Hello, everyone, and welcome to today's conference, LCI Industries Q4 and Full Year 2022 Earnings Call. My name is Bruno, and I will be operating your call today. I will now hand over to your host, CFO, Mr. Brian Hall.

Good morning, everyone, and welcome to the LCI Industries' fourth quarter and full year 2022 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. Jason?

Thanks, Brian, and good morning, everyone, and welcome to LCI's fourth quarter and full year 2022 earnings call. Our fiscal year 2022 marked another record year for LCI as we reached all-time high revenues while continuing to deliver strong margins. As we got to the back half of the year, our diversification strategy proved pivotal to our performance, helping to partially offset the impact of RV OEM production shutdowns enacted during the fourth quarter to normalize inventory levels across the country. Thanks to the agility and operational strength of our veteran leadership teams, we were able to make necessary changes quickly in order to adapt to the volatile operating environment. These results are a testament to our cultural strength and long-tenured leadership teams, which we believe have been and will continue to be the cornerstone of our long-term success. We closed 2022 with a record $5.2 billion in revenues, up 16% year-over-year. This growth was supported by solid performance in our RV and Adjacent Industries, driven by overall growth in the outdoor lifestyle and aggressive content expansion and innovation. We completed four acquisitions throughout the year, adding two very strong industry brands to our portfolio, including Way Interglobal and Girard Products. Net sales from acquisitions completed in 2021 and 2022 contributed approximately $219 million in 2022. These acquisitions bolstered our innovative portfolio, which we have leveraged to continue our trajectory of record content growth. Looking at North American RV OEM, sales increased 17% during the year compared to 2021, reaching $2.8 billion despite lower production levels in the back half of 2022. Industry wholesale RV shipments for the year totaled roughly 490,000 units, and we expect some further softening in 2023 as demand continues to normalize and come off all-time highs. January and December were rightsizing months for the industry, as industry OEMs took a majority of these two months off to allow inventories of the dealers to rebalance. In the interim, we are working closely with the OEMs to keep our capacity aligned with the changing production levels. Despite lower RV OEM production, we have quickly and diligently worked to adjust costs and capacity, leveraging operational improvements implemented in the past years, as well as making some cuts. Overall, we've cut $370 million of costs out of our structure since RV industry volumes started to decline during the second quarter of 2022. Thanks to the agility of our teams and focus on our diversification into other markets, we have been able to shift some of our manufacturing costs to these other areas of our business that are running pretty strong in order to achieve maximum leverage. I do want to emphasize that retail demand has slowed, but is stabilizing at levels that are still historically strong. Data like retail traffic and purchases from recent RV shows have proven to be a bright spot in an otherwise challenging macro environment, giving us confidence in the industry moving forward. Importantly, secular trends such as younger buyers, as well as the growth and popularity and availability of peer-to-peer RV rentals, continue to bring new consumers into our lifestyle. Outdoorsy and RVshare, two of the largest peer-to-peer rental companies, have recently said that U.S. campers have rented RVs for over 3 million collected nights on their platforms. Additionally, RVIA data revealed that 67 million North Americans are planning a trip in an RV this year, up from 58 million in 2022, with 50% of those surveyed RVers planning to buy a new RV, underscoring the long-term popularity of RVs and the outdoor lifestyle. Throughout the quarter, we saw heightened input costs, most notably through freight and materials. While it will take us some time to work through the raw materials that carry these higher costs, we believe our customers are committed to help us work through these costs. In addition to several continuous improvement projects we have in the pipeline, we remain focused on driving costs out of our business through automation, as we have 10 new projects slated for implementation largely in the back half of 2023. Our team also achieved record content growth in both towable units and motorhomes. Content per towable RV for the full year 2022 increased 45% from the prior year to $6,090 while content per motorhome RV in the full year 2022 increased 43% from the prior year to $4,099, all supported by a long-term focus on innovation and continued investment in R&D capabilities as well as our acquisition strategy. Given the current RV production environment, our diversification strategy is paying dividends and is proving to be critical to driving sustainable growth across our business. In prior down cycles such as 2008 and 2001, our performance was substantially impacted due to the majority of our revenues coming from RV. Today, our Aftermarket, Adjacent Markets, and International Business make up 46% of our total net sales. In December and January, 64% of our sales came from our diversified markets. We have simply never been this diversified while in a down cycle. We believe our ongoing focus on diversification will further cement our leading position in the broader outdoor recreation markets to support consistent, profitable growth in the long term. Revenues in the North American Aftermarket grew year-over-year, up 7% compared to 2021, largely impacted by a drop in revenues in the automotive aftermarket business. Coming off a strong year in 2022, we are thrilled to see a record number of RVs on the road. As more enthusiasts take to their RVs, we believe we will see more repair and replacement business, which should continue to drive our Aftermarket revenues. To highlight that point, Aftermarket parts revenues were up 65% in January. As we've said on many prior calls, there have been 2 million RVs added to the system in the past four years, so there will be a need for parts and services that we supply as many of these RVs are now coming to the repair and replacement cycle. As the purchasing of RVs decreased for the season, we are already seeing an increase in service at dealerships. In 2022, we had 1.2 million calls to our contact center for service and repair-related activity. This trend should be nothing short of fantastic for the aftermarket products and services businesses that assist RV consumers with repair, replacement, and upgrades. With that being said, we will continue to invest in this part of our strategy as we steer our Aftermarket business towards a $1 billion market. While our Aftermarket RV continues to grow, we are maintaining our emphasis on creating a best-in-class customer experience, as engaging and listening to our customers is central to our building long-term relationships and strengthening the Lippert brand with dealers and consumers alike. The Lippert Scouts program, which has grown substantially in membership in the past year, serves to provide valuable insights on our products and services, how customers use them, and most importantly, how we can drive improvements in product and services. Further, we held our second annual event for RVers across the U.S. called the Lippert Getaway during the last week of October in Pine Mountain, Georgia. It was a resounding success and consisted of five full days of learning, repairing and improving their RVs, as well as listening and fellowship among nearly 400 people. We will continue to stay focused on developing relationships with the end consumer to help drive our business and achieve more successful results. Turning to the North American Adjacent Markets, 2022 revenues rose 26%, driven by demand in Marine along with solid content growth throughout the other adjacent businesses like bus, specialty vehicles, and powersports vehicles. Our adjacent offerings benefit from the same secular tailwinds driving growth across the RV and aftermarket. Unlike RV OEMs, Marine production has been relatively stable, producing pressures as RV demand softens. In Marine, we experienced substantially fewer challenges related to macro conditions, as the overall market didn't ramp up as hard and fast, and thus did not create as much excess inventory as the RV business did. Like RV, we are continuing our focus on consumer groups and aftermarket-related activity. We also saw the launch of our seating division for TRACKER Marine earlier this year in Missouri. We believe our developing relationship here will provide additional opportunity now that we are located near and supplying the largest pontoon and boat builder in the country. Our Marine revenues for 2022 have increased to $493 million, and we're anticipating a flatter year-on-demand, which we believe we will improve through organic growth and market share gains. Our Marine production facilities have never been operating at their peak levels they are today and we expect their solid performance to continue as we continue to supply the high demand and offer many new products in this space. As a part of our diversification strategy, we have also been gaining traction in manufactured housing. With the rising housing prices impacting people across the country, manufactured housing continues to be an alternative for some that might be priced out of traditional residential homes. Also, during the past few years, as residential window suppliers were plagued by demand and in turn created a long delay for builders, our team took advantage and started offering entry-level vinyl windows at short lead times to residential builders. We're now starting to build a nice residential window lineup in a market that's over $3 billion annually addressable. And one other positive note around diversification is that we announced a key partnership last week with ATW, which is now owned by Bain Capital and is the largest utility trailer builder in the country. We launched a collaborative partnership to start supplying them axles to all of their trailers starting this month. We are extremely excited and our team will strive to bring new products, as well as incredible dealer and OEM services that they have never seen before. We believe our adjacent market expansion is key to our diversification efforts and our team continues to gain more and more momentum finding new products for customers in these markets. Looking globally, our International Businesses also experienced growth in 2022 with revenues increasing 6% year-over-year, proving to be a stabilizing force in our diversification strategy. Growth in our International Businesses was driven by the ongoing introduction of innovative products into EU markets and we are encouraged by the backlog in these businesses as we head further into 2023. Issues stemming from global chip shortages are easing slightly, which we feel will lead to more growth in the European RV business in 2023. We expect some of this demand to start breaking loose in the second quarter as many OEMs are starting to see chassis shipments increase so they can build more motor caravans. In addition, we continue to see great progress toward Lippert European components such as pop-top and acrylic windows that are already popular in Europe being adopted by U.S. RV OEMs. These opportunities could provide big competitive barriers for our competition because of the ability to utilize European designs, proven products, and production facilities. While the last couple of years have been challenging for the European division, we are optimistic about 2023 being a year in which they are contributing to the overall company in a much more meaningful way. Turning our focus to innovation. Throughout 2022, we had one of our largest product launch years in company history, and this should help bolster a challenging 2023. With about 150 people dedicated to innovation and product development in our business, we are committed to making innovation a huge competitive advantage as few peers and competitors invest this kind of money into innovation. Our ABS brakes for our suspension systems, Tire Linc tire pressure management systems, continued development of Onecontrol and new window, awning, appliance and door designs have all gotten tremendous traction with OEMs, helping to solidify our reputation as a company that continues to refine and innovate our core products. As mentioned earlier, we are thrilled about the acquisition of Girard and Way Interglobal, both adding substantial products to our offering that connects our appetite for cutting-edge products with our desire to bring increased utility and aesthetics to each RV. These two acquisitions also make us the largest and most diverse appliance and awning maker in the entire RV industry. One of the other things we are proud of in our innovation is that we made several of our new products the new standard. The standout in that category was our instant hot water heater design taking the place of the older, larger tank water heaters that have been around and standard for decades. With respect to capital allocation, we continue to do our part maintaining a balanced deployment strategy. We remain receptive to strategic M&A opportunities when they appear, but are also focused on maintaining ample liquidity and a strong balance sheet with modest leverage. We have also continued to make strategic internal investments, specifically in automation, to add further flexibility to our cost structure. In 2022, we allocated over $70 million to growth and automation CapEx, and we anticipate allocating even more dollars to these important projects in 2023. I'll now move on to our cultural highlights for the year. Here at Lippert, a well-rounded culture is our core focus, fostering an environment that values all team members and enables each team member to grow. We believe the strong culture starts with experienced leaders at the top, but also creates opportunities for all team members to become leaders in their own roles. To this end, we have a group of leadership coaches that are tasked with creating and executing programs focused on developing and training leaders throughout the front lines of our manufacturing business. This group of 30 individuals are focused on coaching team members across the business in personal and professional leadership development, getting all team members the power to make LCI a better place and impact team members around them more positively. In the end, we believe our great culture and focus, a real resource on leadership development, is the key to retaining people. We also believe that when people are retained over the long term, there is no question that quality, safety, efficiency, and innovation, the key fundamentals of the business, all improve. Our culture focus is not only on how we can support our team members, but also how we impact the communities around us. Over 2022, Lippert team members performed over 150,000 hours of community service through serving in various charitable organizations and mission work around the country. Over the last six years, our team members have collectively served over 700,000 hours of community service. We could not be prouder of this accomplishment in our team's effort to give back to those in need and look forward to our culture initiatives having even more of an impact in 2023. In closing, as always, I'd like to thank all of our team members for their hard work and commitment in driving our business forward, while upholding our company values and leading strong. We could not have achieved such amazing results without this incredible dedication coupled with the strength and guidance of our leadership team. We look forward to continuing our progress in 2023. While we may not be setting volume records, we are dedicated to setting many other records such as safety, efficiency, continuous improvement and community impact records. We believe that we are in a great position even in the face of RV volume challenges to come out strong and excited to continue our efforts in delivering long-term value for our customers and shareholders. I will now turn to Brian Hall, our CFO, to discuss in more detail our fourth quarter and full year financial results.

Thanks, Jason. Our consolidated net sales for the fourth quarter decreased 26% to $894 million compared to the prior year period, impacted by a reduction in RV production, partially offset by growth in our other end markets. January sales were down 48% to $273 million versus January 2022 due to the continued decline in wholesale RV shipments, as we estimate the industry shipped less than 14,000 units in the month, many of which were produced in prior months. This was partially offset by continued diversification success with growth in Adjacent Industries, including Marine. Q4 2022 sales to North American RV OEMs decreased 42% compared to the prior year period, driven by a decrease in wholesale shipments, partially offset by record content expansion in towables and motor homes. Content per towable RV unit increased 45% to a record $6,090, while content per motorized unit increased 43% to $4,099 compared to the prior year period. Towable content growth can be attributed to organic market share gains of 15%, while acquired revenues contributed 7% of the year-over-year growth. We saw a positive performance from our other end markets, which helped to partially mitigate the impact of softened RV demand. In the quarter, North American Marine sales increased 4% with our estimated content per powerboat increasing 19% to $1,712, driven by market share gains. Overall, sales to Adjacent Industries grew 3% versus the prior year period, supported by the aforementioned growth in Marine sales. Q4 2022 sales to the Aftermarket decreased 17% compared to the prior year period, driven by a decline in automotive aftermarket sales, partially offset by strength in RV aftermarket sales. International sales decreased 1% year-over-year, representing 10% of our total company revenue, as exchange rates negatively impacted results by approximately 9% due to the strength of the dollar compared to the euro and British pound. Excluding the exchange impact, organic growth would have been 8%, led by the strength seen in our rail markets. Gross margins were 16.4% compared to 24.1% in the prior year period, driven down by one-time charges, production inefficiencies, and elevated input costs in aluminum, steel, and freight. Our one-time charges were a key contributing factor to margin compression and our EPS variance for this quarter. These one-time costs consisted of severance and inventory expenses, leading to a negative impact of $0.62 per share. Severance expense was incurred as we worked to improve our cost structure and remove redundancies within our operation. Our one-time inventory charges primarily related to the difference in price at which we purchase these commodities such as aluminum versus the selling price as well as adjustments for excess and obsolescence reserves. Typically, the pricing variance is accounted for by our quarterly lag pricing adjustments. However, given the high volatility seen in the recent prices for some commodities, we incurred a one-time charge to earnings. Although this write-off hindered near-term margins, we expect reduced margin pressure in the second half of 2023, as production ramps supporting profitability during the year. Looking ahead, we are primed to deliver profitability despite the macroeconomic conditions moving into 2023. SG&A costs as a percentage of sales increased year-over-year due to the one-time costs noted previously. Operating margins decreased compared to the prior year period, in line with expectations as we absorb fixed costs on a lower sales base and consuming the aforementioned cost inventory layers. GAAP net loss in Q4 2022 was $17.1 million or $0.68 per diluted share compared to net income of $82.3 million or $3.22 per share in Q4 2021. This decrease was a reflection of lower RV demand. EBITDA decreased 93% to $10.2 million in the fourth quarter compared to the prior year period. Moving on to full year 2022 results. Sales to North American RV OEMs increased 17%, driven by increased interest in the outdoor lifestyle and content expansion. Sales to North American Adjacent Markets increased 26% to $1.2 billion in 2022. And North American Aftermarket increased its total sales by 7% to $825 million. While International sales increased 6% to $398 million compared to the prior year period. Acquired revenues were approximately $219 million for full year 2022. Non-cash depreciation and amortization was $129.2 million for the 12 months ended December 31, 2022, while non-cash stock-based compensation expense was $23.7 million for the same period. We anticipate depreciation and amortization in the range of $130 million to $140 million during the full year 2023, primarily due to amortization from recent acquisitions. For the 12 months ended December 31, 2022, cash generated from operating activities was $603 million, with $131 million used for capital expenditures, $108 million used for business acquisitions and $127 million returned to shareholders through $103 million of dividends and $24 million in share repurchases. Operating cash flows were positively impacted by increased earnings, and as inventories continue to normalize, we anticipate a reduction in the impact of working capital on cash generation. Driven by our strong operating cash flows, we further pursued our capital allocation strategy of deleveraging our balance sheet, making net payments of $178 million on outstanding borrowings during 2022. At the end of the fourth quarter, we had an outstanding net debt position of $1.1 billion or 1.5 times pro forma EBITDA adjusted to include LTM EBITDA of acquired businesses. As the greater macro environment remains uncertain, 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. Full year 2023 capital expenditures are anticipated in the range of $80 million to $100 million. Given the uncertainty in the marketplace, we anticipate RV production levels to remain volatile in the short term. As a result, we estimate the January consolidated sales results of down 48% to be indicative of full Q1 2023 results, as RV OEM production remains suppressed while the dealer base seeks the right inventory levels for expected demand. The sales decline is primarily driven by the reduction in RV production as we anticipate Q1 2023 RV shipments between 45,000 and 50,000 units. Looking forward to Q2 and beyond, we are anticipating RV shipments to improve more in line with those experienced in the back half of 2019, which results in an estimated RV shipment range of 330,000 to 350,000 units for full year 2023. While we have responded quickly to reduce our cost structure, material cost headwinds, as discussed in prior quarters, will continue to limit profitability through the first quarter, and we anticipate operating profit margins to return to mid- to high-single digits throughout 2023. That is the end of our prepared remarks. Operator, we're ready to take questions. Thank you.

Our first question is from Kathryn Thompson from Thompson Research Group. Kathryn, your line is now open. Please go ahead.

Hi. Thank you for taking my questions today. First, could you provide an update on the ramp-up with OEM? Additionally, as you mentioned in your prepared remarks, there's good strong demand for maintenance at RV dealers for units that have already been sold. Can you discuss the historical trends you've observed regarding maintenance compared to sales? Are you noticing any divergence in that trend in today's market that might be positive for the outlook?

Yes, I'll begin. In terms of the industry's progression, we've been adjusting downward and aiming for a point where retail surpasses wholesale. We experienced a few challenges in November and December, but overall, it appears that in the upcoming months, retail should outstrip wholesale significantly. We’re still assessing the situation, as some customers are taking extended breaks until March, but we're optimistic that by March or April, we'll see an upward trend. The retail growth is reducing dealer inventory, which is essential for us to resume wholesale orders. Regarding the aftermarket segment, we've been closely monitoring that activity. In January, parts orders from dealers increased by 65%, as we mentioned earlier. Dealers are requesting replacement parts and service components, indicating a notable rise in activity, which we expect to persist as dealers have more time to service units and a greater service base has developed over the last year. Brian, would you like to add anything about the aftermarket?

I think maybe not so much on the aftermarket piece, but to give you some additional clarity around our expectations, I mean, obviously, Kathryn, there's a lot of uncertainty in the marketplace today. But as we said in our prepared remarks, we're expecting somewhere between 45,000 to 50,000 units for the first quarter. I mean, that's far off from when you think about Q1 of last year at 170,000-plus units. But as the OEMs hold production levels pretty down or suppress here temporarily, as Jason said, to let the inventories deplete some, we would then expect that to start to come back up. And like we said, if you look more in line with 2019, from Q2 through Q4, you're certainly looking at 85,000 to 100,000 units a quarter is kind of what our current expectation is. I mean, we continue to hear a lot of positivity from a lot of the dealer base. There are retail sales occurring. So, at some point, as they continue to deplete inventory, there's going to have to be orders and production to follow suit and replenish inventories in the system.

Okay. That's helpful. As a follow-up to that, there are several larger retail shows that have occurred at the beginning of this year. Any color on trends from those? And what this could portend for the future?

We've had discussions with numerous OEMs and dealers over the past few weeks since the big shows began in Tampa back in January. The retail traffic and purchasing comments have been very encouraging. We're observing a decrease in inventories as dealers work to rebalance their stocks, as Brian mentioned. Dealers are noting that their inventories are returning to healthier levels, and it's clear they will need to restock for the upcoming summer selling season. Everyone is preparing to position dealers optimally before this begins. Overall, the commentary from the shows has been positive, and retail appears to have stabilized. Considering the significant drop in Q4, which saw around 77,000 or 70,000 units in retail and wholesale, if we annualize that, it amounts to 300,000 units. Therefore, we believe a projection of 330,000 to 350,000 is reasonable. This would be impressive for a down year, reflecting a healthy outlook. Adjusting our costs to align with this volume is feasible, but maintaining a robust retail performance is crucial for our industry's future.

Okay. And then final question for the day. On inflation, you said in prepared remarks, freight and raw materials were up in Q4. But what we're seeing in other industries, a wide variety of industries, definitely you're having certain costs, natural gas, but other labor including pulling back. How do you think about the balance of inflation or even deflation as you look out in 2023? Thank you.

Yes, to begin with, from a pricing perspective, we've communicated to our customers throughout much of 2022 about the significant price decreases we've implemented, which aligns with what we're observing in the marketplace for steel, aluminum, and freight. Costs are declining from the record highs we faced over the past couple of years. While we've been lowering prices, on the consumption side and in regard to our income statement results, we have indicated that our inventory levels are high. Some of the high-cost layers from previous years are affecting us, and this was definitely a challenge in the fourth quarter. As we mentioned at the end of the third quarter, we anticipated this trend would continue into the first quarter. We are beginning to see improvements in our inventory layers, but with the limited volume in the first quarter, it's taking some time. Nevertheless, I expect that we will get through most of this by the end of the first quarter, and moving into the second quarter, we should align better with our expectations. Regarding margins, which are our primary focus, we have had to respond effectively to reduce costs in our business and will continue to take necessary actions regarding both fixed and variable costs. However, material costs are the most significant factor impacting us. As we progress and return to more normalized volumes in the second quarter and thereafter in 2023, we anticipate achieving margins in the mid- to high-single-digit range for operating income.

Great. Thank you very much.

Our next question is from Scott Stember from ROTH MKM. Scott, your line is now open. Please go ahead.

Good morning, guys. Thanks for taking my questions.

Good morning.

Brian, from what you're saying about, I guess, the lag of getting that higher priced inventory through the channel and matching things up, it sounds like the first quarter could be challenged from a profit standpoint, or do you think it will be profitable in the first quarter?

As we consider the fourth quarter, I would compare it to the first quarter. In the fourth quarter, there were one-time items that impacted the earnings per share by $0.62. If you exclude those, the margins are nearly at breakeven for that quarter. Based on January's performance, which we believe will be indicative of the first quarter, I anticipate a slight improvement in February and more in March, but still in line with the declines we experienced in the fourth quarter. Therefore, from a quarterly perspective, they appear quite similar once the one-time impacts are removed. I expect it to be close to breakeven and perhaps aim for slightly better. However, when volumes return in the second quarter and we work through the inventory layers, which I have mentioned before contributes to a margin headwind of about 4 to 5 percentage points we have faced over the last few quarters, we should see a recovery.

Okay. And then, back to the aftermarket. You talked about how the automotive side really drove the decline in the quarter. Can you maybe give a little bit more context on that? And the other side of the business, the RV, how did that perform in the quarter?

The RV business is performing better than expected in terms of volume, with no issues to report. It's primarily related to service and repair parts, along with some upgrades and general aftermarket business across all channels, including consumer, retail, Amazon, dealers, and various distributors. We anticipate this trend to continue throughout the year. On the automotive side, new car sales are the main driver. Currently, there is an oversupply of new cars, but truck production has decreased compared to three years ago. When new car production and sales drop, our hedge business feels the impact. However, we expect to see a gradual recovery. Last year, we focused on sourcing materials, especially steel, which is a key component of our automotive operations. As the market indexes improve and we manage our inventories, we expect to see a positive effect on margins throughout the year.

If you look at the full year, we started to notice a significant difference in the second half of 2022 between the automotive sector and the RV Marine sector of the business. Overall, automotive was down 3%, while the rest of the business experienced a 19% increase. This clearly highlights the contrasting performance. In the fourth quarter, as the automotive sector continued to decline, it dropped around 24%, nearly 25%. Consequently, the automotive side became less than half of our total aftermarket business, compared to what we experienced in the latter half of the year.

Okay. And then, in the first quarter or at least in January, you talked about that 65% increase. That's just from, I guess, orders from dealers for parts, service parts, what is the overall aftermarket doing in January?

For January, everything is still suppressed. However, the automotive sector showed slight improvement, with orders coming in at a decrease of only 17%, compared to the 24% to 25% drop in the fourth quarter. The RV Marine segment performed even better, though it still experienced a minor decline in January. Our expectation is that much of this is due to our sales to wholesale distributors, whose orders tend to fluctuate. We have observed significant month-to-month variances in their order volumes, but at least the decline is not as severe as in the automotive sector. As we progress through the winter months and customers prepare their units for the season, we anticipate further improvement. We expect to see growth in the aftermarket sector starting in the summer months at modest single-digit rates, moving to double-digit increases by the end of the year.

Automotive constitutes approximately half of the aftermarket business, which significantly impacts our performance in that area. Additionally, on the RV side, there are many opportunities with service parts, primarily through retail and dealers. A large portion of our aftermarket business for RVs involves wholesale distributors, and they also have inventories to manage.

Okay. Just last question on the aftermarket. There was a slight operating loss within aftermarket in the quarter. That was strictly related to the auto side? And it sounds like probably having to do with input costs as well?

Yes, you're correct. On both fronts, definitely considering the volumes we were experiencing in the automotive sector and the seasonal trends, the fourth and first quarters typically have very low margins. Therefore, seeing that turn into a loss is not surprising. Additionally, as you mentioned, the impact of high-cost steel in many of those hitch products aligns with what we've observed throughout the business, which has faced significant challenges during the latter half of 2022 and into the first quarter of 2023.

Okay. Thanks, guys, for taking my questions again.

Thanks, Scott.

Our next question is from Fred Wightman from Wolfe Research. Fred, your line is now open. Please go ahead.

Hey, guys. Good morning. I was hoping you could just give a comment on the timing of the model year changeover as we see this depressed production level extend further and further versus where people might have planned? Do you think that your customers are just going to move to model year '24 products when they resume production or is it going to be continued production at '23?

There's been a lot of discussion about the current situation. The main issue right now is likely related to the 2022 model year, which was the most produced year in RV history. Since about July of last year, retail spending has been declining, leading to an excess of product in the pipeline. We've heard various accounts recently indicating that the OEMs are taking steps to move this inventory to dealers and ensure it reaches retail customers, allowing it to clear through the system. On the flip side, production for the 2023 models has been quite limited, so I don't expect that to pose a significant problem. There will be some challenges, but I believe the OEMs and dealers are collaborating effectively to address their shared issues. Historically, they have managed to work well together during tough times, and I am confident they will navigate this situation as well.

Okay. And then, Brian, you gave us the total number for the one-time costs in the quarter. I think, you cited it as a $0.62 headwind. Can you just break that down between severance and then the inventory hit?

I can, Fred. I have it right here. From an inventory perspective, it's primarily about $0.44. The remainder is $0.19, which is for severance.

Perfect. Thank you so much.

Our next question is from Craig Kennison from Baird. Craig, your line is now open. Please go ahead.

Yes. Hey, thanks for taking my question as well. I wanted to follow-up on Fred's last question. Regarding your cost structure going forward, how should we think about SG&A in Q1 and on a go-forward basis following the actions you took in Q4?

We've been making adjustments to our cost structure, particularly in November and December as we assessed our production schedules. We'll continue to make further adjustments as we align our resources and gain better visibility into the upcoming months. In the fourth and first quarters, our sales percentage will show slightly elevated SG&A costs, which is expected, but we aim to return to more normalized levels as volume picks up in the second quarter. While we don’t anticipate significant fluctuations, we've successfully reduced some additional costs. Regarding compensation, we plan to align that more with when profits are realized, especially for the first quarter, which is expected to be lighter. Therefore, while costs will decrease somewhat from the fourth quarter, it won't be a substantial change.

Thanks. And then, Brian, I think I heard you make a few comments around your margin expectations for the full year, and then you commented on maybe a breakeven scenario for the first quarter. Could you just give us a sense of the cadence of margin, and where you expect the full year margin to be, at least what range might you expect that to be in?

Yes, I think 2021 is a good year for comparison. When I look at the top-line expectations and the margins we were running throughout 2021, I expect them to be quite similar when we have the volume. Once we move past the first quarter, where we expect to break even or make a small profit, and as volumes return to more normal levels, we anticipate mid- to high-single digit margins. As for unit production, there is a lot of uncertainty, but for Q2, I would estimate margins around 8% to 10%, improving through the rest of the year as volume increases. The fourth quarter typically has seasonal variation, but for the second and third quarters, which are the significant periods for the year, I expect margins to fall within that range.

And our diversified businesses are really adding a huge lift to our profit improvement through the year. So, most of our businesses there are having really solid years, off to a good start and all those. So, the diversification is a big part of the story as well, Craig.

Great. Thank you. And then on the content per unit metric, you mentioned giving some price back as your cost changes. Just curious, is that figure something that would go down sequentially? Or is there enough innovation and other drivers to that metric such that you could see continued growth?

Yes, Craig, if you compare the past few quarters on a year-over-year basis, you definitely saw growth reaching all-time highs in the 50% range. We're currently at 45%. When looking at the specifics, our organic growth rate is among the highest I have seen during my time here, at 15%, with acquisitions contributing an additional 7%. As we advance into the next couple of quarters, I expect the revenues from acquisitions to remain relatively stable. We have secured enough business and anticipate continuing to gain market share in 2023, which leads me to believe that we will maintain a double-digit organic growth rate in the near term, significantly higher than our historical average of 3% to 5%. Regarding the remaining factors, that's related to pricing. Over the past couple of years, we have seen inflation rates exceeding 35% affecting the system, but that has decreased. In the fourth quarter numbers, we noticed a significant drop from the third quarter. As we move into the first and second quarters, I expect that pricing pressure to continue decreasing as we adjust prices for our customers, leading us to a more normalized situation where pricing will no longer be a concern and the focus will be on organic and acquired revenue growth.

Great. Thank you.

Thanks, Craig.

Our next question is from Mike Swartz from Truist. Mike, your line is now open. Please go ahead.

Hey guys, good morning. To start, Jason mentioned the $370 million cost reduction program initiated in 2022. Can you provide some insight on how much of that was achieved in 2022 and how much we can expect in 2023?

Yes, I mean, I'll jump in there, Mike. I'd say we realized most of it. We've had to make as you've watched the RV industry production rates decline really ever since the first quarter of 2022, we've been taking costs out of the business ever since that point, whether it's labor or adjusting our fixed cost structure to the best of our abilities. So, I would say that's what's been realized at this point. We probably have a little bit more to go, but probably not meaningful enough until we really see what sales levels are going to be I think here in the short term. Like I mentioned earlier, we've taken some additional cost out in January based on changing forecasts, but we're really looking forward to the second and third and fourth quarters as to what levels, the cost structure we need to target.

Yes, I think it's important to note that when entering a cost-cutting phase, the process tends to continue indefinitely. We are evaluating various aspects of the business every day as we focus on reducing costs. However, we want to ensure that our cuts are not too severe, as we anticipate reaching a run rate of around 400,000 units by mid-year. Our aim is to avoid cutting so much that we struggle to maintain higher production levels when the demand returns. That's what I wanted to add.

Okay. That's very helpful. And then just on the Marine business, I think you made some comments that you think will be flattish in 2023. Is that including market share gains, or is that what you see just from industry production?

Yes. I believe that as we start the year, based on what we can see from the manufacturers, the run rates are not changing significantly, with some increasing and some decreasing. Overall, we expect them to remain fairly stable through the first quarter and into the second quarter. It is still unclear how much this will vary throughout the year. There will certainly be some pricing adjustments leading to declines as aluminum costs decrease. However, our organic growth should help offset some of these price declines, but it remains to be seen what the volumes will be for the manufacturers as the year progresses.

It feels steady right now. They've been running at a good click for a while. And we anticipate at some point in time, it will cool off, but we're not seeing it at this point in time.

Okay, great. Thank you.

Our next question is from Bret Jordan from Jefferies. Bret, your line is now open. Please go ahead.

Hey, good morning, guys.

Good morning.

Quick question on your expectations for 2023 retail and RV, specifically regarding how it aligns with shipments and inventory levels.

Yes. We said on retail 370,000 to 390,000 is our expectation. Wholesale 325,000 to 350,000.

And then, on Marine, the same question, I guess. Are you seeing that retail demand is clearing the inventory or is inventory building on the Marine side? Obviously, there is a backlog there because of supply problems, but is retail still as strong as it had been?

Yes, I think they have been building some inventory and retail has fallen off just a little bit. But again, like I just mentioned a minute ago, we're not seeing the production rates change much on the OEM side. We anticipate that that'll happen at some point in time this year. But with the introduction of electric Biminis, a lot of seating content, we got plenty of new business there to override any way the business might soften or the market might soften.

Okay. And then a really big picture question. I guess you commented in the beginning about the RVIA forecast of 63 million RV trips this year and I think you talked about peer-to-peer RVshare, because I'm just trying to do the math. If there's 11 million RVs in the population, we're going to have 63 million people using them, is this peer-to-peer sharing to get this utilization? And I guess at some point, is peer-to-peer a risk to the industry and that one RV can service 10 people as opposed to 10 people buying an RV, does it impact demand at some level?

Yes, it certainly is both. The 3 million rental nights reported by RVshare and Outdoorsy over the past few years represent a significant increase in rentals compared to years before the marketplace was established. However, in discussions with many consumers, I believe they often use rentals to decide if they want to buy an RV. While some families prefer to rent whenever they use one, others may embrace the RV lifestyle and choose to own their own instead of borrowing each time they travel, particularly if they plan to use it frequently. This is some of the feedback we've gathered from our customer experience team, and I think it's a positive trend for the industry. Additionally, there are individuals who operate rental RVs, with some purchasing multiple units and creating fleets for rental and maintenance purposes.

Right, okay. And then, one last question, I guess, on the cadence of pricing. Obviously, I think you talked about how we are going to be giving some of the price back that had been 30%-plus. Is most of the price decline already been seen or does it sort of staggered out through Q1 and Q2 on the RV OE price side?

It really depends on the performance of commodities in the next couple of quarters, but we believe we have a solid foundation. I was going to mention earlier that there are actually some price increases happening as well. In areas where we haven’t had indexes, we are trying to maintain prices for as long as possible. We are committed to managing our margins effectively to achieve the target numbers we discussed earlier, which we consider solid for a year that is otherwise challenging.

Yes, Brad, I would like to add that regarding the contractual agreements effective July, as we discussed earlier, there was a significant reduction for our customers. The January agreement is another point to consider. Although there was a slight increase in October, it was very minimal. Given the volatility in this sector, we have observed fluctuations, but most of the substantial reductions on a contractual basis have already been implemented.

Okay, great. Thank you.

Our next question is from Daniel Moore from CJS Securities. Daniel, please go ahead. Your line is now open.

Thank you. Thank you for all the color. Greatly appreciate it. Just maybe to crystallize for aftermarket, what are you thinking about for growth for the full year? You gave a lot of color and commentary about some of the buying patterns for January. But what are your expectations for growth? And second, in addition to the CapEx, just talk about how much working capital do you think you can take out this year? And what a free cash flow number might look like for '23? Thanks.

From a full year aftermarket perspective, after we get through the first quarter, I believe that in the latter half of the year we'll achieve double-digit percentage growth rates. Overall, I anticipate an average growth rate of high single digits for the year, which is slightly below our historical figures. However, considering the current challenges we're facing, a significant improvement is expected. In terms of cash flow, I expect a better operating cash flow in 2023 than in 2022, provided we keep reducing inventories. Based on our guidance and an anticipated reduction of over $300 million in inventory this year, we should see operating cash flow exceeding $700 million, which is slightly above what we had in 2022. Thus, we are expecting very strong cash performance in 2023.

Appreciate the color, again. Thank you.

Thanks, Dan.

Thanks.

Our next question is from Brandon Rolle from D.A. Davidson. Brandon, your line is now open. Please go ahead.

Thank you. I just had a quick question on your shipment outlook. Did that change at all since your pre-announcement a couple of weeks ago?

No, I don't think so.

Okay. And then on just the content per unit and de-contenting, given pricing seems to be the biggest impediment to retail right now, how much de-contenting are you expecting in this upcoming model year 2024? I think, a lot of people are expecting '24 to be cheaper than '23 and '22. I don't know if you're able to gauge that or if it's on a brand-by-brand basis, but on average I guess how much de-contenting do you expect to take place in this upcoming model year?

Honestly, not much. We anticipate some reductions in content, but now it's time to demonstrate the value in the units. For example, we launched ABS brakes this year, and there’s a lot of interest in that. This feature actually doubles the cost of axle products in the units. As I have mentioned in previous calls, the innovative products we offer to the industry are not commoditized; they're unique. We tend to provide more options like this and incorporate them into the units. Regardless of whether the industry is doing well or not, they tend to remove commoditized products and replace them with better features and values, managing costs that way. We don’t supply many commodity products to the industry. So, while they might be doing that, it usually doesn’t impact us much. If you need an auxiliary slide-out for a unit, you will still use high-quality slide or leveling systems; you won’t remove essential features that consumers need. That’s the brief answer.

Okay. All right, thank you.

Our next question is from Tristan Thomas-Martin from BMO Capital Markets. Tristan, your line is now open. Please go ahead.

Good morning. I have a question regarding your production outlook for the industry in the first quarter, which I believe is projected at 45,000 to 50,000 units. Given that January's production was at 14,000 and it appears that production began to increase in February, with expectations of further ramping up in March, what are the chances that the industry will exceed your forecast?

Well, there is always a chance. So, as we've said before, we usually don't have great visibility out beyond three, four weeks from an order perspective. So, it's a hard question to answer, but it's all going to depend. And at this point where we're at on February 14, dealers that have to be putting through a lot of orders, and that's going to take time for them to produce, that hasn't really been happening yet. So, I wouldn't expect it to vary greatly.

We are confident in our target of 325,000 to 350,000 units, which we consider a solid estimate. There are many positive aspects to note. Unlike the downturn in 2008 when the economy was in poor shape, this time the economy is relatively healthy. Retail consumers are strong, the original equipment manufacturers are consolidated and stable, and the dealers are also more consolidated and in good health. Unemployment is low, and there are many favorable indicators. While some parts of the economy may face challenges in the next six to 12 months, the fact that these issues are not hitting all at once is reassuring. The retail market is holding up well, and consumers appear to be in a good position. Overall, we are optimistic and believe we can meet or exceed our targets; I don't foresee falling short.

Awesome. That all makes sense. Thank you.

We currently have no further questions. I will now hand back to our speaker for final comments. Mr. Jason Lippert, please go ahead.

Thanks everyone for being here. As I mentioned earlier, we are currently navigating a challenging phase in the RV market. However, we've faced similar situations before, and we have strong leadership in place. The business is also much more diverse now than it was a decade ago, which will provide us with a considerable advantage. This time, the circumstances don't feel as severe as during past recessions. Additionally, the original equipment manufacturers, dealers, and consumers appear to be in relatively good health. Therefore, I believe we are positioned well. We look forward to providing you with more updates in our next call, where we will have a clearer view of the market and the direction of the RV business. Thank you for joining us, and we will see you next time.

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.