Patrick Industries Inc Q1 FY2021 Earnings Call

Good morning, ladies and gentlemen, and welcome to the Patrick Industries, Incorporated First Quarter 2021 Earnings Conference Call. My name is Diego, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note that this conference is being recorded. And I will now turn the call over to Ms. Julie Ann Kotowski from Investor Relations. Ms. Kotowski, you may begin.

Good morning, everyone, and welcome to Patrick Industries First Quarter 2021 Conference Call. I am joined on the call today by Andy Nemeth, President and CEO; and Jake Petkovich, CFO. Certain statements made in today's conference call regarding Patrick Industries and its operations may be considered forward-looking statements under the securities laws. There are a number of factors, many of which are beyond the Company's control which could cause the actual results and events to differ materially from those described in the forward-looking statements. These factors are identified in our press releases, our Form 10-K for the year ended 2020, and in our other filings with the Securities and Exchange Commission. We undertake no obligation to update these statements to reflect circumstances or events that occur after the date the forward-looking statements are made. I would now like to turn the call over to Andy Nemeth.

Thank you, Julie Ann. Good morning, ladies and gentlemen, and thank you for joining us on the call today. We kicked off our first quarter of 2021 with a continuation of the strong trends and tailwinds supporting our markets as expected. In fact, momentum accelerated both year-over-year and sequentially in our leisure lifestyle markets, which represent 75% of our first quarter revenues as the strength of both retail and wholesale shipments in the recreational vehicle and boating markets materially improved year-over-year. Demand for outdoor recreation remains solid in interest and popularity in alignment with our view of their tremendous attractiveness and potential in both the COVID and post-COVID environment. Energy remains strong, capitalizing on interest in outdoor recreation activities that provide adventure in the exploration of the Great American outdoors, the ability for families to experience this adventure together, and the inherent social distancing through the freedom of being outside. In our housing and industrial markets, which collectively represent approximately 25% of first quarter revenues, housing, repair and remodel and home improvement conditions also remain robust, with demand for housing continuing to outweigh supply the success of the evolving work-from-home model and the continued urban migration and exodus from certain concentrated regions to less dense and more attractive climate-associated regions. These trends in leisure lifestyle and housing and industrial consumer preferences and activities all provide strong tailwinds for Patrick in our primary end markets, further solidifying an already promising long-term outlook. From an operations perspective, the size, scale and flexibility of our well-positioned operating and financial platform allowed us to execute strategically and tactically during the quarter and leverage our fixed cost structure to drive increased profitability. Our fourth quarter decision to carry heavier inventories in anticipation of a strong start to the year proved positive as those inventories were quickly used up in Q1. Our tremendously talented team members and business unit leaders leveraged our internal sourcing synergies, purchasing power and supply chain partnerships and relationships, proactively overcoming material pricing and supply chain challenges and constraints to support our customers where others couldn't. We further deployed capital within our infrastructure to proactively drive our business model off of as well as automating and expanding capacity, which will continue to allow us the opportunity to consistently deliver our differentiated products and services to our customers. We continued our investments in innovation, automation, capacity and our facilities in anticipation of resilient demand and channel restocking for the foreseeable future to again match up and flex with our customers' growth expectations and demands. We completed the acquisition of Sea-Dog in the first quarter and also focused efforts on investments in our human capital initiatives. We are actively investing in the tools needed; talent and energy of our people who work for our customers, both internal and external, to more proactively provide them with access to the solutions and products that will help further drive our performance in end markets. The spirit of our team members, in combination with their dedication and can-do attitude, has led us forward as we partner with our customers in the development and delivery of products, promoting and enabling excitement, growth and enthusiasm toward our end markets. On the COVID-19 front, the passion and compassion of our team members has been inspiring. Our trends continue to improve, and our protocols remain in place and active. We will continue to prioritize the health, safety and well-being of our team members in alignment with our core values and culture. Our ESG and related initiatives continue to be a high priority for us as well as we continue on our journey to drive focus, goals and vision on sustainability across our platform and the way we use resources through innovative programs to reduce waste and reuse materials. Additionally, we are dedicated to solid corporate governance and accountability to our stakeholders and human capital management initiatives to provide a safe, inclusive and tolerant environment in which everyone is encouraged, empowered and supported in the pursuit of their professional and personal development goals. With that as a general update and backdrop, our first quarter operating performance was very strong in alignment with high double-digit revenue growth in our RV, marine and industrial end markets and high single-digit revenue growth in our MH market. Our teams worked tirelessly to match up with OEM and build our production levels as we once again leveraged our fixed cost structure to drive improved gross profit, operating income, net income and diluted earnings per share during the quarter. Our first quarter revenues of $850 million increased 44%, or $261 million, compared to the first quarter of 2020, and we earned $2.04 per diluted share, a 124% increase over the prior year's first quarter. Subsequent to quarter end, we completed the acquisition of Sea-Dog, the industry-leading marine supplier of nonslip foam flooring, and also closed on new financing with the issuance of $350 million of senior unsecured notes in conjunction with the expanded capacity and extension of our credit facility, which Jake will further detail.

Thanks, Andy, and good morning, everyone. Our consolidated net sales for the first quarter increased 44% to $850 million, driven by increases in all four primary end markets. Our leisure lifestyle end markets continue to benefit from the popularity of RV and marine outdoor activities, while our industrial and MH markets benefited from consumer investment in homes and remodeling and a growing price differential between stick built and manufactured housing. Revenue from our leisure lifestyle markets, which are comprised of RV and marine, increased 60% with RV and marine revenues up 57% and 75%, respectively. RV content per unit increased 6% to approximately $3,288 per unit and estimated marine content per unit increased approximately 44% to $2,426 per unit. Revenues from our housing and industrial markets increased 11% in the quarter, with MH revenues up 8% versus the prior year and industrial revenues up 16% compared to the prior year. MH content per unit increased 3% to $4,691 per unit. Gross margin in the first quarter was 19%, increasing 40 basis points compared to the prior year. The gross margin improvement was primarily driven by benefits of leveraging our fixed costs against a strong increase in revenue but was partially offset by labor inefficiencies and overtime necessary to maintain quality standards and consistent delivery of our products to end markets. Operating expenses were 10.9% of sales compared to 11.9% in 2020, due to our leveraging fixed operating expenses as sales increased. Warehouse and delivery expenses decreased 70 basis points due to the lower mix of MH sales in the quarter. SG&A expenses were 6% of sales in the quarter, a 10 basis point decrease compared to the prior year, again, primarily reflecting the benefit of leveraging our fixed cost against increased sales. Operating income of $68 million increased 74% in the first quarter and operating margin of 8.1% increased 140 basis points, primarily due to factors previously described. Our diluted earnings per share in the first quarter was $2.04, up from $0.91 in the prior year. Net income and diluted EPS for the quarter reflect an income tax benefit of $5.7 million, or $0.24, respectively, related to the vesting and exercise of share-based payment awards. Our overall effective tax rate decreased to 17.1% for the first quarter of 2021 compared to 26.4% in the prior year mostly due to tax benefits related to share-based compensation. We expect our overall effective tax rate to be 24% in 2021. Looking to cash flows. We generated approximately $50 million of operating cash flows for the first quarter of 2021, an increase of 281% compared to the prior year quarter. The increase was primarily attributed to the strong increase in net income during the quarter, offset slightly by the continued investment in inventory as we work to align with strong OEM customer demand and the goal of supplying production lines in a just-in-time manner. As Andy discussed, we have focused on securing inventory levels through the leveraging of our extensive supply chain and continue to make strategic purchases to strive to attain a strong supply for our customers. Strategically, we further invested $30 million in acquisitions in the first quarter of 2021, including the previously announced acquisition of Sea-Dog. After the close of the first quarter, we also completed the acquisition of Hyperform, operating under the industry-leading SeaDek brand further increasing our penetration into the marine market and related aftermarket. These acquisitions represent investments in best-in-class popular marine categories and aftermarket solutions positioning our platform to deliver a deeper value added, highly engineered spectrum of products to marine manufacturers as they fulfill increased marine production levels. In addition, in alignment with our disciplined capital allocation strategy and dividend policy, we invested $14 million in capital expenditures for the quarter to support capacity expansion and automation to support growing end market demand. We returned nearly $7 million to shareholders in the form of quarterly dividends. We had approximately $303 million of total liquidity at the end of the first quarter, including $6 million of cash on hand, and remaining unused capacity on our revolving credit facility of $297 million. We have no major debt maturities until 2023. Our operating cash flow has positioned us to capitalize on strategic growth opportunities, return capital to our shareholders, and maintain our disciplined capital allocation strategy with attention to our long-term leverage profile. Our leverage position at the end of the quarter was 2.3x net debt to EBITDA. As Andy previously mentioned, subsequent to the end of the first quarter and in alignment with our strategic growth plan and financing strategy, we completed the issuance of $350 million of 4.75% senior notes due 2029, increased the capacity of our senior secured credit facility of $700 million, and extended the maturity of the credit facility to April 2026. Strong trends in our markets, our sound and flexible capital structure, our disciplined leverage position, and cash flows have positioned us extremely well for growth in our markets. We expect leisure lifestyle channel replenishment well into 2022 as marine and RV dealers work to first obtain inventory for immediate retail sell-through with the goal of leisure lifestyle retailers to eventually build inventory levels to an appropriate level of inventory in hand and we expect solid and resilient MH and industrial markets growth during the same period. For 2021, RVIA currently estimates an approximate 24% increase in wholesale unit shipments to 533,000 units, with an upside range of 544,000 units, and our current estimates going towards the higher end of that range. Based on current conditions and trends, we are presently estimating RV retail to be up low to mid-single digits for the full year. We currently anticipate marine wholesale to be at 25% to 30% over the 2020 shipment rates on retail that is estimated to be up low to mid-single digits. Based on these estimates and the continued strong retail demand expectations, we believe channel inventories in both the RV and marine markets will remain well below recent historic levels and will not be calibrated to a new normal until 2022 and possibly into 2023. In the manufactured housing and industrial markets, we currently expect MH wholesale unit shipments to increase low to mid-single digits in 2021 and new housing starts to continue their strong trajectory of high single-digit to double-digit growth in 2021. We have continued to invest in our capabilities to strive to ensure that we can meet increasing OEM demand as the markets grow at a rapid pace. Geographic diversification and scale will enable us to support and capture the growth of our addressable end markets. Our strong cash flow and liquidity support investments in our end market platforms. We estimate approximately $45 million to $50 million of CapEx for the full year 2021, which reflects increased investment in automation projects to offset the expected continued tight labor market, which will enable us to continue to support growth of all of our end markets. That completes my remarks. Andy?

Thanks, Jake. As discussed, our teams have been actively working with our customers during this incredibly dynamic period to support their needs. Our proactive inventory management and investment in our infrastructure have afforded us the opportunity to move with our customers and partner in their growth across all end markets this quarter. We will continue to position ourselves in alignment with our customers' demand and remain flexible and nimble in our end markets as we execute our disciplined capital allocation and growth strategy. As always, the health and safety of our over 8,800 team members will continue to remain paramount in our efforts and priorities. Their inspiring dedication and outstanding performance during this quarter have energized and strengthened our commitment to strive for the highest level of internal and external customer service. Additionally, we remain committed to serving our communities, stakeholders and partners in driving overall shareholder value. Our focus on human capital management initiatives has resulted in energy, ideas and solutions for our customers and team members. The importance of our people and their talent is both tangible and inspiring. As our incredible market serves such a vital purpose of balance and enjoyment in the well-being and recreation of families and individuals as they pursue and explore the outdoors and invest in their homes, the dedication of our people is visible and evident as our team members give shape and meaning to the solutions and products we deliver to our customers. Our financial versatility, breadth, and depth of our resources, strong liquidity and balance sheet strength afford us the opportunity to pursue strategic acquisitions and key capital investments to expand the portfolio of brands we offer our customers to further drive capacity, efficiency, inter-brand synergies, and continuous improvement initiatives. As we look ahead to the remainder of 2021, we believe the scale and capacity of our infrastructure position us to match up with the cadence of growth in leisure lifestyle and our housing and industrial markets. Our team members, core values and humble culture represent the center of who we are and our relationships with our suppliers, Board of Directors and shareholders continue to crystallize our efforts in creating long-term shareholder value and in always driving towards our goal of striving to serve our customers at the highest level. By investing in and protecting our talented and dedicated team members, dealing ethically and responsibly with our business partners in supporting our local communities, we believe our contributions will continue to enhance our overall brand and thriving end markets. This is the end of our prepared remarks. We are now ready to take questions.

Our first question comes from Brett Andress with KeyBanc Capital Markets.

So thinking about the updated wholesale outlook for RVs, we've seen monthly shipment numbers kind of ramp from the 40,000 into the 50s and now I think the mid-50s here in March. And so how are you thinking about April and May here with the information you have? I mean do you think the industry kind of shoots up into the 60,000 plus? Or are there just too many constraints holding the industry back in the near term?

I believe there is potential for that kind of number. However, we may face some limitations in the coming months as we assess the supply chain. That said, manufacturers have done an excellent job of adapting to the supply environment. Our teams have worked diligently to ensure we align with production needs. While there are constraints in various areas, we do not foresee anything preventing us from maintaining strong production levels at the OEM level. Our perspective is that OEMs and the supply chain are quite adept at adjusting. We anticipate a steady pace over the next few months, which will positively support the flow to the retail channel.

Got it. Okay. And then just curious what you're seeing with Indiana Transport, maybe first, just the financial profile of that business in this environment. But also, any insights you're seeing from that business as it relates to retail here in April, how quickly delivered units are getting sold? It just still seems like a very heavy presale market.

Certainly, we have two transport companies today that are doing an outstanding job and performing exceptionally well. We are continuing to gain market share. Additionally, they are very efficient in managing their driver pool. Currently, the inventory levels at each of these operations are at a minimum, and units are moving quickly as they arrive on the lots and are sold through the dealers. Dealer feedback indicates that units are reaching retail consumers just as swiftly. Overall, the operations are running very smoothly and efficiently, and we are not seeing any significant challenges at this time.

Our next question comes from Daniel Moore with CJS Securities.

Perfect. Andy and Jake, given just what we've seen in terms of rising raw material costs, obviously, you don't have a ton of steel, but others are going up. Just what are your expectations for margins in Q2 relative to what we saw in Q1?

Sure, Dan. This is Andy. We've definitely seen commodity costs really across the platform go up. We're definitely in an inflationary environment. Our teams have worked very hard to mitigate the impact of those commodity costs as it relates to be our customers. Our expectation would be is that we won't see any material degradation as we work with our customers, both on the upside and on the downside when materials are flowing upwards or downwards. And so we really partner with our customers through that process, have continued to do so, and we'll do everything that we can to mitigate the impact on them, but we're working very hard. That being said, we are definitely seeing commodity costs continue to rise and have seen it in Q1 in this environment.

Helpful. And then SG&A, is Q1 a kind of reasonable run rate to think about anything unusually good or bad in there?

Nothing unusual either way, no anomalies. We're a high variable cost component. And so I would expect our SG&A to stay pretty consistent.

Perfect. One last thing. You mentioned the increasing price difference between stick-built homes and manufactured homes. Can you share your thoughts on what is causing that? Is it due to a more efficient operational model for manufactured homes? Is it possible to pass on the rising raw material costs? Any insights on this would be appreciated.

Sure, Dan. It's all of the above, but also there's an embedded kind of infrastructure of the stick built that's probably a little more mature than where they're putting in some of the manufactured housing. What you end up with the supply and demand paradigm is driving a lot of buyers still to the stick built just because there's a little more inventory. We've talked about in previous calls, and you can see it that there's a little bit of capacity constraints on the MH side. So that drives people who are looking for homes into more of the stick built or the lot ability to do that. There's a lot more builders out there that can help satisfy that demand. When you get with the supply demand driven by the migration patterns, you see it from just the household formation and everything else. It's pushing a little more pricing on that side as well. Input costs are certainly impacting everybody out there and supply chain availability for all the folks, whether they're building MH units or stick built, are still seeing that inflationary pressure as well. So it's creating a delta. But while there's strong demand, I think, across both categories, there's just a little more availability out there on the stick built side, and that's driving a lot of people that way while there rather than waiting maybe for an MH house.

Our next question comes from Scott Stember with CL King & Associates.

Jake, did you give what the organic sales growth was, whether it's Patrick-specific on top of what the industry is doing?

No, I did not, but I'm happy to provide that. We are up 44% at the top line. We have a 6% increase net of industry on the organic side. About 28% is due to industry growth, and the remainder comes from acquisitions made starting in the second quarter of last year.

Okay. That's perfect. And then on the supply chain side, I know that you guys have been doing a great job of dealing with this. But are there any specific areas, whether it's fiberglass or anything else that's given you guys any headaches right now that we need to be aware of?

Nothing significant, Scott. I mean it's really kind of in a number of areas, is what I would say. And from week-to-week, things can change pretty quickly, but our teams have really done a great job of staying on top of things, working with each other, working with our like brands to make sure that we mix and match to be able to keep a constant supply chain going internally to our customers. I expect it to continue. But again, I expect us to continue to manage that very actively and continue to work to match up with production needs. It's really in a number of different areas. We're seeing it. So I think it's going to continue to be a challenge, but it's something that, I believe, our teams are doing a fantastic job of working through.

Scott, as Andy noted in his earlier comments, we began the year in a strong position, allowing us to maintain the necessary stock and momentum to navigate phases of supply chain constraints. We discussed this extensively in the fourth quarter; our proactive inventory buildup has been beneficial as we enter a time when some companies are experiencing difficulties. We are approaching the first quarter with a head start, which has positioned us well to capture market share.

Okay. Very helpful. And then last question on labor, specifically in the Elkhart area, how is that going in labor, any inflation on that front that we need to think about?

Sure, Scott. This is Andy. Labor continues to be very, very tight in the area. Again, I think, the teams have done a great job of working through kind of some labor headwinds as it relates to efficiencies. We're working a lot of overtime, certainly. But our teams have done a great job of managing that. We're definitely focused on maintaining a balance with our team members and making sure that they've got some balance, especially in this environment as we look forward. Overall, I think that it's going to continue to be tight. Some of the things, certainly on the automation front that we're working on, we're very excited about to be able to continue to offset some of the labor constraints that we're seeing out there. Again, it's a tight market for sure, but we're doing a good job of managing through it.

Our next question comes from Steve O'Hara with Sidoti.

Regarding the second quarter, it seems you've increased your performance from January through March. It appears that a monthly range of 50,000 to 55,000 units is a reasonable estimate for the second quarter. Does that align with your thoughts on the RV side?

I think that definitely makes sense, Steve. I think, again, there's just a little bit of constraint here or there as it relates to some of the materials that are out there. Overall, again, the manufacturers have proven that they can manage through that and operate at that type of cadence. So I think that's definitely an opportunity to achieve out there.

Okay. Regarding the margin performance, it was quite strong this quarter. While it may seem like an easy comparison, the change suggests otherwise. How do you view a normalized operating margin? Should we consider 30 to 50 basis points above last year, or is there a more suitable figure to use as a benchmark for a normalized number for 2020?

Yes, Steve, I appreciate the question. It's something we certainly put a lot of thought into. You can see the margin expansion that we've been able to drive both the gross margin and the operating profit lines as we come through the first quarter. Good leverageability of our fixed costs. As Andy has mentioned today and in the past, we have a pretty significant variable cost component to what we do, and that's helped drive that. Some of the input costs, we talked a little bit about labor today. We talked a little bit about raw material today and our ability to manage those. I would tell you, as we think through the remainder of 2021, we're thinking backwards at that 30 to 50 and maybe moving that upwards to thinking about 80 to 100 basis points of margin expansion versus last year for the full year.

Okay. Great. That helps. And maybe just on the marine market, you noted that inventories are extremely low there as well. Do you have a sense for that industry's ability to flex up to the same extent that the RV industry has performed? Is there any further constraints there? Or are there the issues that they face, maybe the RV industry does in terms of their ability to kind of meet that demand or, let's say, inventory shortfall?

Steve, this is Andy. There's similar constraints, if you will, as it relates to the material supply that's there today, but they're also very, very resilient at the OE level in the marine side and would expect them to continue to flex as well. We're continuing to partner with those customers and our customers to make sure that we're doing everything that we can to match up in a similar fashion as we are in the RV industry. I don't see any reason why they can't. I think, again, it's just going to be a little bit choppy here on the material side for a couple of months. And so, I don't expect that to go away in the near term, but everybody is managing through it as best as they can right now and doing a great job of managing through.

And we have no further questions at this time. I'll now turn the call back over to Ms. Julie Ann Kotowski for further remarks.

Thanks, Diego. We appreciate everyone for being on the call today and look forward to talking to you again at our second quarter 2021 conference call. A replay of today's call will be archived on Patrick's website, www.patrickind.com, under Investor Relations. I'll now turn the call back over to our operator.

Thank you. Ladies and gentlemen, this concludes today's teleconference. Thank you for participating, and you may now disconnect.