LCI Industries

Ladies and gentlemen, thank you for standing by. And welcome to the Q2 2020 LCI Industries Earnings Conference Call. At this time, all participants are in a listen-only mode. And 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 1 on your telephone. If you require any further assistance, please press star 0. I'd now like to hand the conference over to Victoria Sivreis. Please go ahead.

Good morning, everyone, and welcome to LCI Industries' second 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 would like to inform you that certain statements made in today's conference call regarding LCI industries and its operations may be considered forward-looking statements under the securities laws and involve a number of risks and uncertainties. As a result, the company cautions you that there are a number of factors, many of which are beyond the company's control, which would cause actual results and events to differ materially from those described in the forward-looking statements. These factors are discussed in 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 second quarter 2020 earnings call. We delivered better than expected results in the second quarter, despite suspended production at the majority of our facilities across the U.S. and Europe due to COVID-19 for the first five weeks of the quarter. As we resumed production in early May, retail demand recovered rapidly, driven by increased demand for RVs and outdoor recreational products as consumers sought safe alternatives to traditional vacations and getaways. This rebound in retail demand allowed us to deliver strong results in the second quarter, including record high revenue in the months of June and July, as well as a profitable and cash flow positive quarter. Revenues for the quarter were down 16% to $526 million compared to the prior period, driven largely by production shutdowns in the beginning of the quarter. That said, the strong recovery in retail demand in RV and adjacent markets in the latter half of the quarter, combined with the exceptional growth in our aftermarket and international businesses, help to offset this decline. There's little doubt that RVs and boats have become the 2020 summer go-to vehicles of choice. The long-term fundamentals of the RV and boating industries remain strong and the need for consumers to find safe alternative outdoor activities and vacation options that also allow for social distancing is likely not going away anytime soon. While a recent report from AAA said 97% of American vacations will consist of a road trip this year, many people are hesitant to stop off at restrooms, hotels, and even restaurants while on the road. With an RV, all of these amenities are made available in the vehicle, providing both safety and convenience that consumers are looking for. The addition of current travel restrictions, along with favorable gasoline prices and low interest rates for consumer financing, have led many people to make the decision to start using RVs with a solid uptick of first-time RV buyers in recent months. To highlight this trend, a recent RVIA survey reported that 46 million Americans said they'll likely take an RV road trip over the next 12 months, an incredible and encouraging statistic for us. Leveraging our reputation for high-quality, innovative products, we are confident that we'll be able to capture a significant amount of this demand as people are increasingly drawn into the RV lifestyle in both the near term and beyond. As a result of the temporary production shutdowns and weaker consumer demand at the start of the quarter, RV OEM sales were down 38% year over year to $237 million for the quarter. We've been more than encouraged by the recovery in retail demand, with RV sales in June up 17% year over year for LCI. Our run rates in June and July would place us at an all-time high output rate for 2020. And in addition, these were the two biggest revenue months ever in company history, with July 2020 sales over 53% higher than July 2019. On the wholesale side, OEMs are adding capacity to keep up with increased demand and are reopening facilities that had been closed prior to the outbreak of coronavirus. Despite operating in a lower production environment in the beginning of the quarter, content per towable RV adjusted to remove fury on sales from prior periods increased 4% year-over-year to $3,371. Our sustained content increase in towable RVs is driven by continued new product innovation and market share gains. Content for motorhome RV decreased 4% year-over-year to $2,308, driven by a shift in wholesale mix towards smaller entry-level Class C units. Our diversification strategy continues to gain momentum as our adjacent aftermarket and international markets grew altogether during the quarter. On a combined basis, these markets now make up more than 48% of our trailing 12-month sales, keeping us on track to reach our target of having these markets make up 60% of our total revenue by 2022. The continued execution on this strategy through both acquisitions and organic growth positions LCI to outperform the broader RV industry, even in challenging market conditions like this last quarter. We remain focused on further advancing our diversification strategy and developing our leading positions in markets outside of RV OEM to drive incremental growth. As part of our long-term diversification strategy, we work towards strengthening our business across various adjacent markets. Revenue in our adjacent market category for the second quarter declined 23% year-over-year to $131 million, driven by the temporary production shutdowns in marine, which resumed production in the latter half of April and early May. Marine, which has benefited from the same secular trends driving demand for RVs, is a focused area of growth, both organically and through acquisitions, as we strengthen our presence in this market. The integration of the SureShade acquisition brand of electric marine awnings and biminis is also progressing as planned. As a predominant player in North America and Europe for marine shade solutions, this will be a substantial growth opportunity for LCI going forward, as shade solutions on all types of boats continue to become more popular and standard on the majority of boat types. For the second consecutive quarter, revenues in our aftermarket segment more than doubled year over year. Total revenue in aftermarket grew to $158 million, up 109% year over year, primarily driven by our acquisition in late 2019 of the Kirk Group We're very pleased with the integration of CURT to date. CURT had an all-time high sales in June and July, selling a record number of pitches, and is continuing to gain market share with its exposure to a wide variety of products. CURT's extensive dealer and distribution channels and innovative product portfolio, which includes products like Butterway, Rockerball, and Echo, continue to generate new cross-selling opportunities and will help support further growth in the aftermarket. Our RV and marine will continue to grow share in many different categories as well. The countercyclicality of the aftermarket business, underscored by its steady growth since the outbreak of COVID-19, has proven to be a key competitive advantage for LCI as it mitigates the cyclical impact of our exposure to our OEM businesses. As a result of consumers taking to the outdoors in unprecedented numbers, there has been a subsequent increase in demand for aftermarket parts. Our international business also grew substantially, with sales rising for the quarter 40% year over year to 44 million. Polyplastic, a premier manufacturer of acrylic window products that we acquired in January of this year, was one of a handful of business units that continue to operate without significant disruption to production from COVID-19. In a normal operating environment, polyplastic primarily manufactures windows for the European caravan industry. However, There was an increase in demand for acrylic panels as stores worldwide needed acrylic separators at registers to serve as protective barriers between cashiers and customers. As a result, Polyplastic was able to dedicate some of its acrylic production specifically toward COVID-related uses. Despite this near-term impact, these operations are now growing above their pre-COVID levels, and we remain confident in the outlook for marine, rail, and caravan markets in Europe and and our positioning in these spaces as we work towards further integrating our latest acquisitions, Polyplastic, Lumar Marine, Levet, Femto, and Chiesa. After implementing temporary suspensions and production at the majority of our facilities at the end of the first quarter, our plants have been operating above pre-COVID levels since late May. The health and safety of our team members has remained our top priority, and we have implemented heightened cleaning and sanitization protocols across our manufacturing sites to help ensure team member safety. Our teams have done a fantastic job executing on areas within our control. These efforts have showcased our agility as an organization as we quickly and effectively shut down, then restarted production, which we then ramped to exceed pre-COVID production levels to meet record demand for product. We have continued to manage our supply chain and manufacturing extremely well, delivering quality products to customers with minimal disruption, while some other suppliers in the space have struggled to gain footing, creating an opportunity for us to really gain market share. I'm incredibly proud of our teams for the unbelievable communication, dedication, and execution exhibited during one of the toughest periods in our company's history. To come out of this crisis like we did is an exceptional testimony to the leadership displayed by the men and women leading our teams. Our success through this very tough time further highlights LCI's strong culture and leadership models, and we feel strongly that our teams were able to maintain solid communication and navigate through the pandemic due to the consistency of our values and leadership. While many companies froze during this time, our leaders reached out weekly to our thousands of team members to keep them aware of each step we were taking as we brought operations back online. The years we have spent developing our culture, values, and leadership have been the sole reason we were able to quickly get our production up and running as effectively as we did as demand rose to record levels. We are maintaining constant touch points with our OEM and dealer partners to ensure we can continue to react quickly to the changing environment and stay ahead of the curve. In addition, continued success with operational excellence initiatives has helped us achieve profitability far beyond our expectations for the quarter, enabling us to drive efficiencies while we work to meet these increased demand levels. We are continuing to turbocharge automation opportunities as we executed and finalized a large window project over the quarter. Additionally, we have many continuous improvement projects going on as well as labor initiatives to help with the quality and labor challenges that come with an all-time high demand environment. Our R&D expertise and innovation is a critical piece of our long-term growth strategy, also serving as a key competitive differentiator for LCI as new consumers increasingly look for innovative products to meet a variety of needs. While we are operating in an unprecedented environment, We will continue to invest in technology and develop new industry-leading products, as well as new features to existing products to drive market share and content growth. Our one control technology is becoming more frequently requested and adopted among consumers and is poised for continued growth. We also see more OEMs adopting our push-button upgrades as more consumers shift from manual to electric jacks and other manual to electric products. We are also excited to announce the upcoming launch of our newest product, a tire pressure management system called TireLink. This product has the potential to improve safety across the RV space due to its ability to alert the RV owner about temperature and air pressure, similar to current auto technology. Since 2008, automobiles have been mandated to have a standardized tire pressure management system, but to date, there is no similar regulation in place for RVs. This is an important safety feature that we believe should be a requirement on all RVs and which we are working alongside our OEM partners to standardize. Our R&D teams are also working on further innovations for windows, shade systems, and awnings, not to mention the many new developments within the CURT group. After aggressively executing on acquisitions in 2019, we spent the first half of 2020 focused on integrating these new businesses and paying down debt. Since then, we've been able to generate solid cash flow to enhance our already strong financial position. While we are beginning to resume conversations around our current acquisition pipeline and remain open to small and strategic tuck-in acquisitions, our priorities continue to center on integrating and realizing new synergies from recent acquisitions, continuing to pay down debt, and preserving cash. In closing, I want to thank all of our LCIT members once again for rising to the occasion this quarter and stepping up in a way we never could have anticipated. navigating what turned out to be the most challenging environment in our company's history, and tackling unprecedented challenges while also driving the business forward. I will now turn to Brian Hall, our CFO, to discuss in more detail our second quarter financial results.