Lci Industries Q2 FY2023 Earnings Call

Good morning or good afternoon, all, and welcome to the LCI Industries Q2 2023 Earnings Call. My name is Adam, and I'll be your operator for today. I will now hand the floor over to Lillian Etzkorn to begin. So Lillian, please go ahead when you are ready.

Good morning, everyone, and welcome to the LCI Industries' Second Quarter 2023 Conference Call. I am joined on the call today by Jason Lippert, President and CEO; and Kip Emenhiser, VP of Finance and Treasurer. We will discuss the results for the quarter in just a minute. 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 could 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 that the forward-looking statements are made, except as required by law. With that, I would like to turn the call over to Jason.

Thank you, Lillian. Good morning, everyone, and welcome to LCI's Second Quarter 2023 Earnings Call. We delivered solid results in the second quarter, highlighted by continued content growth and sequential margin expansion as we navigate a challenging RV operating environment. Revenues were $1 billion, down 34% compared to the prior year, but up $41 million sequentially. Net sales from acquisitions completed in '23 and '22 contributed approximately $17 million for the quarter. While revenues are down compared to the record highs we reached in 2022, our results are still $386 million above the second quarter of 2019. We continue to benefit from strength in our aftermarket, international, marine transportation, and housing businesses, which made up a combined 64% of overall revenue this quarter, partially offsetting the impact from the significant year-over-year drop in RV wholesale unit shipments. The North American RV being only 36% of our revenues this quarter, our diversified revenues are greatly helping make a difference in our results during the challenging RV environment. Coupled with our steadfast commitment to driving long-term operational improvements throughout our business while continuing to move forward with our diversification strategy, we believe we will continue our trajectory of sustained profitable growth. Pursuing and capitalizing on operational efficiencies remains a top priority. With the flexibility we've added to our manufacturing footprint, we're able to quickly adjust capacity to match changes in demand while supporting areas in our business that are running strong. Our executive and plant leadership teams have been hard at work driving new cost savings initiatives, driving new sourcing initiatives, and implementing hundreds of continuous improvement projects around the business to diversify and improve our overall cost structure. We've been successful in rightsizing our overall cost structure, reducing general and administrative expenses while also significantly bringing down inventories to drive enhanced cash generation. We continue to rationalize margins across the business and also invested in a few smaller business units, focusing on better-margin product lines to improve our mix. These combined actions, along with the tailwinds of lower freight commodity costs, have strengthened our financial profile, putting us in a solid position with sufficient cash amidst uncertain operating conditions. Needless to say, our company will be in a better position with this reduced cost structure as the industry starts to normalize in the coming quarters. Moving on to RV OEM. Sales decreased 55% during the second quarter of 2023 compared to 2022, largely due to decreased wholesale shipments. We're beginning to see improvements, and dealer inventory levels will be the most challenged as destocking rates amongst dealers decelerate as inventories reach appropriate levels. In addition, 2022 and 2023 year vehicles are being moved out of the pipeline as '24 models began to enter the market just over a month ago. This changeover also creates a major buying opportunity as dealers cut prices on older models, helping bring in new RVers looking for great deals. August and September OEM order forecasts have improved slightly over prior months, a sign that they are likely hitting an inflection point in demand. Camping trends this summer are also up, with millions more taking trips this Memorial Day and Fourth of July versus '22 against the backdrop of frustrated air travelers. Comparing air travel and other traditional modes of vacation, RVing is 35% to 50% more affordable, on average, according to a recent RVIA study, which makes it an attractive choice in any economic environment. During the quarter, content per towable RV increased 2% from the prior year to $5,487 while content per motorhome RV for the quarter increased 6% from the prior year to $3,760. The model changeover has also supported content growth in recent months. As we continue to launch new and innovative products for RVs, we are typically able to capture share and demand from the latest models, which normally feature additional leading-edge content each successive year. With the annual RV open house only a month away in September, we are looking forward to showcasing some of our latest product introductions that have been driving content growth like our new 4000 Series windows with built-in shade systems, independent suspensions, ABS suspensions, air conditioners, and much more. Moving to the Aftermarket. Revenues reached a record trailing 12 months of $854 million, decreasing only 2% year-over-year for the quarter, driven by inflationary pressures that have impacted consumer demand, partially offset by improvement in automotive end markets, which weighed positively on Aftermarket results. Operating profits of the Aftermarket segment expanded significantly year-over-year in the second quarter, driven by market share gains, declining commodity costs, and targeted price increases. We believe the RV, automotive, and marine aftermarkets will continue to be a major driver for our business as we meet demand for RVers looking to make improvements and repairs to their vehicles. In addition, we feel with the hundreds of thousands of rental nights added annually through rental platforms like RVshare and Outdoorsy, repairs and upgrades will be turbocharged as many RVs go from being used just a few weeks a year to as many as 20 to 30 weeks a year for some renters. We continue to expand our wide aftermarket product catalog by launching many new products and product programs in the RV aftermarket, helping us capitalize on nearly 0.5 million RVs entering the repair, replacement, and upgrade cycle annually. As we become a premier source for our targeted aftermarket, we're continuing to expand our share in a nearly $5 billion addressable market while strengthening the Lippert brand through our best-in-class customer service. With the support teams in place to directly engage RVers everywhere, we're able to quickly solve problems and help people spend some more time on the road rather than in a repair shop. In the month of June alone, our customer care center took a record 180,000 calls, which was up 80% over last year, which we believe is a sign that we will continue to grow as we add content and continue to make the customer experience and service a central focus of our aftermarket business. We also just announced our third annual Lippert Getaway event, which will be held in Island Park, Idaho this September. Our teams are always excited for the opportunity to shape the future of RVing by engaging the community and collecting valuable feedback about the products that keep them in the lifestyle. In July, our customer experience team attended the EAA AirVenture Air Show event in Oshkosh, Wisconsin that attracted over 50,000 RVers. Events like this, along with other major initiatives like the Campground Project, Lippert Ambassadors, product giveaways, and Lippert Scouts, have been critical to helping us build trust and lasting relationships with customers, all while helping us create a strong community that is involved with and heavily invested in the Lippert brand. Turning to North America and adjacent markets. Second quarter revenues were down 8% compared to the prior year, primarily due to softness in marine and manufactured housing end markets. On a positive note, we continue to see stabilization and some growth in other meaningful adjacent markets like transit bus, school bus, and utility trailer markets. We're very focused on continued innovation in the marine markets on products like our anchor systems, thrusters, windshields, and seating, and moving the market to our electric Bimini product lineup that is quickly becoming an industry standard since we launched it a few years ago. In June, we launched a partnership between our Captains Group and Oasis Marinas, the largest marina management company in the U.S., to support and donate Lippert marine products to several events in celebration of National Marina Day. Because our brand is one of the largest product supplier brands in boats, we have our customers' attention, and we'll continue to develop more featured products for the space. Our international markets had another quarter of solid results due to easing supply chain constraints that have hindered our OEM partners, along with continued operating improvements as we integrate our acquisitions there, helping to drive a sales increase of 6%. As expected, with chassis shipments increasing, European OEMs are able to deliver higher levels of production to meet pent-up demand, which we anticipate will be a tailwind through the remainder of the year. We continue to leverage European innovations in our North American RV markets to drive long-term content growth with products like window blinds, pop-tops, and acrylic windows. These types of products have the potential to strengthen our competitive differentiation in the U.S., with easy access to our proven European product designs and production facilities. We look forward to driving further growth internationally as this business continues to contribute to our overall performance. I'll now move on to our innovation highlights. In the past months, we've announced many new exciting product launches, including our Solera Off-Grid awnings, with an industry-first solar panel fabric; the OneControl Auto setup app, BaseCamp Leveling systems, independent suspension axles, windows with integrated line systems, glass entry doors, ABS braking, Class B pop-tops, and much more. We believe that our suspension system enhancements are one of the greatest opportunities for us as we introduce the ABS concept for total RVs that has been around on auto suspensions for decades. We have developed an ABS product that we think meets price point and performance expectations and volume that should influence many of the industry-leading brands to make a move in this direction as many already have. Other innovations, such as the industry's first glass door and windows with integrated lines, make for cleaner and better-looking designs inside and outside the RV while aligning all price points to consider these options. We believe that innovation is a significant reason we have grown our business profitably through adding meaningful content to most RVs over the last 3 decades. On top of innovation, culture remains a true differentiator for our business. As I've long stated, the strong culture starts with experienced and caring leaders at the top who work to create trust and meaningful relationships and leadership opportunities for people that have the privilege to lead. Our leadership development programs and in-house leader development staff have made Lippert a place where team members have the opportunity to grow both personally and professionally. Beyond simply creating a better work environment, our cultural focus has had a measurable impact on our company, helping us achieve an annualized voluntary turnover rate of 25%, an incredible achievement given the environment, putting us far ahead of our peers. With team members that are excited and energized to show up every day and here for the longer term, we believe we are able to more consistently build high-quality products at a safer, more productive workplace. Within our culture, in addition to focusing on how we can support our team members, we also focus on how we can improve the communities around us. It's important for our stakeholders to know that we actually measure this. In the first half of 2023, Lippert team members performed 65,000 hours of community service at hundreds of charitable organizations. Over the last year, over 75% of our 15,000 team members participated in at least one serving event. Overall, we cannot be more proud of these accomplishments and the efforts from our global teams that give back and serve to the areas where we operate. We look forward to bringing our teams together to make even more of a community impact through the rest of 2023. Regarding capital allocation, our priority is keeping a strong balance sheet, driving solid cash generation to pay down debt and maintaining sufficient liquidity amidst challenging operating conditions. We remain open to strategic M&A opportunities and have an acquisition pipeline, but our primary focus is on fortifying our balance sheet and making investments in the business to support our growth. We are taking a diligent approach to CapEx, which we expect to be lower this year than last year by approximately $50 million, and targeted on high-return investments. In the past 18 months, we've invested over $50 million in new automation projects, including significant glass automation dedicated to the towable and motorhome window and windshield markets to drive efficiencies, getting new products to markets, and improve product quality. We believe that automation projects like these have been transformational for our business, and we are already seeing the benefit of these investments in our performance today. In closing, we want to give a very heartfelt thank you to all of our team members for their very hard work this year in what has been a very challenging operating environment. We are proud to see how our teams continue to grow personally, professionally, and contribute to the ongoing success of our business with the guidance of our driven and tenured leadership teams. Moving further into 2023, we believe we are very well positioned to keep Lippert moving forward and deliver long-term value for our stakeholders. I'm now going to turn the call over to Lillian Etzkorn, our CFO, to give more detail on our financial results.

Thank you, Jason. Our consolidated net sales for the quarter decreased 34% to $1 billion compared to the prior year period, primarily impacted by the reduction in North American RV production and decreased selling prices, which are indexed to select commodities, partially offset by acquisitions. For the month of July, sales were down 20% to $295 million versus July of '22, primarily due to the decline in wholesale RV shipments. And as Jason noted, we are continuing to see the benefit from operational improvements that we have made to our business while also capturing continued tailwinds from our long-term diversification strategy. While sales in North American RV OEMs declined 57%, sales in our adjacent markets, aftermarket, and international businesses only declined 4%. This significantly reduced the impact of the year-over-year decline in the RV industry production. The decline in Q2 2023 sales to North American RV OEM was again driven by a decrease in wholesale shipments, partially offset by content expansion in towables and motorhomes. Content per towable RV unit increased 2% to $5,487 while content per motorized units increased 6% to $3,750 compared to the prior year period. Towable content growth can be attributed to organic market share gains of 7% while acquired revenues contributed 5% of the year-over-year growth, partially offset by the sales price reductions contractually tied to commodity prices. Sales to the adjacent industries declined 6% versus the prior year. Sales were positively impacted by acquisitions and pricing adjustments to our transportation product and were offset by lower sales in North American marine OEM and manufactured housing. Marine content per power boat decreased 17% to $1,457, primarily due to price decreases associated with year-over-year declining input costs and changes in product mix. Q2 2023 sales to the aftermarket decreased 2% compared to the prior year period, driven by inflationary pressures impacting consumer demand. International sales increased 6% year-over-year, including an estimated 2% positive impact of exchange rates in the quarter. Supply chain constraints have been easing, which has enabled European OEMs to meet pent-up demand. Gross margins were 21.5% compared to 26.6% in the prior year period, primarily due to the impact of fixed production costs on lower sales volume and the timing of sales price reductions contractually tied to commodity prices. Operating margins decreased compared to the prior year period, in line with expectations, as we continue to absorb fixed costs on a lower sales base and also decreased prices indexed to select commodities. As a bright spot, we had a year-over-year increase in aftermarket margins, driven by decreased material commodity costs, helping to partially offset the impact from lower overall sales. GAAP net income in Q2 of '23 was $33.4 million or $1.31 per diluted share compared to $154.5 million or $6.06 per diluted share in Q2 of '22. EBITDA decreased 65% to $88.2 million for the second quarter compared to the prior year period. Noncash depreciation and amortization was $65.5 million for the 6 months ended June 30 of '23, while noncash stock-based compensation expense was $9.1 million for the same period. We anticipate depreciation and amortization in the range of $130 million to $140 million during the full year of '23. For the 6 months ended June 30 of '23, cash generated from operating activities was $274 million, with $34 million used for capital expenditures, $26 million used for business acquisitions, and $53 million returned to shareholders in the form of dividends. Operating cash flows were negatively impacted by lower sales and partially offset by the positive changes in working capital. The improvement in working capital were led by the initiatives we put in place to decrease inventory, which has resulted in a decrease of $200 million year-to-date. As inventories continue to normalize, we expect further improvements to working capital and a positive impact on cash flow. We have made net debt repayments on our long-term debt of $179 million year-to-date through June 30. At the end of the second quarter, we had an outstanding net debt position of $921 million, 3.1x pro forma EBITDA adjusted to include LTM EBITDA of acquired businesses and the impact of our noncash items. As we look forward, we are focused on continuing to maintain a strong balance sheet and targeting 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 of 2023, capital expenditures are anticipated in the range of $60 million to $80 million. We continue to expect that RV production levels will remain volatile in the short term. We estimate our July consolidated sales down roughly 20% to be indicative of third quarter '23 results as RV OEM production remains suppressed as dealers continue destocking to get inventories to more appropriate levels. We anticipate Q3 of '23 RV shipments will be between 65,000 and 75,000 units, with a full year estimated range of 290,000 to 310,000 units. We believe third quarter's financial results will be very similar to the second quarter. Looking ahead, we are confident in our ability to keep up our solid performance and are very well positioned to continue managing through operational challenges to create long-term shareholder value. With that, this is the end of our prepared remarks, and we're ready to take questions.

Our first question today comes from Kathryn Thompson from Thompson Research Group.

This is really more about the balance of going into the Elkhart open house and where inventories in the field are right now. Have you noticed dealers potentially adjusting orders to some extent before the open house and perhaps running a bit leaner in anticipation of placing orders for new units? Or do you believe that current inventory truly reflects current demand? I’m just looking to understand how you view inventories as we approach that show.

Thank you, Kathryn. I believe it's more in line with what you mentioned. Clearly, dealers reach a point where their inventories drop so low that they need to place orders to restock. While dealer inventories have slowed their de-stocking, they are still experiencing a shortage. Looking back to Q1 2020, when inventories seemed fairly normal, we have around 85,000 to nearly 100,000 fewer used units this quarter compared to then. It certainly feels like inventories are quite low. The shipyards at the manufacturers are also quite empty, a stark contrast to just a year ago when they were filled to capacity. Nonetheless, orders have increased, showing a rise of about 10% for August or September as they need units due to the scarcity of orders in the past few months. It seems they require these units for the upcoming open house, and we expect inventory levels to continue rising, especially as Camping World recently mentioned their plans to build up stock over the next six months. That's the current perception.

Okay. And that connects to cash generation. You mentioned before that inventory and cash are closely related, especially with an increase in inventory. However, with lower inventory and a focus on reducing debt, what is your outlook on converting inventory to cash and its uses?

Kathryn, it's Lillian. So as you noted, we've done some significant reductions in our inventory. Year-to-date, we've reduced it by about $200 million. We are going to look to continue to reduce inventory through the second half of the year, probably not at that type of pace, but we are going to still continue to rightsize our inventories as we move forward. We've had very strong cash generation in the first half of the year. Expect that we're going to continue to be generating cash as we move into this next half. So the company has been positioned very solidly and very focused on cash generation, and that's going to be something that we will continue to be working towards the balance of the year.

And it feels like if volume stays up as we kind of see the trend for August or September, what we have immediate visibility for, obviously, we can reduce inventory at a quicker pace than what we have in the last couple of months. But July was obviously a little slow. Again, if August, September, and the rest of the year pick up, we can move inventory out and generate more cash. So...

Okay. And then final question, can you touch on any of your updated automation efforts? Just where you are...

Yes.

And given low production rates, seeing this as an opportunity to speed up some of those initiatives.

Yes. We've obviously squeezed CapEx this year for obvious reasons, but we had quite a few projects flowing into the year that were carryovers from 2022. Probably most notable is our glass automation that we're doing for windshields, which will be a new product line for us, for towable and motorized RVs. Especially in the towables, the windshields have really ticked up over the last few years. You see probably about 30% of the towables now with windshields on the front, where they didn't have anything in prior years. So we've got automation for those two lines. I'd say we've probably got $40 million or so of automation and one building for glass now. Half of that is online. The other half is coming online over the next 6 to 8 months. And we've got other projects that we've got in the back burner warming up for '24 as soon as cash improves.

The next question comes from Frederick Wightman from Wolfe Research.

I just wanted to follow up on the comment about 3Q being similar to 2Q. I wasn't sure if that was a comment in terms of total dollar performance, so sales, EBITDA earnings. Was that a comment on year-over-year performance? What exactly did you mean by that?

Fred, it's Lillian. Yes, what I was referencing with that, really, is comparability to the second quarter of this year's performance, both from the top-line perspective and the overall earnings for the business.

Okay. Perfect. Did you provide an updated retail number for '23?

I don't know if we did or not, but we feel the retail for this year is going to be somewhere in the 375. And we feel 375 to 400 for '24, that's kind of what we're throwing out. I think that's in line with some of the other public companies that have stated their forecasts.

Okay. Great. And then just lastly, I think last quarter, you said, from an inventory mix perspective, model year '22 was like 35%. Do you have an updated number for that sort of where it stands today?

It seems that based on our discussions with dealers and OEMs, the inventory levels are approaching the 10% mark. Some dealers are seeing up to 15%, while others range from 3% to 5%. The decline is noticeable. Regarding our performance, I want to clarify that although we're currently facing challenges with lower volumes, we are confident in our business. As we've mentioned in previous years, this is a business that generates double-digit operating income. We believe we will return to that level, though we anticipate some fluctuations in volume and inventory management issues in the coming quarters. I just wanted to emphasize this point.

The next question comes from Mike Swartz from Truist Securities.

Just maybe for Lillian, a question. I think previously, you said you anticipated mid- to high single-digit operating margins for the full year. I think you're implying kind of mid-single digit again for the third quarter. So do you have an update there? It seems like it would be probably at the lower end of the range, but I don't want to put words in your mouth.

Yes. No, I think that's probably fair. So as we're seeing how the cadence for volumes coming through and as we're seeing the RV business cadencing and what-have-you through the balance of the year, it probably is more at that mid-single digit for this year. And as Jason just commented just immediately previously, we do still see this business on a longer-term basis being a double-digit operating income business. It's just taking a little bit of time as we get into more normalized operating patterns for the industry to get there.

Got you. Okay. And then just a point of clarification. I think you said your kind of visibility into August and September RV production looks better than past months. I'm guessing you're talking about maybe June and July. Was that on a year-over-year basis? Or was that absolute production levels? I just want to clarify that.

I think it's important for investors to understand the significant ramp-down we've experienced over the last year. In April 2022, the industry was at a run rate of 725,000 units, which was the target based on that month’s production. Fast forward to April 2023, and we're now at a run rate of 260,000 units. The decline is steeper than it may have appeared, especially with 2022 ending at a 500,000-unit wholesale and 2023 looking at over 300,000 units. However, we currently have visibility for August and September, which show improvement and should lead to better comparisons as we approach the first quarter. Right now, August and September seem to be about 10% higher compared to May, June, and July, which experienced more downtime than usual. I hope that answers your question, and if not, we can continue to discuss it.

Okay. No, that's helpful.

Okay.

The next question is from Bret Jordan from Jefferies.

On the prior topic, I guess, you'd said Q3 is similar to Q2, but it sounds like most of Q3 is going to be running better than Q2. Or is that just better year-over-year? I'm trying to reconcile the August and September being up versus the second quarter.

Yes. I think we've got some puts and takes with our diversified businesses that might be where some of the clarity needs to be. But if you look at August in Europe, they take the entire month down, where, if you look at Q2, we had a pretty robust quarter for Europe. So you got to look at all the different industries and segments independently. But for the RV segment, I think, is what we're speaking to, as we see orders at least for August and September, not knowing what October is going to be yet. And still, we can't be certain that they don't come back after open house or even in the next few weeks and say, 'Hey, we need to take a week down in September.' So just telling you what we see today.

Okay. And then what's your outlook...

Yes. Maybe building on that a little...

Sorry, go ahead.

Bret, just to expand a little bit on that from a sequential perspective as we look at some of the other industries, I think it is important to note that Europe, generally speaking, is lighter from a seasonality perspective for Q3 because of the shutdowns that we have in the various countries. The other area that we're seeing softness, as expected, is in the marine side of the business, but that was down a little bit sequentially in the second quarter. And as we progress through into the third quarter, that's also going to be down again sequentially. So again, to the point that everything kind of the puts and takes, we are seeing strength in certain areas. Clearly, some of these adjacent markets are being puts and takes with the RV.

Okay. And what's the second half impact from commodities, I mean, what you can see in price deals that you have now?

Yes. There are both positives and negatives to consider. Some commodity prices are decreasing while others are increasing. Additionally, our pricing to customers varies, with some prices going up and others going down. Overall, I would say the result is relatively neutral. We will have more information about the fourth quarter next quarter, but that's our current situation.

Okay. And then one last question. The outlook on sort of content as the OEs, the manufacturers are rolling out the '24s, is there a bias to sort of try to get consumer prices lower, on average, moving content down? Or is it sort of trying to make them more appealing by moving content up? Is there any shift there?

Yes, there is definitely a shift occurring. As you may have heard from some of the other earnings calls, there is a strong effort to reduce pricing after it has gone up over the past couple of years. This is happening through decontenting and pure discounting. When I examine our products, I believe it's worth repeating that removing a slide-out, axles, or a chassis does not significantly change the content because those products, such as windows and awnings, are essential. You cannot build units without them. The decontenting is primarily happening on products we don’t sell. The only time we feel some pressure is when the market shifts from high-end units to entry-level units or from larger travel trailers to smaller ones. We are observing this trend, particularly with larger Class A motorhomes and diesel motorhomes, which are experiencing the most decline, though this segment remains a small portion of the overall market. I hope this provides some clarity.

The next question comes from Scott Stember from ROTH MKM.

Can we return to the content conversation? It appears that decontenting may not significantly affect you. Looking ahead to 2024, considering all factors, where do you anticipate organic content growth? I understand you've set a goal in the 3% to 5% range. Will that remain the target?

Yes. I think if you peel out inflation and those pressures, certainly, our goal is to continue to add bells and whistles and features to existing products and then continue to come out with new product lineups. And we've been doing that for the better part of 20 years and been pretty successful. I'd also add that we haven't lost market share during this time. So it's another strength we've got as we tend to continue to keep our market share pretty level or grow it over time. So given all that, I think that's still a fairly safe assumption, again, netting out any kind of inflationary issues and things like that.

All right. And then looking at the marine side, getting a little bit softer than the previous quarters, but could you maybe just flesh that out pontoon versus more expensive types of boats?

Yes. We sell a significant amount into pontoons, but we also provide a lot of windshields for larger boats, so we have a good presence there. However, over the past few years, the marine business hasn't experienced the same rapid growth that the RV sector has, especially when comparing their respective levels. We anticipate that this cycle will be relatively brief. Most of the OEM customers we interact with are indicating that the first quarter will be focused on clearing out some inventory. However, I don't believe that dealers are facing the same issues or the same magnitude of marine inventory problems as RV dealers did with their inventory, particularly in the towable segment.

All right. And then for the last question on the aftermarket, you mentioned significant increases in inbound calls to your customer call centers. Could you elaborate on the source of these calls? Are they related to repair work or break/fix issues? Additionally, what feedback are you receiving from dealers regarding warranties and similar matters?

Yes, that's a great question. We received 180,000 calls and communications in each of the last two months. Over the past decade, during which our call center has been operating at full capacity, we rarely had a quarter with fewer service impacts and calls than the previous quarter. The more RVs we have available, the more calls we receive. Similarly, increased content leads to more calls. I believe another factor contributing to the increase in calls and opportunities is our superior service compared to the industry. We often receive calls when other companies’ lines are busy. We monitor every call closely, including our answer times and the sales efforts associated with each call, even when the inquiry is about repairs. To address your question about repairs, I estimate that around 65% to 70% of the calls are related to service repairs and warranties. The remaining calls are inquiries like, "I'm considering this or that product for my RV, where can I find it? How do I get it? How do I have it installed?" We have services in place to assist with all of these inquiries. We anticipate that calls to our service center will continue to grow, particularly as we introduce more RVs and content, which is beneficial for our aftermarket segment and a key factor in its growth.

The next question is from Daniel Moore from CJS Securities.

Covered a lot of ground already, but maybe just one or two quick ones. The decontenting discussion, maybe if we take that over to marine, content was down, I think I heard 17%. What was the split between price and mix? And do you anticipate mix being maybe a little bit more of a headwind, at least, near term if customers are looking for lower price point, lower amenity models?

They're looking for those exact numbers, and I want to share a few points. First, we only began measuring marine content in the last year, so some of the figures might be unclear as we're just starting this process. There is some inflationary impact as we've made a few reductions. When examining the pontoon market, especially after Forest River's recent dealer show, it seems that the prices of pontoon boats are at an all-time high in terms of dealer purchasing. The entry-level $30,000 pontoons are increasingly rare, with many now priced between $70,000 and $100,000, equipped with numerous features and enhancements. Notably, there are electric Biminis and power arches being added, and more pontoons are now featuring windshields, unlike in the past. Our seating packages are also becoming more costly. This is the most insight I can provide at this time, and perhaps clarity will improve in future quarters as we gain more experience reporting on the content.

Fair enough. That's helpful. Maybe 1A and 1B on capital allocation, CapEx, as you mentioned, tightening the belt a little bit. Are there projects that you deem as less necessary? Or maybe just sort of pushing things out to fiscal '24 when things get a little bit clearer?

Yes. I'd say that we're just pushing them out. I mean all the projects that we've got on the block right now we feel are important. We wouldn't put them on. We'd deprioritize them. Some of those projects are automation projects. So those usually take priority because we're improving our labor and quality and safety, all while putting these CapEx in place. So when we look at last year at $130-ish million in CapEx, and this year at $65 million, we're just trying to put the most important projects. $65-ish million in CapEx this year is what we look to be at. We're just trying to prioritize the most important ones we can do in that range.

Makes sense. And lastly, I appreciate the color, Lillian. You mentioned your leverage target 1.5x again. Would you want to get back down 90% to 100% all the way there or all the way there before you kind of start looking at M&A again? Or if you made meaningful progress, would you start to consider smaller tuck-ins along the way?

Yes. I think what I would want to see is that we're making meaningful progress. We will always be looking for opportunities in mergers and acquisitions, as long as they align with our business and strategic objectives. If the right opportunity arises and we are making significant progress, then I would be comfortable proceeding. For now, as we've mentioned, we are focused on ensuring that our balance sheet remains very strong, but we are always open to considering opportunities as long as we are making that progress.

The next question comes from Craig Kennison from Baird.

It's been a good call. I believe I have a solid understanding of stocking trends in the RV and marine channels. Could you provide any insight into stocking trends in your aftermarket channel?

It's quite challenging to answer that question in a way that offers more clarity than you might already possess. Typically, trends align with retail unit trends. When dealers face difficulties, they usually hold back on their inventories. Additionally, when retail slows down and consumers shift towards used products, there tends to be an increase in the usage of aftermarket parts for upgrades, which we sell significantly. Our quarter shows a 2% decline, which is considerably better than the overall market performance. As we continue to introduce more content into the aftermarket channels, our automotive segment is contributing positively to that trend, having seen some recent improvement after past challenges. There's also the marine channel to consider. Thus, when analyzing that number, you have to look at the three aftermarket channels in relation to our RV OEM, which is exclusive to RVs. Is that helpful?

It is. And then just an unrelated question, hopped on a little late, but did you offer any commentary on your appetite for acquisitions in this environment?

Yes, we are being very cautious regarding capital expenditures. We're evaluating potential companies and have a pipeline in place. We are currently delaying some opportunities for clear reasons, but I expect that when we reach 2024, mergers and acquisitions will continue to be a crucial part of our growth strategy. We will keep looking for acquisitions as actively as we have in the past. The focus may shift slightly towards marine and aftermarket sectors, while there may be less emphasis on RV. It all depends on the opportunities that arise, but we intend to remain active. We are likely to pursue smaller tuck-in deals, similar to the two smaller acquisitions we announced this year. If such opportunities come up, we would consider them.

The next question comes from Brandon Rollé from D.A. Davidson.

I just had a quick one on the labor situation in Elkhart. Could you comment on the availability and maybe competition for labor as the industry starts to ramp up production?

Certainly. I'll begin by saying that the current situation is somewhat puzzling. We are experiencing one of the most significant downturns the RV industry has seen, and this community is heavily dependent on that sector. However, unlike the downturn in 2008 and 2009, I have spoken to numerous people recently, and I haven't encountered many complaints about job availability. Clearly, many individuals have been doing quite well. The RV workforce seems comfortable maintaining a 4-day work week for the time being. In contrast to the last major decline, there hasn't been a lot of reports about people struggling to find employment. Additionally, other industries in the area are starting to attract the labor they need, and many businesses appear to be faring well. Overall, while the RV industry is currently facing challenges and has been for the past year, it’s encouraging to see that people are sticking around. This may be a lengthy response, but I hope it provides some clarity.

We have no further questions, so I'll turn the call back to Jason for concluding remarks.

Yes. I just want to thank everybody for joining the call. Obviously, it's been a year of dealing with some of the RV challenges, but it feels like we're starting to see some of the light at the end of the tunnel. And we look forward to updating you on that over the next couple of quarters. So thanks for joining the call.

This concludes today's call. Thank you very much for your attendance. You may now disconnect your lines.