the nine months ended September 30, cash generated from operating activities was $12 million, while $155 million was used for business acquisitions, $74 million for capital expenditures, and $64 million was returned to our shareholders in the form of dividends. Operating cash flows were negatively impacted by the intentional increase in working capital to support heightened demand and minimize supply disruption in addition to rising prices of steel and aluminum-based products. At the end of the third quarter, we had an outstanding net debt position of $1 billion or 1.8x pro forma EBITDA adjusted to include LTM EBITDA of acquired businesses. With the constantly evolving operating environment, we are focused on maintaining a strong balance sheet and continue to target a long-term leverage of 1.5x net debt to EBITDA. In the near term, we are working to integrate recently completed acquisitions which we expect to positively impact our operating cash flows in the coming quarters. For the full year 2021, capital expenditures are anticipated in the range of $130 million to $150 million. Looking ahead, we are confident in our ability to continue delivering strong performance results and remain dedicated to further executing our growth strategy to drive long-term value creation for shareholders. That is the end of our prepared remarks, operator, we're ready to take questions.

Your first question comes from the line of Scott Stember with C.L. King.

Just starting out, maybe just talk about Furrion a little bit. Obviously, you guys had a history with them a few years ago, and what's different now that you're taking over the entire thing after walking away from it a few years ago. And then maybe just talk about the margin profile of how this will impact the overall results.

Yes. Sure. So, the big difference is that we have total control over the entity now. Prior, we were strictly sales and distribution, so we did all the warehousing, logistics, and sales work. We had a little input on product, but not much. And today, we have 100% control over product which is the big piece of it. So we control the amount of money that goes into innovation and R&D. We can listen to the customers and figure out what they need and go right to the R&D and engineering and start designing products that the customers are asking for as opposed to just taking what's given to us. So we said in the earlier remarks that we feel we can double that business in the next few years, strictly because competition is in a good spot for us. The competition is relatively weak in that space. There's a lot of opportunity. There's not a lot of innovation in that space. And Furrion is the clear innovator in that space. And there's a lot more they can do with appliances and electronics. So does that answer your question?

Yes, also about the margin profile.

Yes. And then from a margin profile, it's about 60% OEM and 40% aftermarket business today, which the aftermarket side has grown significantly since when we were in the partnership with them a couple of years ago. So aftermarket certainly taken off and has very, very attractive margins, as you would anticipate, much better than our consolidated aftermarket margins. From an OEM perspective, I would expect those margins to come in pretty consistent with our other OEM margins, just given the competition and some of the margin profile we're seeing today.

They were not heavily focused on the aftermarket, Scott. We have a strong structure, sales force, and distribution network in place, and we plan to fully capitalize on the aftermarket opportunities rather than just relying on e-commerce and some of the smaller aftermarket business we are currently engaging in. It sounds like a similar overall operating market profile for the whole company.

Except on the aftermarket part, as I said, that's accretive to the margins that we're seeing in our legacy aftermarket business today. So that should be where we should see consolidated margin expansion.

And then just on the price front, I know you guys usually have the two-quarter lag and price increases are now going through interperiod. Can you just talk about how that's going, any sign that consumers are pushing back, and then just the last question would just be on the gross margin or the margin commentary, Brian, that you made about 100 basis points. Are we talking gross margin or operating margin?

Yes. Regarding consumer feedback, we haven't observed any significant changes yet. It appears that dealers who initially had larger margins due to selling existing inventory at or above MSRP are now seeing a shift as we begin to catch up with rising costs. As our selling prices increase, we may find that dealers start to reduce their margins, which will eventually impact the whole sales chain. However, up to this point, we haven't noticed any pushback from consumers. New buyers, particularly, may perceive a $20,000 trailer, which previously cost $15,000, as reasonable given the current market, and may not have strong comparisons for price expectations. Overall, we have not seen much resistance to the price increases due to inflation that have been passed on to consumers.

And Scott, to wrap that up on margins. So, as I mentioned in my prepared remarks, we finally have what we believe reached the turning point at the bottom of the curve, where we're starting to catch up a little bit. So in the fourth quarter, we had October price increases that were meaningful in our index contracts. And so we're expecting 100 to 150 basis point improvement to start here in October. So it's good to finally see that come. And as for where it falls on the P&L, I'm talking operating profit margins, but really all the compression we're seeing in margin is due to gross margin, due to direct labor and materials, so that's where we're really experiencing it at all and offsetting it is leveraging our manufacturing overheads as well as our SG&A overheads.

Your next question is from the line of Kathryn Thompson with Thompson Research.

It's Brian Biros speaking for Kathryn. Can you share any additional insights regarding Q4 and how it might differ from typical seasonality, especially considering the significant increase in October and the record backlog that you're managing? I'm curious about your strategy for Q4 in relation to normal seasonal patterns compared to this year.

Yes. I mean, we're just looking at run rates with respect to the OEM. We certainly keep a pulse on what's going on at the dealer and the retail level. But right now run rates are at all-time highs. I mean, they're above where they were at last quarter. So there's just some constraints from a supply chain and materials and labor standpoint. So we could actually run more than what we're running today or what we're forecasted to run for the quarter, if we could just get materials and not have some of the supply chain issues that we're having. But the industry is running at about 600,000 clip right now. If you take all the production from all the manufacturers on the OEM side, it's about 600,000. They're trying to run more than that, but supply chain has kind of got a constraint to 600,000. And we feel that, that will continue to alleviate over time, but it's just going to take some time for some of these issues that have popped up to work themselves out.

Hey Bryan, as far as the seasonality, I think I said in my prepared remarks, October was up 52%. I would expect for the quarter to pull back a little bit from that just due to the typical shutdowns around Christmas and New Year's. We're working with the OEMs right now to try to gauge how consistent that is with what we've seen in the past. I suspect it won't be too different from what we saw last year or maybe even compared to July of this year. So they'll take some time down, and I'm sure it will be a week or maybe even a day or two beyond that.

In your follow-up question, you've mentioned that automation has been a focus for some time, and it appears that the need for further investment in this area continues to grow each quarter. How has your perspective on automation evolved recently, if at all? It seems that larger projects might be considered now compared to earlier times when the focus was more on smaller projects and manual processes. Are you currently considering bigger initiatives in automation, especially given that supply chain challenges persist and some issues seem to be ongoing?

Our typical process involves analyzing each manufacturing cell in the business to identify areas for continuous improvement, aiming to enhance efficiency. Once we achieve that, we consider automation. We're focusing on projects that usually range from a few hundred thousand dollars to a few million, which is where we find the most success. This investment allows us to automate an entire production cell, leading to significant improvements in efficiency, quality, and safety. It also ensures that our processes are repeatable, scalable, and consistent. We prefer this approach over larger projects, which tend to be more complex. By automating one cell at a time, we can tap into the numerous opportunities across our 100 facilities worldwide, and that’s where our focus lies.

Your next question comes from the line of Mike Swartz with Truist Securities.

Maybe just help us think about the price cost dynamic. I think in the second quarter, you said your costs were uncovered by about 300 basis points. I guess, what did that look like in the third quarter? And then how do we think about that in the fourth quarter and maybe beyond?

Yes, it has continued to be a challenge. If you review the trends for steel and aluminum, especially considering that we experienced delays in our price increases over the past few quarters, the situation has worsened even as we expected some cost stabilization that would allow us to catch up in the second quarter, which did not occur. In the third quarter, the situation deteriorated further. Year-over-year, our materials are down over 500 basis points compared to Q3 of last year, illustrating the significant gap between material input costs and current pricing compared to a year ago. This has worsened slightly. However, as I noted earlier, we are now in the fourth quarter and are anticipating an improvement of 100 to 150 basis points, mainly due to prices catching up and exceeding the inflationary pressures on our input costs. We are beginning to see a turnaround, which should help us improve margins. Additionally, many of our index agreements have a contractual nature and are subject to a two-quarter lag, which will affect us in the first quarter and possibly a bit into the second quarter of '22.

Steel is one of our largest input costs, especially in raw materials. At the beginning of the year, we expected steel prices to peak around Q2, but they continued to rise. Our pricing to customers has been gradually trailing this increase, and only a few weeks ago did it reach its peak. The improvement that Brian mentioned mainly stems from the fact that our selling prices this quarter will finally align with and even exceed our input costs.

Brian, second question, just looking through the P&L, I mean it looks like the SG&A dollars were down quarter-over-quarter slightly. Revenue was up. You had some more acquisitions in there. I know some of your outbound freight costs actually were up in the quarter, I believe. So help us understand why you had so much SG&A leverage during the quarter?

I would say there was a slight improvement in both dollar and margin perspectives due to a little bit of improvement in transportation. Many of our outgoing shipping costs are on a contractual basis, so some of those adjustments are occurring with a delay. Looking back at past quarters, our shipping costs were among the highest as a percentage of sales in the second quarter, but we saw a slight improvement in the third quarter, aligning more closely with what we experienced in the first quarter. This accounts for the nominal improvement. I expect SG&A costs to remain relatively stable. Price increases will certainly benefit margins, but the overall dollar amounts should stay fairly consistent.

Your next question is from the line of Fred Wightman with Wolfe Research.

Maybe you could elaborate on the steel commentary. I assume that indicates some relief from the tariff situation. How significant do you think this could be as a tailwind, considering the price pressures you've experienced over the past year?

We haven't observed any of that yet. The price increase has been primarily driven by supply and demand dynamics. It has risen to three times its historical trend. We didn't expect it to exceed $0.50 a pound, but it's climbed all the way up to the mid-90s. However, it should decline from this point. We are uncertain about where it will stabilize, likely not back to historical levels but certainly much lower than the current price. This is where the index has become advantageous as pursuing them on the way down is more beneficial and impactful for our bottom line compared to pursuing them on the way up.

I believe that the discussions about easing trade negotiations in Europe are likely to have some impact, although we haven't fully seen it yet. This could explain why things have leveled off recently, but there's still uncertainty about the future. It seems like we may have reached a peak. As those negotiations continue, there could be more imports coming into the U.S., which should help with supply and demand and lower some prices. However, we will have to wait and see how it unfolds.

And then on the content per unit side, can you just sort of help us think conceptually about how we should be modeling that sort of post Furrion? And then as the supply chain environment hopefully starts to normalize a little bit here. You guys have called out some share benefits just from some of the smaller competitors being more capacity constrained than you are. But when you look at it from a higher level, how do you see that shaking out for both categories going forward?

Yes, we're experiencing over 10% growth in the towables category during the third quarter. Historically, pricing has not significantly contributed to content growth, and before this quarter, we were at around 7%. However, pricing is beginning to play a crucial role in content growth. It's important to note that the current content figures do not include Furrion, as we only acquired them for a couple of weeks in September at the end of the quarter, and they are excluded from historical numbers for consistency. Moving forward, Furrion will start to impact our results; they are currently on a pace of about $230 million, with 60% of that being OEM. We believe there is a strong opportunity to double that business in the next two years, and we have a plan to achieve this. Additionally, pricing is expected to keep positively influencing content, so we should anticipate that in the upcoming quarters as it becomes more significant.

It feels like the content that we've always given in terms of opportunities is about $7,500. It feels like that's running closer to $10,000 with all the other things that we've added in, in terms of total opportunity. We've got new products coming on board, 2.0 innovations on a lot of products. So that always bumps up the opportunity as well. But that gives you a range that's higher than $7,500 today of opportunities.

Your next question is from the line of Daniel Moore with CJS Securities.

Just in the aftermarket business, what do you anticipate for organic growth in that sector over the next three to five years? Is this influenced by the direction of wholesale shipments of RVs, boats, and similar products?

We've completed the integration of the Curt acquisition, and we haven't pursued many new acquisitions in that area. In Q2, we experienced around 36% growth, which dipped slightly in Q3 as we've been adjusting some pricing. However, we're still seeing double-digit growth, and it's been quite a while since we've been under 10% in this category. A long-term growth rate for our legacy business is typically between 15% and 25%. Regarding Furrion, there is significant growth potential, although supply chain challenges may present obstacles. As these issues improve over the coming years, we anticipate being able to enhance that growth rate due to the Furrion product. As Jason mentioned, there are millions of units on the road, and as we navigate the three- to five-year trade-in and upgrade cycles, this should positively impact our aftermarket growth.

We are highly focused on our aftermarket growth, which sets us apart from many other companies that may not be considering it. In 2021 and 2022, we saw 1.7 million RVs enter the market, and these will eventually require repairs. Looking back at 2018 and 2019, we had about a million RVs, and over the next few years, these units will start to enter the repair and replacement cycle, which presents a strong opportunity for our organic growth. Additionally, we continue to introduce new products through our innovation department, specifically for the aftermarket. The way RVs are being used is also evolving, with more people exploring peer-to-peer rentals. If someone uses an RV for only 20 days a year and increases that to 24 days, it will require more servicing. Even if just 10% or 20% of RV owners utilize peer-to-peer rentals, the increased usage will lead to a higher demand for servicing, which is advantageous for our aftermarket division.

Once we move past the fourth quarter and complete our acquisition accounting for Furrion, do you anticipate the margin improvement mentioned earlier for 2022, or is that expectation more of a long-term perspective? Additionally, considering the supply chain challenges, what kind of growth should we expect over the next 12 to 24 months?

Yes, I believe that we will start to see some margin improvement next year. Initially, we used a third-party logistics provider, but we are in the process of transitioning that to manage distribution ourselves as we did previously. This should lead to some improvement, though it will take time to fully integrate. I anticipate some benefits in 2022. In terms of the aftermarket, we should see margin growth from the outset as their margins are good, even when selling to major retail chains. However, keep in mind that this currently represents about 40% of their business. On the supply chain front, the first half of the year might present some challenges, but we are looking to onboard additional suppliers for their products, which should open up more opportunities in the latter half of 2022.

And your last question comes from the line of Ethan Huntley with Jefferies.

This is Ethan Huntley on for Bret Jordan. Just with regards to the October sales being up 52% year-on-year, can you sort of break out what percentage of that might be organic versus acquired?

It's a good question, Ethan. I wouldn't expect it to be much different than the Q3 numbers I provided, because Furrion was acquired at the end of September or mid-September and didn't have a significant impact on us. So, if you look at Q3, it was about 31% organic growth and almost 10% acquisition growth year-over-year. For Q4, considering Furrion, that might increase by a couple of points due to acquisitions. However, I also think organic growth will balance that out.

And then just sort of into Q4, I know you said sort of expect a pullback in November and December, but is there any sort of color or commentary you can provide on the magnitude of that pullback?

I'll chime in here. As I mentioned, we are currently experiencing record run rates, approximately 600,000 units. They're planning for more than that, but the industry supply chain is not yet able to meet those numbers. Suppliers are exploring alternative supply chain options to achieve those higher figures, and they've scheduled even more for Q1. Supply chain issues are significant. The only factor that might affect seasonality in Q4 is that many manufacturers are taking time off in December, with some breaks spilling over into January. However, they are not extending their Thanksgiving breaks, and the run rates are currently at an all-time high. If you consider the run rates for October and November, possibly with an additional week of seasonality due to the holiday months and December, that should help reach the target number.

And then just lastly here, I just wanted an anecdotal commentary on retail trends you've been seeing. And then, I guess, sort of to that extent, any outlook on sort of the OE backlog would be helpful.

Yes, retail remains quite strong. We are entering a period when it typically slows down a bit, as is historically the case. However, the original equipment manufacturers and dealers are expecting a strong selling season once it begins. OEM backlogs appear to be quite substantial still, and they are advising us to prepare accordingly. All the OEMs are currently expanding their facilities, with some becoming operational recently, some last quarter, and others expected to come online in the next few quarters. Therefore, we are gearing up for a solid selling season in the upcoming quarters.

There are no further questions. I will now turn the call back over to Jason.

Thank you all for joining the call. I'd like to take a moment to acknowledge the tremendous effort our teams have put forth to navigate significant challenges related to labor, materials, and supply chain. This has not been an easy task, and our customers have indicated that we rank among the top suppliers for our reliability through the crises of the past 12 to 18 months. We look forward to connecting again next quarter and appreciate your participation today. Thank you.

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