Patrick Industries, Inc.

Good morning, ladies and gentlemen, and welcome to Patrick Industries' first quarter 2023 earnings conference call. My name is Karen, 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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note that this conference is being recorded. I will now turn the call over to Mr. Steve O'Hara, Vice President of Investor Relations. Mr. O'Hara, you may begin.

Good morning, everyone, and welcome to our call this morning. I'm joined on the call today by Anna Nemeth, CEO, Jeff Rodino, President, Jake Pekovic, CFO, and Matt Feiler, Senior Vice President of Finance. 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 2022, 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, Steve. Good morning, ladies and gentlemen, and thank you for joining us on the call today. As we begin our discussion this morning, I want to take a moment and express our sincere and unwavering appreciation for our team members' continued dedication and commitment to drive Patrick forward through these dynamic times. Their focus on our goal of providing exceptional quality and customer service is inspiring and energizing. Through our Better Together culture, the brands that make up Patrick continue to collaborate and drive best practices while developing new and innovative product solutions in an effort to improve our performance and the value that we provide to our customers, positioning us as a leading component solutions provider to the leisure lifestyle and housing markets. Today, our portfolio is more balanced across our end markets, as our first quarter results once again reflect the benefits of our focus on strategic growth and diversification. We are realizing the returns on the investments we've made in this strategy, particularly in the marine market, which remained resilient through the first quarter. Highlighting this is the fact that despite a 54% decline in RV wholesale shipments in the first quarter, our consolidated net sales declined 33%. Our RV and marine revenue mix in the first quarter of 2023 was 41% and 31% of total revenues respectively, compared to 61% and 16%, respectively, in the first quarter of 2022. Additionally, for historical comparison purposes, this RV wholesale shipment tally represents a 21% decline versus the first quarter of 2019 or the last first quarter before the pandemic. Despite this decline in shipments, we earned adjusted EBITDA of $97 million and net income of $30 million, which are 78% and 45% higher, respectively, than the same quarter in 2019 when our business was much more heavily weighted towards RV. In short, although first quarter 2023 RV shipments were much lower than in the same period in 2019, our RV content per unit was 71% higher and our consolidated revenue was 48% higher. Net, we have a more profitable and resilient business model and stronger balance sheet with significant liquidity. While we've made progress, we continue to see significant opportunity to build an even stronger, more diversified company, which we believe will benefit all of Patrick's stakeholders. Although our end markets continue to face headwinds from inflation, rising interest rates, and overall economic uncertainty, the leisure lifestyle markets have traditionally been the first markets into and out of economic cycles. Demographics across our markets remain strong, with younger buyers having begun to enjoy the benefits of the leisure lifestyle. Additionally, housing inventory in general remains low while demand for affordable housing remains solid. Therefore, we believe these conditions will be temporary with a healthy and promising overall long-term trajectory. Turning to the numbers, our first quarter revenues decreased 33% to $900 million, and on a trailing 12-month basis, our consolidated revenues were approximately $4.4 billion. Our net income in the first quarter decreased 73% to approximately $30 million, and our net income per diluted share was $1.35. Finally, I'd like to share my sincere and heartfelt appreciation and best wishes to Jake as he begins the next chapter of his career in May and moves back home to North Carolina. He worked tirelessly to implement and strengthen our processes, software, policies, and procedures, and significantly enhanced our overall financial foundation, well positioning us for the next stage of growth. While we are disappointed to see him depart, the team he leaves in place is first rate, and will continue to work together toward our continuous improvement long after his departure. As we begin the process of finding our next permanent CFO, we are confident both in Matt's abilities and expertise in the interim, and that we will find the right individual who is ready to take on the opportunities and challenges that come as we begin the next phase of our growth. I'll now turn the call over to Jeff, who will highlight the quarter and provide more detail on our end markets.

Thanks, Andy, and good morning, everyone. As mentioned, the uncertain economic environment has impacted demand across all of our end markets, with heavier emphasis on consumers more sensitive to rising interest rates. We continue to diligently flex and manage our production schedules across our business in alignment with our customer needs and remain in constant contact with these partners in all of our markets. Our RV market has experienced the most volatility as OEMs utilize their tremendous scalability to match wholesale production with balanced dealer inventory levels. RV wholesale unit shipments of 78,600 decreased by 54%, or more than 93,000 units from the first quarter of 2022. We currently estimate first quarter retail registrations of approximately 84,000 units. As we head into the selling season, based on our touch points, we believe the dealers are utilizing incentives to work through a larger than optimal mix of 2022 model year units, as they position themselves for the upcoming 2024 model year change in the back half of the year. The metrics we have outlined imply a net decrease of approximately 5,400 units to dealer inventory in the quarter. Our estimates indicate that TTM dealer inventory weeks on hand at the end of the first quarter of 2023 have remained consistent with the levels beginning in the back half of 2022 at approximately 18 to 21 weeks. This is below historical pre-COVID levels of approximately 26 to 30 weeks, implying a potential new normal inventory level based on trends for the last four quarters. Our first quarter RV revenues decreased 55% from $821 million to $367 million and represented 41% of our consolidated total. Our RV content per unit increased 22%. on a TTM basis to $5,349 per unit, driven by market share gains, pricing, and acquisitions. Same with leisure lifestyle. The marine side of our business has remained resilient through the first quarter of 2023, as dealers in general have reached or are reaching basic wholesale retail equilibrium and inventory on hand. We further believe dealer inventories are balanced as we approach the spring selling season and model year change in the second half. We estimate marine wholesale unit shipments were up 14% in the quarter to approximately 52 to 57,000 units on retail unit shipments that were down approximately 20% to a range of 32 to 37,000 units. Pre-pandemic production seasonality was generally spread between 50 to 55% of units produced in the first half of the year and 45 to 50% of the units produced in the back half of the year. We expect similar cadence in fiscal 2023 as marine OEMs continue to work with dealers to keep inventory levels in balance with consumer demand. Our marine revenues, which represents 31% of our first quarter 2023 consolidated sales, increased 25% to $276 million, driven by acquisition, market share gains, and pricing. Our growing aftermarket portfolio is a complement to our marine OEM-focused business, where we offer an expanding array of products aimed to customization, upgrade, and replacement. In addition to higher margins and generally lower cyclicality, the aftermarket allows us to tap into a significant base of used boats that change hands annually, a market that is much larger than the new boat market on a unit basis. Our estimated marine content per wholesale unit has increased 27% on a TTM basis to $5,266 per unit. We estimate overall marine dealer inventories are at 20 to 23 weeks on hand, increasing from the fourth quarter levels and potentially approximating or approaching a new normal based on current economic conditions. Pre-pandemic average weeks on hand as approximated 35 to 40 weeks. The housing side of our business is primarily tied to MH single-family, multifamily, and big box, with an approximated split of about 52% manufactured housing and 48% single-family, multifamily, and big box. MH estimated wholesale unit shipments were down 28% in the quarter. Total residential housing starts for the first quarter decreased in 18%, of which single-family starts declined 29% and multifamily starts increased 5%. Revenues in our housing market decreased 14% to $257 million and represented 28% of consolidated sales. Our estimated MH content per unit increased 16% to $6,353 on a TTM basis. Although OEM shipped fewer units in the first quarter, we expect production will improve sequentially in the second quarter, and we continue to believe that manufactured housing remains a viable, cost-effective alternative to site-built housing and remains a highly relevant as consumers grapple with higher interest rates. On the operations front, we continue to invest in automation and innovation, improving our efficiencies and boosting our ability to compete in any environment. We recognize the relevance of technology and are continually exploring how it can enhance our manufacturing processes and infrastructure. We are keen to identify and implement cutting-edge end technology with an eye towards improving our efficiencies and the satisfaction of our team members. Our innovation team continues to engage directly with our end consumers of RVs to understand their needs and preferences better and ensure we focus on customer utility and satisfaction. With our culture of embracing change and leading markets we serve, we remain confident that our investments in automation and innovation will position us for continued success in the years to come. As an example of our efforts, our innovation team visits Patrick Brands to find those that would benefit from deployment of Cobot robotic systems in our facilities. We have collaborated with multiple regional automation integrators to find ways within our organization to engage with robotic applications to improve safety, output, efficiency, and labor utilization. One of our major manufacturers of complex interior and exterior sub-assemblies for the automotive, RV, and marine markets recognized an opportunity in their manual drilling cell. The robotic drilling cell consists of two universal robots that control precision high-speed drill motors to complete the previous manual operation. We believe there remains significant upside from their efforts like these, and our team remains eager to implement solutions to improve efficiencies, throughput, and safety. We will continue to focus on scalability and flexibility of our operations in alignment with our customer needs. We are aligned on capital allocation strategy to reinvest in our business, drive return on capital, and return value to our shareholders. Our acquisition strategy has brought us high quality brands, premium products, and strong team members, allowing our growth to potentially outpace our individual end markets. We are ready and prepared to pivot when markets conditions change, and leverage the flexibility and resiliency of our business model and culture. Finally, I would like to personally thank Jake for his tremendous contributions to our team over the past two and a half years. It was great working with you, and I wish you the best in the next chapter of your career. Now, for the last time, I will turn the call over to Jake, who will provide additional comments on our financial performance.

Thanks, Jeff, and good morning, everybody. Our consolidated first quarter net sales decreased 33%, or $442 million to $900 million. Our end markets were all impacted at the retail level by the headwinds of a slowing economy and rising interest rates and inflation, with RV OEMs addressing softer demand through a significant reduction in production. As Jeff noted, while our RV revenue declined 55%, our diversification strategy continued to resonate with our marine revenue increasing by 25%, and partially offsetting the declines in other markets. Our housing revenue declined 14%. Gross margin declined 40 basis points to 21.6%, as the negative impact of the significant decline in RV and MH shipments was partially offset by the contributions of portfolio diversification, recent acquisitions, and the realization of production and labor efficiencies, coupled with our automation initiatives. Warehouse and delivery expenses declined $5 million to $36 million in Q1 2023, but increased 90 basis points as a percent of sales due to reverse absorption of overhead, primarily in our distribution operations. Operating expenses for the first quarter were 15.3% of sales, an increase of 530 basis points due primarily to a 9% increase in SG&A expenses and 17% increase in amortization due to acquisitions. SG&A increased 360 basis points as a percentage of sales, reflecting our investments in human capital and recent acquisitions, which tend to generate higher gross margins but also carry a higher SG&A mix. Excluding a $5.5 million pre-tax gain on sale of property included in the SG&A in first quarter of 2022, SG&A was essentially flat year over year. Operating income decreased $106 million, leading to a 590 basis point decrease in operating margin, primarily driven by the factors previously described. We continue to invest in several key features, infrastructure initiatives that are expected to bolster our ability to drive automation and efficiencies, both operationally and administratively, and provide excellence to our customers while providing long-term value to our shareholders. These initiatives include IT, software, and automation, as we seek to leverage cutting-edge technologies and enhance analytical insight to streamline our operations and improve efficiency. We also continue to invest in human capital initiatives, and our culture has remained committed to our people, whose talent, training, and expertise are pivotal to our success. Net income decreased 73% to $30 million, which equates to $1.35 per diluted share. Adjusting for the impact of our 1% convertible notes, which matured and were fully repaid in February, our adjusted net income per diluted share was $1.38. Aside from full year 2023 results, which will include one month of the adjustment, there will be no impact on our EPS related to these notes for the remainder of the year. Our overall effective tax rate was 20.1% for the first quarter compared to 23.3% in the prior year. Although the first quarter rate was low due to the tax benefit of share-based compensation, we continue to expect our overall effective tax rate for 2023 to be approximately 25% to 26%. Looking at cash flows, cash used in operations was approximately $1 million compared to cash used in operations of approximately $23 million in the prior year's quarter. We continue to focus on the monetization of working capital. Reduction in net income alongside the seasonal timing of the collection of our receivables resulted in a use of cash. Given the reduction in production we've seen, we remain focused on inventory levels and note our inventory is down 10% year-over-year to $628 million and 6% on a sequential basis as well, reducing the operating cash outflow versus the prior year period. This quarter, we invested $20 million in purchases of property, plant, and equipment focused on automation, which will drive improved efficiencies. In tandem with our highly variable cost structure, our investments have and will continue to allow us to seize opportunities intended to boost long-term growth. We now expect to spend $65 to $70 million on capital expenditures in 2023. We continue to evaluate opportunities to strategically deploy capital and continue to focus on well-run quality businesses that champion the entrepreneurial spirit with a focus on growth and diversification. Our strong financial health allows us to actively explore attractive acquisition opportunities as a softer market may lend itself to more favorable valuation scenarios. We repurchased approximately 54,600 shares for a total of $4 million in the quarter and returned $11 million to shareholders in the form of quarterly dividends. At the end of the first quarter, we had approximately $489 million of total net liquidity comprised of $31 million cash on hand and unused capacity on our revolving credit facility of $458 million. Our total net leverage ratio was 2.3 times. In addition, by design, we have no major debt maturities until 2027. We've worked hard to build this robust liquidity profile and long-term capital structure, which enables us to navigate through the uncertain macroeconomic environment with confidence. Our financial flexibility has allowed us to quickly adapt to meet the changing needs of our customers while still being able to invest in our business effectively. Our long-term cash flow performance is a testament to our commitment to creating long-term value for our shareholders and our ability to adapt to changing market conditions. Moving to our end market outlook, as noted on our fourth quarter call, we remain in a period of macroeconomic uncertainty. Starting with RV, OEMs are continuing to work with dealers to keep channel inventory appropriate as the industry's return to normal seasonality has coincided with a slowing economy and consumers impacted by higher interest rates and the effects of persistent inflation. Although the year is off to a slower start for both wholesale shipments and retail registrations, wholesale and retail remain close to parity, which means OEMs have remained disciplined in their production, a positive sign. Based on recent trends, we currently estimate full-year RV retail registrations will be down approximately 20% to 24%, complying approximately 335,000 to 360,000 units. Assuming current dealer weeks on hand remain consistent as Jeff discussed, this approximates based on our retail estimates. Full year 2023 RV wholesale unit shipments of 310,000 to 325,000 units, implying a decline of approximately 35% to 38% from 2022. In our marine market, we continue to estimate 2023 wholesale shipments will be down low double digits, marine retail to be down high single digits to low double digits. We believe dealer inventories are generally calibrated with retail, with higher price categories leaner on inventory. On the housing side of the business, we expect MH wholesale shipments to be down 15% to 20% for 2023, retail sales absorbing available wholesale production on a real-time basis. In our residential housing end market, we expect 2023 new housing starts will be down low double digits. To wrap up, we've adjusted our end market outlook based on the most recent trends. We are entering the selling season for our end markets and expect the 2023 retail trajectory to become clearer as we progress through the year and as consumers calibrate to the current financing environment. We continue to estimate our operating margin will be between 7.5% and 8.5% for full year 2023, expect to generate operating cash flow at or in excess of $400 million this year as working capital aligns with revenues, which implies free cash flow of over $320 million based on our CapEx estimates. Each of these expectations is the resilience of our marine business relative to our RV business in the current RV slowdown. Before we start the Q&A, I'd like to share my thanks to Andy, Jeff, and the entire Patrick family. While my tenure has been shorter than I expected, I enjoyed working with the people of Patrick and his brands. Although I'm excited to begin the next chapter of my career, I am confident that the work we've done together will continue through the very strong and talented team that we have collectively put in place. Matt Feiler, as noted, will be assuming the role of interim CFO upon my departure later in May. I'm highly confident in Matt's and our team's abilities and will be working with them to facilitate a smooth transition. That completes my remarks. We're now ready for questions.

Thank you. Ladies and gentlemen, the floor is now open for questions. If you do have a question, please press star 1 on your telephone keypad at this time. If you're using a speakerphone, we ask that while posing your question, you pick up your handset to provide favorable sound quality. Once again, ladies and gentlemen, if you do have a question or comment, please press star 1 on your telephone keypad at this time. Please hold as we poll for questions. And we'll take our first question from Daniel Moore from CGS Securities. Please go ahead, Daniel.

Thank you. Good morning. I'll start very briefly just by saying, Jake, thank you very much for all the help, and best of luck on to bigger and brighter. I'm sure you'll do extremely well. I appreciate the help. Let me start with a question on, you know, content per unit continues to see really healthy growth across the board. Maybe just walk through the segments. in high-level terms, starting with RV and break down, you know, growth between acquisition, pricing, organic volume gains, and, you know, what your expectations for growth look like going forward. Thanks.

Hey, Dan. Thanks. It's Jake. And I appreciate the kind words at the outset there. Maybe I absolutely agree. We've seen great growth in our content per unit. As you know, we've been acquisitive across, generally speaking, our end markets, specifically in leisure lifestyle with RV and marine. a lot of that capital allocation for strategic purposes directed towards our marine business and is really shown with that sequential and year-over-year growth we experienced in our content per unit as well as just overall revenues for marine. And as we've spoken about last year, creating a billion-dollar top-line market business, which we're very, very proud of. So maybe to take it back a half-step and talk about the overall components of the business, change in our revenue on a quarter-over-quarter basis, which we indicate is down over 35%. When you think about the buckets that that falls into, and we usually start with the industry growth, which is the most significant piece of it in most cases, whether on the way up or on the way down. And then, you know, highly publicized change in wholesale shipments for RV lead the way there. But aggregate across our end markets, a little bit of bright spot for marine, but on a net basis down 40%. related to industry growth, so to speak, or decline in this case. Organic, still continue to see it, and it resonates through our content per unit. As you know, that's something we're very focused on, and we've been pretty consistent in our expectation of 3% to 5% growth and have exceeded that on a number of occasions over the past couple of years. And some of that related to our foresight to rebuild our inventory ahead of increased supply chain issues and maintaining strong liquidity, working closely with our banking partners to make sure we're in a position that we can invest in our working capital and be able to provide those products for our customers. And that really paid off and gave us only 3% this quarter, but all on share gain that we've taken away from folks and we have the ability to satisfy our customers' needs and continue to grow with them, even though we're in some down markets across the end markets. Acquisition growth, a little bit lighter than we've seen over time. As you know, it's been a little quiet here. You still have Rockford, Diamondback, and others rolling in, but that's 4% of the growth. So bringing that back around, it's 40% for industry down, up 3% on organic, up 4% on acquisitions. It's just that net just around 33% down in our business on a quarter-by-quarter basis. You know, when I think about content per unit, and as you're aware, we don't typically break down the components of that content per unit on a market basis and like to stay at the higher level. Certainly, as I mentioned in these comments here, RV is a lot about share gain. The acquisition of Alba Systems well over a year ago has been probably the most meaningful acquisition bump to that content per unit, but really it's about taking share and then doing our best to maintain our pricing gains that we've experienced partially through the underlying commodities, which we feel have stabilized, but partially through just better innovation, higher and better use, better products, higher mission-critical offerings to our customers. On the marine side, certainly a lot of acquisition activity there. I think over a billion dollars and a couple of years of revenue contributed through acquisitions we've made spanning back the 2019-2020 timeframe. And that's the principle. That plus some pricing that's kept up and gotten a little bit ahead of some of the commodity inputs over time have contributed to our growth there in CPU. But that's primarily related to the acquisition growth of revenue and a greater share of the overall industry as we continue to move forward and rebalance across our portfolio and markets and specifically weighted towards leisure lifestyle and the marine business for that growth. On the housing side of the business, not a lot of acquisitions here lately, a few little tuck-unders here and there, not really from a materiality perspective worth mentioning, but a lot of activity there in finding better products. There's a lot of innovation in our end markets, whether in the RV or the housing or the marine side, and staying ahead and having better, whether solar or other technological products, have given us a lot of share gains there as well as our ability to build up that inventory there. and gain share and then now maintain that share has really contributed to the growth we've seen across the housing CPU related to MH.

That's great color, and you've killed a couple of birds with one stone, which is very helpful. Just talk about how April is shaping up in terms of OEM production levels relative to March and your expectations for the remainder of Q2. Appreciate the updated color in terms of the full year forecast, just kind of seeing how Q2 shapes into that. Thank you.

Yeah, Dan, this is Jeff. You know, as we, you know, move through March into April, production levels, you know, stayed relatively flat. You know, we're still seeing those shutdowns, you know, as far as, you know, three-day, four-day work weeks, an occasional, you know, week off here or there for an OEM. But overall, we see that kind of continuing now through the end of the second quarter as dealers are really trying to right-size their 2022 inventory, get that through the system, and really prepare for 2024 model year. So I think we'll see some continued shutdowns in pockets as they try to keep those inventories in line.

Perfect. And last for me, I'll jump out, but just in terms of margins – So look in seven and a half, eight and a half for the year. Maybe just talk about, you know, gross margins held up pretty nicely in Q1 despite the RV shipment declines. Your outlook for Q2 for gross margins and operating margins, you know, kind of relative to those Q1 levels. Thanks again.

Dan, it's Jake again. So appreciate the question. And we still feel like we have a lot of resiliency at that gross margin line. And despite some pretty meaningful reduction in our prime principal end market, or at least where we have the greatest concentration in RV, as we change that mix, which is just a little bit of that balloon squeezing we've talked about in previous calls, the gross margin profile of our marine side of the business, which is typically one of our greatest gross margin contributors, is kind of picking up where we're losing a little bit on the RV side through some absorption and just lower levels of production against a relatively modest fixed cost base, but a fixed cost base nonetheless. At gross margin, some of the things to think about is – We're holding in pretty well, I think 40 basis points down on a quarter-over-quarter basis. And what's really helping contribute to that is our ability to hold at the cost of materials line and rebalancing that inventory that we've been talking about and ensuring that we're kind of partnered up with our customers on these stabilized commodities and our product pricing. A little bit at the labor side is where we've executed a lot of cost savings type activities and rebalancing our labor force to the production week. encounter and expect to encounter over the near to intermediate term. Though, you know, it was a really hard slog to build up the labor force, even though we were able to mitigate some of those pressures with the automation we've spent money on over the past couple of years with our larger CapEx budgets that we've spoken about. But still want to hang on to some of that labor and make sure that we, as we see some of the fits and starts and new model year starts up, make sure we're in a good spot to continue to build and meet our customers' needs. So that little bit of that decline that we saw is more related to some absorption on overhead and a little bit a little bit hotter on labor than we might otherwise do if we were right side of the business on a perfect apples to apples basis. Of course, operating margin is SG&A, as we've talked about in the past. We've made a lot of investments in SG&A over the past two years. We've also trimmed a lot of costs from SG&A over the past two years. And it's kind of, I would tell you, about $25 million down on an annualized basis and $25 million up on an annualized basis, but creating a better and stronger infrastructure. It's highly leverageable on a go-forward basis, but that's what, as we trend down at the top line, that's where you're seeing that pressure, that margin differential between that resiliency at the gross margin side, and we're giving up a little bit at the operating margin side. But, again, that's all planned, and we're very deliberate in those investments and ensuring we've built the cost structure and the infrastructure to support this business as we trend back up once we get through this period of macroeconomic uncertainty. When I think about the next couple quarters, I think it's going to be a very similar story to what you saw in first quarter. You know, first quarter from a production perspective, particularly in RV, came out a little slow as we anticipated with the December shutdowns that extended somewhat into January and for some brands even into February. Folks are back up and running, working through the 23s, as Jeff mentioned. They got some 22s in the lot as well. But ultimately we're thinking about what those production schedules look like in accordance with his guidance just a few moments ago and what that means to our business. And I would tell you it feels real tight now. the first quarter and our expectations of production and those margins, but still working towards that target, as we mentioned here in the prepared remarks of operating margin of 7.5 to 8.5 for the year.

Extremely helpful. Thanks again. Hope to see you in New York next week, and if not, best of luck. Yes, sir. Thanks, Dan.

Thank you, and we'll take our next question from Scott Stember from Roth. Please go ahead, Scott.

Good morning, guys. Thanks for taking my questions, and I echo Dan's comments. Jake, it was great working with you, and I wish you all the best of luck in your new opportunity.

Thanks, Scott. Appreciate that.

I'm just trying to drill down to 22, you know, how much excess inventory there really is still out there. You know, there's some commentary out there about dealers starting to face curtailments in May 2021. So I was just wondering through your touch points, through your logistics company, what are you guys hearing from the dealers? Thank you.

Yeah, it varies. Really, it varies among OEMs and dealers alike as far as what type of inventory they have with regards to 2022s. You know, we've heard varying discussions, you know, from 10% to 20% upwards of maybe even around 30%. really it's something that is dependent on the product line and really the dealers. So I know they're working very hard with the OEMs to diligently get through that product. I think it's slowed down, you know, the 2023 production a little bit to make sure that they're, you know, not bringing anything out on the lots new so they can really focus on that 22 product so they can really get that really in alignment to where they feel like they need to be going into the 2024 model. year that's coming up in July.

Got it. And then on the organic side, obviously being within that 3% to 5% range in this environment is very impressive. But just trying to get a sense of, you know, how much of it is coming from some of your customers' inability to work through the supply chain crisis and how much of it is just through innovation and stuff like that.

Scott, this is Andy. I think one of the things that we're really excited about, especially in an environment like this, is that we've been able to really work between our brands to bring solutions to our customers and grow our business organically. So there's some price that's rolling in through the TTM numbers as it relates to our content, but the new business that we've been able to not only bring on to date because of the innovations that we've been bringing, the product solutions opportunities that we've been bringing, have been fabulous. And then, you know, as we look forward, there's still significant opportunity out there to be able to go after organic share with our customers. And, you know, as we've kind of, you know, pivoted a little bit here as it relates to kind of our acquisitions and kind of working through the market here and being very, very balanced and disciplined, we've certainly focused inward to be able to see you know, and focus on all the opportunities that we think we have to bring more and more value to our customers. So it's been a great transition to that, and I think it's reflected in our organic numbers, which we expect to continue.

All right, and then last question on the margins, the 7.5 to 8.5, maintaining that for the full year. Is there any step-down function that we should worry about in the next quarter or two? I'm just trying to figure out. the ramp up towards that number for the rest of the year.

Yeah, this is Andy. I think as we look into Q2 and Q3 and we're looking at kind of a full year estimate of 7.5% to 8.5%, we would expect to see, you know, up margin lift in Q2 and Q3 and then kind of resuming back to some normalization of Q1-ish in Q4. So as we think about just the next couple of quarters with a lot of things coming in line as it relates to commodities that we've seen stabilize, you know, our ability to execute on the automation initiatives that we've done, that's where we would expect to see the rise would be in Q2 and Q3 and then coming back to more normalized, I don't want to call it normalized, but typical seasonality Q1, Q4 margin levels. Got it.

That's all I have. Thanks again, guys. Thanks, Scott.

Thank you. And we'll take our next question from Noah Zadkin from KeyBank. Please go ahead.

Hi, thanks for taking my questions. I think you might have touched on this a little bit as it relates to 2022s, and I know you touched on the shipment side. But in terms of RVs, you know, what are you hearing or seeing, you know, in April in terms of retail and any color on how March kind of shook out would be helpful as it relates to kind of the lower industry outlook there? And then, Second, if you could provide any color on inventory cadence as well as target operating cash flow for the year, that would be helpful. Thank you.

Yeah, no, I'll start. This is Jeff. On the retail side, you know, our touch points are, you know, again, it's varying, I would say, you know, from dealer to dealer and throughout the country. We're hearing that, you know, traffic, you know, remains pretty positive. weekly. It can change, but relatively speaking, positive as far as people out looking for units on the lots. But it does vary out there, and we're being very mindful of it and really keeping a good eye on the retail to see where that shakes out. I think that really is reflective in kind of the production levels that we're seeing from the OEMs and the fact that it's really kind of flattened out between March and April. So We'll continue to keep a pretty close eye on the retail and see where that brings us moving forward. This is Andy.

I think when you think about the 22s, you know, as we look at it, I think the OEs are, you know, really utilizing their tremendous scalability to manage that inventory that's out in the field. And as we look at Q2, you know, we would expect to see the OEs continue to be very disciplined in their production to make sure that they're very well positioned for the 24 model season, you know, post-July 4th shutdown. So that's how we're thinking about it. I think Q2 is that calibration point that the OEs are utilizing, again, very, very aggressively as they think about their scalability. They're so good at it. You know, that's how we think about them managing the inventory mix of 22s that's out there. So I think everybody's looking forward to kind of that July, you know, new model season for the 24s.

Hey, Noah, it's Jake. Let me step in on the inventory cash flow question that you had. So, you know, we spoke a lot about the inventory deliberate build over time, and then we hit an inflection point last year where we're thinking about where the normalization of the production levels are, particularly in RV. And as you know, our expectation is not only down this year, but we have another bit of a step function down in our range of expectation for RV wholesale shipments for this year. When it comes to inventory, as you can see from December 31 to now, we've taken over $40 million out of our inventory between what's showing up on the balance sheet and what we have in a category of prepaid inventory. So working hard on the monetization, a lot of it takes the form of slowing our purchases and in some cases eliminating purchases as we feel pretty good about the raw materials we have, what we have on the racks in our distribution businesses, which is about 23% of our business. To put us in a position where we can just continue to monetize through those products. As you look at our balance sheet when it comes out, you'll note that as we traditionally are, we're weighted towards raw materials, which are true raw materials, which puts us in a great spot to flex those raw materials across our various business units that serve our various end markets. There's a lot of commonality there. It gives us some great outlets while we still see some kind of level wholesale shipments and persistent demand on the marine side that may make up for where we've seen this drop off on the RV side and the housing side as well. When I think about the cadence of how that inventory looks, as I mentioned, we're down $40 million, and I think this is typically a quarter where we're building working capital. And you can see in our consolidated cash flow statement that our cash burn, so to speak, is much lower than it was a year ago, same quarter. We expect to accelerate that inventory and balance sheet monetization through the year. I'd expect to see it really weighted towards that cash generation from inventory to happen in kind of second half of third quarter and through fourth quarter, Noah. And then, as I mentioned in the prepared remarks, we expect that to lead to kind of a baseline of $400 million of cash flow from operations. So on an expectation of significantly reduced production and impact on the top line on a year-over-year basis, we expect to be pretty leveled up on cash flow from operations. And when you cut into that for our cash flow, rather our CapEx expectations of $65 million to $70 million, So it puts us in a great spot from a free cash flow perspective to continue to either, you know, address the balance sheet, invest in the business, even beyond that CapEx, target the acquisitions that Andy mentioned we're always being thoughtful about and where there might be great opportunities to add to the business, or return capital to shareholders. So we expect to be in a pretty good spot to continue to execute on our capital allocation strategy through 2023 as well beyond.

Thank you. Very helpful.

Thank you. And we'll take our next question from Craig Tennyson from Baird. Please go ahead, Craig.

Hey, good morning. Thank you for taking my question. And, Jake, it's been a pleasure working with you as well. I wanted to ask about the M&A pipeline. I guess maybe just shed any more light you can on your M&A pipeline. And then as a broader question, with all of your focus on automation, do you think Patrick – as a whole, as an entity, brings more to the table as a buyer. It's some of the opportunities whereby you can drive more synergies than maybe you could before, before you had some of these, I think, manufacturing and automation expertise is, I guess.

This is Andy. I'll take this. On the M&A front, we are continually cultivating our M&A pipeline. as it relates to kind of deal flow coming from external sources. You know, I would say that that's slowed down certainly with the uncertainty in the market, but we constantly are out, you know, making sure that our pipeline has opportunity and potential in it. And I think as we look at it today, we're being very disciplined. We've got a full pipeline as usual and plenty of opportunity to execute on. I think as we look at the markets, we want to make sure that we're being, you know, disciplined and opportunistic. in our acquisitions as well as our deployment of capital, as Jake mentioned. So, you know, we feel like we're in a good spot to be able to execute on opportunistic acquisitions that come to, you know, as well as the other forms of capital deployment to drive the best value and the most returns, you know, in this marketplace. So we feel good overall. We're staying disciplined. There's plenty of opportunity, and we're going to continue to focus on the return model. I think as you look at, you know, where Patrick's at today, My answer to that would be, without question, do we bring more value as a buyer on the M&A front? Certainly, there are tremendous synergies that I think we can work with potential candidates on to drive value. We're doing that today. We're working amongst our brands internally. to see where we can harmonize and bring solutions to our customers without jeopardizing the independence and individuality of the brands, which have made them so special. So I feel like we're in a really good spot overall, and the investments that we made in our infrastructure, in our automation, in our IT, and that we're making today, I believe are positioning us very well for when the market does pivot you know, we believe we'll be able to take advantage of that and leverage off those investments. So overall, yes, the answer is I believe we have a – we continue to drive a solid value proposition as a buyer, but also as Patrick overall.

That's great. Thank you so much.

And once again, that's Star 1 if you do have a question. And next we'll go to Rafi Jedrosich from Bank of America. Please go ahead, Rafi.

Hi, it's Ray. Good morning. Thanks for taking my question. And Jay Cook, best of luck going forward. I wanted to just ask kind of a bigger picture question about what you're sort of hearing about potential financial stress related to tighter credit across the value chain, both on potential opportunities you can create in terms of challenges from your competitors and then what you're hearing about anything on the dealer side and if they're having any issues.

Andy, I think just in general, overall, you know, we are not seeing or hearing tremendous pressure on the financing side as it relates to the retail environment today. Retail financing is available. Certainly rates are higher, but lending is available and we're not hearing that as a constraint. really across our platform. We believe it's really just a matter of kind of the new normal and consumers getting used to the new normal as we kind of go forward. You know, we look at kind of where the rate environment could land, you know. So I think that's what we're seeing out there today as it relates to that sort of pressure. From an internal perspective, you know, I think we're in a really, really good spot. Jake's done a fabulous job, you know, of really positioning our balance sheet and positioning our financing structure to be able to be very opportunistic, you know, as it relates to opportunities that are there, but as well, you know, from a liquidity perspective, we're in a really good spot. So, you know, overall, I think that we feel like we've got an advantageous position with where we sit today. And there could be some financial stress out there, you know, in the markets. But the markets that we play in are very resilient, you know, as it relates to our competitors and our customers that we've been through these cycles before. And I think that as we look at it, we're going to remain opportunistic. and we will take advantage of opportunities that come our way. But overall, you know, again, we're not seeing the overall financing environment create a tremendous amount of pressure today.

That's super helpful. And then just you mentioned in the prepared remarks, you spoke a little about the aftermarket opportunity in marine. Could you just give – Sounds like a very interesting, compelling channel for growth. Can you just give a little bit more color on maybe like sizing the opportunity and then the margins in that segment and just like what your initiatives are there?

Hey, Rafe, it's Jake. And I appreciate that question. And it's something we're very focused on as we think about these couple of years now of running record production levels across our end markets and ensuring that while we have great connectivity almost to the umbilical level with our OEM customers. There's a lot of vehicles out there and houses out there in the RV park, the boat park, or the manufactured housing park, I guess, for lack of a better description, that we want to make sure that we have great connectivity to and able to service them, as well as all the benefits that aftermarket can bring to help with cyclical pressures and otherwise. When we think about our... actual aftermarket exposure, as we've spoken about in the past. We've always pegged that around $200 million plus or minus of annualized run rate revenue. And I would say it's a little bit inside that on a run rate basis today. If you think about the global aftermarket kind of complex over the past few years, it had a lot of momentum, whether for us or our markets, auto or otherwise, through 2022 into the summer of 2022. A lot of speculation that was fueled by stimulus spending. Folks were working from home. They had time to do their own kind of shady tree mechanic type work. The installers were busy doing the things that they do. And we invested at that time as well. And some of our more significant aftermarket investments since that time were, you know, Seadog, Wet Sounds, and Rockford Fosgate, who are meaningful participants through that aftermarket channel. You know, aftermarket, again, categorically kind of cooled off a little bit through 2022 into now, and I would say it's normalized, and it's normalized in that just a little bit for us at that run rate under $200 million level. But we see a lot of opportunity there, and as Andy mentioned, when we think strategically about the business and where to take it and look for deeper penetration across our end markets into that installed base of product, it's something that's pretty exciting to us.

You think about how to –

quantify that market. It's hard to do if you were to say an addressable market, but there's a million boats out there and we had a year of 600,000 RVs out there, which implies a whole lot of folks in the years before that and the years that will follow that that we can touch through after market. So hard to quantify what it is, but we have so much run rate in front of us in that space, it'll be a long time before we bump up against the ceiling and we're looking for those opportunities actively. He asked about margins. The margins are typically, depending on the product, of course, soft goods. If you're trafficking in T-shirts and beer koozies and things like that, it's going to be a little bit lower to monetize products. But for the other things that we're looking to get into, value-added products like our Rockford offerings, our Wet Sounds offerings, Seadog, Turbo Swing, Fishmaster, so on and so forth, those typically bring better margin profile than what you see from an OEM perspective, as it's in many cases direct-to-consumer or one-step distribution to the consumer. So it's very additive to us, not only on a running basis from its margin contribution, but also as we think about the typical R&R type spend that you see, whether in housing or across our end markets, that when someone has a boat that they don't want to sell, but they want to bring it up to code, we want them to go buy some Rockford or WebSound speakers and put it in there and really, or put a new tower on it and really add to their look of that unit. So that's how we think about it. We're probably going to stop short of disclosing the absolute margin profile, but know that there's a lot of benefits aftermarket brings us, and we're very focused on it. We like what we've seen so far with these investments.

Thank you. That's really helpful. And then just one more. I wanted to follow up your comments on how you're managing the labor level. Obviously, we just went through a period where it was really difficult to find labor, and Now with the manufacturing curtailments, everybody has pulled back a lot, but the overall job market is generally pretty healthy. How do you think about managing the labor force and not having too much turnover during this sort of downtime or cyclical downturn relative to eventual recovery? Any perspective there would be helpful.

Rafe, this is Andy. I think as we look at the talent that we've got in the organization, we feel really good about our core talent levels and the engagement in our culture. I think our team is very much aligned. We've got great players and some hard chargers that are fun to work with and be a part of. Our culture is about engagement and talent development and opportunities. Just from the kind of the overhead side of the business. We feel good about the foundation that's there. And then on the variable side of the business, as you mentioned, you know, our team as well has done a really good job of managing the labor workforce today. We're not seeing, you know, tremendous labor issues out there. We are doing a great job of flexing our labor, you know, to make sure we're matching up with customer demand. And again, I think as we focus and continue to focus on engagement and talent planning and you know, and opportunities in front of team members. We just think there's an incredible runway, you know, that supports, you know, the talent that we've got here. So we feel overall good about, you know, where we sit from a labor position. Our team's done a great job of flexing. It's not something that, you know, we're seeing a tremendous amount of pressure on today, but we remain focused on engagement with our team members.

Thank you. That's helpful.

Thank you, and we'll take our next question from Griffin Bryan from DA Davidson. Please go ahead.

Yeah, thanks, guys. So this one's for me. We've had some pretty negative news from green dealers and OEMs this morning. Can you just kind of talk about what categories are currently holding up the best and then maybe which ones are lagging as we head into May? And then I guess just your overall sense of where retail is currently at.

Thanks. Sure. This is Andy. As we look at kind of our mix across the spectrum, we sell to all components of the retail environment as it relates to marine. And, you know, we've got a heavier concentration of what I'd say fiberglass, saltwater, ski and wake than we do mix of let's just call it aluminum and pontoon. And so we still see strength in the fiberglass market, the saltwater market. And as well, even in the freshwater market, we're seeing resilience there today, too. So our mix is geared towards the, I would say, a little bit of the higher-end boats, which have remained strong and solid to date. We've not seen tremendous fall-off on retail. We do think that there will be some softening, as we talk about in our estimates and our expectations for a full-year market, which we've built into our model. But overall, I think there's balance in the mix that's out there today, as we've mentioned, as it relates to dealer inventories. Dealer inventories are lower than they've been historically. And, you know, we're not expecting retail to fall off of a cliff and feel pretty good about where we sit today.

Once again, that's star one. If you do have a question or comment. There are no more questions at this time. I'd like to turn the call to Andy for closing remarks.

In conclusion, as we navigate these dynamic market conditions, we remain committed to our goal of providing the highest quality products and services through our Better Together values, which guide us in everything we do. We will continue to strategically invest in our business, driving scalability and pursuing strategic diversification to ensure our long-term success. A resilient business model has withstood the challenges of the past year, and we remain confident in our ability to pivot and deliver value to our shareholders over the long term. We thank everyone who has joined us on the call today and look forward to continuing to create long-term value for our stakeholders.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time, and have a great day.