LCI Industries

Ladies and gentlemen, thank you for standing by. And welcome to the Q1 2020 LCI industry. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star one. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to Victoria Zybris and Best Relations. Please go ahead. Good morning, everyone, and welcome to LCI Industries' first quarter 2020 conference call.

I am joined on the call today by members of LCI's management team, including Jason Lippert, President, CEO, and Director, and Brian Hall, Executive Vice President and CFO. Management will be discussing their results in just a moment, but first, I'd like to inform you that certain statements made in today's conference call regarding LCI Industries' and its operations may be considered forward-looking statements under the securities laws and involve a number of risks and uncertainties. As a result, the company cautions you that there are a number of factors, many of which are beyond the company's control, which would cause actual results and events to differ materially from those described in the forward-looking statements. These factors are discussed in the company's earnings release and in its Form 10-Q and its other filings with the SEC. The company disclaims any obligation or undertaking to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made, except as required by law. With that, I would like to turn the call over to Jason Lippert. Jason?

Good morning, everyone, and welcome to LCI's first quarter 2020 earnings call. In what rapidly evolved into the most challenging operating environment in our company history, we delivered solid performance during the first quarter. Our first quarter was off to a strong start until the first week of March, so we are very encouraged about our trajectory. I'm incredibly proud of the agility of our team in response to the escalated COVID-19 pandemic late in the quarter. Thanks to the team's efforts, we were able to make necessary steps to protect the health and safety of our team members while effectively manage costs and mitigate downside risk to our business. During the quarter, we reported revenues of $660 million, up 11% compared to last year. This top-line growth was largely driven by the successful execution of our diversification strategy and the efficient integration of the nine acquisitions we completed over a 12-month span, in addition to outperforming in the RBOEM space. Before I discuss our results in more detail, let me quickly touch on the impact we have seen as a result of COVID-19, as well as the steps we are taking to confront challenges brought on by the pandemic. To prioritize the well-being of our team members, maintain compliance with federal and state mandates, and better align our production with current demand levels, on March 25th we announced the temporary suspension of our production at select manufacturing facilities across the U.S. and Europe. During the shutdown, 15 of our sites remained active and operational, continuing to produce items deemed essential. At these sites, we've operated with a heightened focus on safety, utilizing reduced staff as appropriate, adhering to social distancing guidelines, and implementing increased cleaning and sanitization processes. Our team members have always been the most valuable part of our organization, and over the past six weeks, our efforts have focused on providing support to them and the communities where over 90 facilities operate as we work to do our part to help combat this virus. For team members facing the most extreme difficulties due to the COVID-19 health crisis, we have established a temporary emergency fund to be utilized for immediate aid. and we will continue to encourage and support team member-initiated volunteer efforts. In addition, we have donated personal protective equipment and other supplies throughout our local communities. We are also manufacturing 60,000 medical face shields for doctors and nurses in Italy to help those on the front lines in the fight against COVID-19. As government mandates have begun to lift nationwide, our customers have largely come back online during levels of production, and accordingly, we began restarting most of our plants last week and this week. As our production continues to start back up, we will be following the guidance of the World Health Organization, as well as state and federal governments implementing our COVID-19 health and safety playbook, where new protocols help create a safer environment for our team members in this post-COVID environment. During this challenging time, we have continued cultivating our dealer-distributor and e-commerce relationship. Encouragingly, during the last couple of weeks, we have seen positive signs from RV and boat dealers selling significantly more inventory than expected as the weather is turning and customers are preparing to get out and behave more normally again. That said, our teams have properly adjusted the business costs to prepare for what we expect to be the new volume in the coming months. In addition, as with 9-11 and the 2008-2009 recession, we expect there to be business to pick up as a result of suppliers that have difficulty coming back from them. We have had to make a lot of difficult decisions in order to adjust the business to operate efficiently in light of the COVID-19 pandemic. But we are well positioned to move forward and emerge from this as a stronger company. Our ability to react very, very quickly to withstand a prolonged downturn scenario has been a proven strength of our business over the last two large economic disruptions. Our financial position remains strong, supported by ample liquidity and cash on hand. However, as market demand continues to shift, we have implemented critical cost-saving measures to enhance our flexibility, ensuring that we will be able to further manage through this challenging environment for the foreseeable future. Two of our senior VPs and I have reduced our base salaries 25%, while other members of the executive leadership team, general managers, and executives across the business are participating in meaningful temporary adjustments to their respective base salaries as well. Our board of directors has also reduced each director's quarterly retainer by 25%. We have not yet established the duration of these temporary compensation adjustments, but will continue to carefully review executive and director compensation as well as other salary personnel costs as we get back to a more normalized environment. We have taken the unfortunate but necessary steps to adjust our workforce by reducing staff, freezing travel, enacting temporary hiring freezes in all locations, and implement furloughs where necessary, and many other measures to match the new demand of the business. Capital expenses are being delayed where practical, and we are also reducing or eliminating non-critical business expenses. And lastly, we will be engaging in ongoing discussions with customers and vendors to determine pricing and input cost adjustments where possible, closely monitoring inventories and implementing aggressive strategies around working capital management in order to preserve our cash flow generation. While COVID-19 presents a level of uncertainty many of us have never seen, We believe the fundamentals of the RV and the boating industries remain very strong, now more than ever. As a result of this crisis, we have an incredible opportunity to introduce more people to RVing and boating. We anticipate that most will be significantly altering their summer vacation plans as air travel, hotel stays, cruises, and travel to large metro areas are going to be largely reduced. RVs and boats provide a wonderful alternative for people to get outside and vacation safely with their families in this new normal environment. Whether short or long trips, RVs and boats allow families to control the destination, who they are around, and most importantly, the place they stay. After an extended duration of self-quarantining, family, community, and the outdoors have become increasingly more important to people, which is what the RV and boating lifestyle embodies in the first place. We believe that there will be a new vacation normal and feel that RV and boats are in a prime position to check all the boxes that families will be looking to check, including that of affordability. Lastly, people are getting outdoors in significant numbers, and experiences are what people are craving at this moment. Our industries have a great answer for families considering new ways to vacation, and it certainly doesn't seem like there has been a better time to consider a boat or an RV. In addition, the same fundamental and secular drivers for our business that have historically moved our company forward are still relevant today, and we believe they will drive further growth long after the pandemic has passed. Turning to the segment results for the quarter, we started the year off strong with RV OEM retail sales trending positively and largely outperforming industry expectations in January and February. While RV dealers spent the majority of the last year working to right-size their inventories, the industry was certainly well-positioned headed into 2020 as inventory levels were largely normalized. Global RV OEM sales were $345 million for the quarter, down 5% versus the prior year periods. This decrease was largely due to the impact of COVID in the final two weeks of March. Despite this lower demand and production environment, content for Total RV adjusted to remove fury on sales from prior periods increased 3% year-over-year to $3,354. Driven by new product innovation, market share gains and the reversal of the deep contenting trend we have seen over prior quarters. We saw a slight decline in content per motorhome RV, which decreased 5% year-over-year to $2,327, driven by a shift in wholesale mix towards smaller Class C units. Our diversification strategy has proven critical in navigating through this challenging operating environment, positioning us for the long-term growth in an extended downturn scenario. Adjacent markets, aftermarket, international markets now make up more than 46% of our total net sales for LCI. a significant increase compared to 39% of total sales at this time last year. Given the progress we are making each quarter, we remain on track to reach our target of having these markets make up 60% of our total revenues by 2022. We have successfully doubled quarterly revenues in our aftermarket and international segments to $127 million and $61 million respectively, which mitigated what would have been a larger impact from COVID-19 on our overall performance. Ultimately, our diversification program allowed us to outperform the larger core markets. Our long-term strategy remains solidly intact, and we will remain focused and diligent on expanding our presence outside of the North American RV business through both continued organic growth and acquisitions. Revenue in our adjacent market category for the first quarter increased 10%, with solid growth at the start of the year, partially offset by the temporary production shutdown throughout marine and other adjacent businesses. As a reminder, Marine is our largest channel in the adjacent market segment and has been a continued area of growth for us. Despite the disruption to production in Marine, we remain focused on growing our product portfolio, integrating our latest acquisitions into the business, and strengthening our presence in this market. After introducing new cutting-edge technology and innovative sunshade awning systems through the acquisitions of Power Arm brand of electric Bimini's and SureShade electric awnings for larger boats in 2019, We are now the predominant player in North America and Europe for marine shade solutions. Being the predominant player will help position us nicely for more innovation in the marine segment in the years to come. Further, customers in manufactured housing and specialty vehicles were less impacted by recent disruptions and were contributors to growth in the adjacent market segment. As we look forward, we continue to seek new opportunities to build market share across all our adjacent markets and add content in a wide range of industries. Our aftermarket segment experienced tremendous growth, more than doubling revenues on a year-over-year basis, largely the result of our acquisition of the Kirk Group in late 2019. As anticipated, the aftermarket has continued to offset weakness experienced in our core OEM markets, which will continue to be a competitive advantage for LCX. In recent weeks, we only saw a 35% reduction in revenues in the aftermarket business, as many of our aftermarket products are considered essential items. Although showrooms were closed, many RV dealers continued to navigate leads online and get creative with the consumers for the sale and service of RVs. The integration of CURT is progressing as planned. We continue to take advantage of new cost synergies and have already benefited from some of the cross-selling synergies including new distribution channels, expanded dealer and customer networks, and broadened product offerings. In addition, CURT has an incredibly strong reputation for product innovation, engineering, and brand excellence. We are continuing to launch and sell through to new customers their latest products like Better Way and Echo, and are excited about the innovation and R&D capabilities of the overall business and strategy. As we continue to grow the business, integrate our recent acquisitions, and innovate new products for the aftermarket, we are confident we will be able to drive market share growth and use our size, product breadth, and customer relationships to strengthen our leadership position here. Our international business also doubled during the first quarter compared to the prior year due to the series of acquisitions we recently completed. In January of this year, we closed on the acquisition of the Netherlands-based Polyplastic Group, a leading manufacturer of acrylic window products and a strong supplier and innovator for the European caravan industry. This latest acquisition, combined with our acquisitions at Lumar Marine, LaVette, Semto, and Chiesa in 2019, provide us with the necessary products, brand power, innovation capabilities, and leadership teams to really grow our presence in the caravan, rail, and marine industries across Europe. As in the case of North America, the ultimate impact of COVID-19 on the European market is still unknown. Several of our manufacturing facilities in Europe temporarily shut down to ensure the health and safety of our team members and comply with federal and local mandates. Despite any near-term headwinds we may face, we are confident in the long-term outlook for these markets in Europe and believe in our growing presence, product breadth, leadership, and influence in Europe will deliver promising results in the future. Innovation is and will continue to be the lifeblood of LCI. It's what we are known for in our core markets. While we have taken aggressive steps to optimize our cost structure, we continue to invest strategically in R&D to ensure that we are delivering on the needs of our customers. Our team's R&D expertise and ability to introduce sophisticated, industry-leading products and technology across all our business and markets is a competitive advantage for us. While many companies in a difficult environment will pull back investments across the board, we believe our innovation strategy will ensure that we will emerge a stronger competitor. We have several new product launches coming this year that we will be excited to talk about in the coming quarters. Our capital allocation strategy remains unchanged. However, in light of the uncertainty we are all facing, our balanced approach will be more focused on preserving cash, paying down debt, and realizing synergies from our most recent acquisition. In closing, I want to thank our team members for the resilience during these uncertain times. Most importantly, we want to say thanks to 1,000 men and women that brave fear and anxiety every day coming to work to our several divisions that remained open during the past six weeks. Our thoughts are with those that have been severely impacted by the COVID-19 pandemic, especially our medical frontline workers all over the country, our team members, dealers, suppliers, and customers. As the situation continues to evolve, we will be ready to respond and leverage our inherent strengths as an organization in order to maintain growth and preserve long-term value for our shareholders. I will now turn the call over to Brian Hall, our CFO, to discuss in more detail our first quarter financial results. Thank you, Jason, and good morning, everyone. Our consolidated net sales for the first quarter increased 11% to $660 million compared to the prior year. The increase in year-over-year net sales was driven by continued growth in the company's adjacent OEM, aftermarket, and international markets as we continue to integrate our latest acquisitions in each of those markets. This growth was partially offset by temporary production shutdowns related to COVID-19, which resulted in a loss of approximately $45 million in sales during the last two weeks of March. Q1 2020 sales to RV OEMs declined 5% compared to the prior year due to the previously mentioned production shutdowns and lower consumer demand due to COVID-19. Sales to North American RV OEMs, which represents 96% of our RV OEM sales, was negatively impacted by the termination of the Furion Distribution Agreement and a related loss of $24 million in net sales, or 7%. This loss was offset by a 3% increase in content per total RV unit and a slight increase in wholesale RV shipments for the quarter. The remaining 4% of our RV OEM sales relate to international RV sales, which were negatively impacted by COVID-19 a few weeks prior to North America and declined 12%. Content per total RV unit increased 3% to $3,354, and per motorized unit decreased 5% to $2,327 compared to the prior year, excluding the impact of Furion in 2019. Content per unit growth in Tobol has improved further due to the reversal of the decontenting trend, while motorized content continues to be impacted by the shift in wholesale mix towards smaller Class C units. As Jason mentioned, we continue to remain focused on product innovation and believe our total content growth rate can continue in the range of 3% to 5%. Despite a challenging macroeconomic environment, we are seeing solid growth in non-RV markets as we execute on our diversification strategy. 2021-2020 sales to adjacent markets grew 10% to $187 million compared to the prior year. Sales to North American adjacent industries, which represents 78% of our adjacent industry sales, declined 7% due primarily to a 14% decline in marine OEM sales, offset by growth in manufactured housing and other emerging markets. Sales to international adjacent industries increased over 200% due to the acquisitions partially offset by the impact of COVID-19. Our first quarter aftermarket segment sales increased 111% to $127 million compared to the prior year, and international sales increased 81% to $61 million. Acquired revenues were $99.5 million, primarily affecting aftermarket and international sales. While sales in April declined 76% from the prior year, we were encouraged by the results as they exceeded initial expectations. Our diversification efforts proved positive as aftermarket and other adjacent industries performed much better than core markets. The resumption of operations by many of our customers in May is significant, and current expectations are for May sales to decline only 29% compared to the prior year, excluding Furion. While significant uncertainty remains, we believe sales should gradually improve from the May run rate as the consumer continues to gain its footing and we slowly return to growth. Operating margins decreased roughly 140 basis points, largely the result of purchase price accounting from the acquisition of Curt Group, which lowered operating margins by 90 basis points, as well as the impact of COVID-19. This was partially offset by favorability from the dissolution of our distribution agreement with Burion and other efficiencies gained through continuous improvement initiatives. Due to our high variable cost structure and our ability to respond quickly, we were able to adjust our cost structure, removing over $30 million in quarterly fixed costs. While April resulted in a net loss, we anticipate May results to return to profitability. From a free cash flow perspective, we burned approximately $15 million of cash in the month of April, and May is anticipated to completely offset the loss, which is extremely encouraging. While gross profit margins had improved to 24%, The absorption of fixed costs on lower sales volume during the upcoming second quarter are estimated to reduce the gross profit margin to 20% to 21%. As anticipated, SG&A costs increased during the first quarter due to the additional SG&A costs from acquisitions along with the related amortization of intangible assets. Due to the actions taken to reduce costs, SG&A costs are anticipated to be $85 to $90 million for the second quarter. Adjusted EBITDA increased 14% to $75 million for the first quarter, which excludes the impact of the inventory step-up. This growth was driven by additional efficiencies gained through our operating improvement initiative implemented over the past year, further optimizing labor and other operating costs. Non-cash depreciation and amortization was $24.6 million for the first quarter, while non-cash stock-based compensation expense was $3.3 million. Gapped net income in Q1 2020 was $28.2 million, or $1.12 per share, compared to $34.4 million, or $1.38 per share, in Q1 2019. Adjusted net income for Q1 2020 was $32.9 million, or $1.31 per diluted share, excluding a non-cash charge recognized in cost of sales related to the inventory fair value step-up for CURT net of tax. Cash generated from operating activities was $45 million for the quarter, while using $96 million for business acquisitions, $8 million for capital expenditures, and returning $16 million to our shareholders in the form of dividends. We maintain a healthy balance sheet bolstered by our current cash on hand and available borrowing. At the end of the first quarter, cash and cash equivalents totaled $98 million, up from $35 million at the beginning of the year, At the end of the quarter, as Jason mentioned, we took several broad-based actions to enhance our cash position and liquidity for the long term to mitigate the impact from COVID-19 as much as possible. We are evaluating additional options to further reduce operating costs and preserve margins and are continuing to closely monitor inventories and implement aggressive strategies around working capital management. For the full year 2020, we are targeting capital expenditures between $20 and $30 million, significantly below our prior expectations as we delay non-essential expenditures. During March and April, we increased borrowings under our revolving credit facility to further increase our cash position and provide financial flexibility, and as of April 30, 2020, we had outstanding borrowings of approximately $438 million under our existing revolving credit facility and remaining availability of approximately $159 million. In the coming months, we will remain in close contact with our strategic banking partners regarding options available to maintain our future financial liquidity. At the end of the first quarter, we had an outstanding debt position of $769 million with no significant debt maturities until 2022 and remain in compliance with our loan covenants. Currently, our leverage position relative to EBITDA stands at just over 2.8 times, and we are focused on further paying down debt in the near term. We are quite comfortable with our current leverage and overall financial position, which will enable us to operate efficiently in this current environment as well as for the foreseeable future. That is the end of our prepared remarks. Operator, we're ready to take questions. Thank you.