LCI Industries

Ladies and gentlemen, thank you for standing by, and welcome to the Q4 2020 LCI Industries Earnings Conference Call. 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 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to Ms. Victoria Syvers with Investor Relations. Please go ahead.

Good morning, everyone, and welcome to LCI Industries' fourth 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's 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-K and its other filings with the SEC. The company disclaims any obligation they're 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?

Jason Lippert Good morning, everyone, and welcome to LCI's fourth quarter and full-year 2020 earnings call. 2020 was not only an extremely challenging year, but also a pivotal and rewarding one for both LCI and the outdoor recreational industry as a whole. In the face of extraordinary operational challenges, we leveraged the skills of our experienced leadership team and pulled together to deliver what we consider to be outstanding results, including the highest annual revenue in LCI's history and double-digit earnings growth despite a six-week period where there were essentially no RV sales. Further, we made significant progress with respect to our long-term diversification strategy, closing on three acquisitions and expanding our market share across our RV, marine, adjacent aftermarket, and international businesses. None of this would have been possible without the unwavering dedication of our incredible LIFR team members who rose to the challenge and worked bravely and tirelessly to ensure we could meet the unprecedented industry demand from consumer streaming into the outdoor recreational lifestyle. Ending the year strong, we exited 2020 with $2.8 billion in revenues up 18% year over year. Importantly, this growth was supported by strong performance of our aftermarket and adjacent market segments. Aftermarket revenues more than doubled during the year due to the addition of the CURT Group, which has done very well since we announced the acquisition in late 2019. Our performance outside the RV business underscores the success of our diversification strategy, which has been a critical driver in outperforming our industry and helping to establish LCI leadership in the many industries it now serves. RV OEM sales increased 3% during the year compared to 2019, reaching $1.5 billion, primarily driven by the ongoing surge in retail demand as new consumers and their families enter the RV lifestyle and recognize the benefits of RVing. This increase was partially offset by the industry-wide production shutdowns in the first half of the year, after which we saw incredible recovery to ultimately deliver 29% sales growth for this segment in the fourth quarter. Industry wholesale RV shipments for the year totaled roughly 430,000 units which was the fourth highest wholesale year on record. We expect this number to rise further in 2021 and beyond, driven by heightened consumer demand and extreme popularity of RVs going forward in a post-pandemic environment. We believe that the growth in popularity and availability of peer-to-peer RV rentals will also help drive RV demand, creating a huge new opportunity for consumers to try RVing, ultimately bringing them into the lifestyle over the long term. Outdoorsy, one of the largest peer-to-peer rental companies, grew 4,500% to over $1 billion in rental revenues in 2020, while others in the space grew significantly as well. While we anticipate continued supply chain constraints heading into 2021, LCI and its customers are doing well at mitigating these challenges. As I've said in the past, when challenges arise, the industry is excellent at finding solutions quickly. We also add a capacity so that we can continue to stay ahead of the demand of ROEMs. We've leased six new facilities in Q3 and Q4 of 2020. All outside Elkhart County in the northern Indiana area, we are quickly staffing up to increase our production output. Additionally, we have two significant building projects already moving and are evaluating others. We are also continuing to leverage our automated processes in our operations, enabling us to further ramp production without the need for much labor. Finally, we are leveraging our lean teams and have turbocharged our continuous improvement projects, so that we can continue to free up more manufacturing space. I am proud to say that we are on pace to complete a record number of continuous improvement projects this year. Our team also delivered further content growth for the year in both towable units and motorhomes, echoing the strength of the Lippert brand despite the recent wholesale mix shift towards small entry-level units driven by the surge of first-time RV buyers. Content per towable RV for the full year 2020 adjusted to remove Furion sales from prior periods increased 1%, from the prior year to $3,390, while content per motorhome RV for the full year 2020 increased 8% from the prior year to $2,479, supported by the success of our new product offerings. Despite the obstacles we faced and overcame during 2020, our diversification strategy remained a top priority as we successfully grew our non-RV businesses, both organically and through acquisitions. We reached a significant milestone in our strategy during the year, with our adjacent markets, aftermarket, and international businesses now making up more than 50% of our total net sales, up from 42% at the end of the year 2019, despite the large boom in RVs. We believe that diversification will help further establish our presence in the broader outdoor recreation market to drive long-term growth. Our large adjacent market contributors are still cargo and utility trailers, components for buses, boats, and other commercial vehicles, as well as windows and other products for manufactured housing and residential housing markets. As I mentioned earlier, our revenues in the aftermarket segment more than doubled year over year, up 125% compared to 2019, primarily driven by the addition of the CURT Group, which remains our largest acquisition to date. We are pleased to say that the CURT teams demonstrated their strong operational skills throughout the year, realizing cost synergies and exceeded their pre-COVID target numbers, and have entered 2021 with a backlog triple of what they started 2020 with. Our RV aftermarket group also knocked the cover off the ball by outperforming their pre-COVID targets as well. Our aftermarket and adjacent businesses proved to be resilient through the pandemic and were the workhorse of our business during the time that our OEM businesses shut down. We believe that in times when our RV and marine OEM businesses are down, our aftermarket businesses will provide opportunities for growth. This is one of the reasons we will continue to invest in this part of our strategy as we continue to steer our aftermarket business toward the billion-dollar mark. We have continued to focus our attention and resources on the customer experience in the aftermarket world. We believe helping to change the customer experience will be pivotal to our future success as we support first-timers coming into the RV lifestyle. Like we typically do, to help drive this initiative, we appointed a leader for this area in Q1 of last year. Nicole Salt is a seven-year Lippert vet with 10 years of additional experience as an RV OEM Director of Customer Service. As Director of Customer Experience at Lippert, She has started to build a team and has already launched several great initiatives to get closer to the consumer and gather more valuable feedback. We also hired Joyce Schofield, who came to us with a great experience from OnStar and Guardian as a call center leader to help change the customer experiences that pertain to the over 60,000 customers each month that reach us by phone or email to get service on our products. We've additionally launched two social communities that are providing excellent feedback for our products and services. The Lippert Scouts, as we have named them, is a group of specifically selected RV super users that connect daily with our customer experience teams. The Scouts, numbering over 1,200 members, will serve as our eyes and ears to provide valuable insights on our new and existing products. We will be listening to their new ideas and engaging in conversations so that we can obtain important feedback to help solve RVing issues. We've also launched a campground project. through which we are sending technically experienced team members to over 100 campgrounds nationwide to meet, survey, and collect candid feedback from real campers and RVers. We are confident that our continued emphasis and passion for the customer experience can serve as yet another competitive differentiator to drive growth for our aftermarket segment and OEM segments, and in turn strengthen our overall business. Turning to adjacent markets, 2020 revenues rose 4%, again driven by the heightened retail demand for marine and other related markets. which continue to benefit from the similar secular tailwinds driving the growth across the RV and the aftermarket. Looking forward, the additions of Challenger Door, leading manufacturer of branded doors for RVs and specialty trailers, and Viata Industries, a manufacturer of marine seating, will both serve as new growth drivers for the OEM segment. And we are excited to continue to integrate these businesses into LCI. Viata has a substantial relationship with Polaris-owned Bennington Boats, the largest pontoon builder in the country. And we are looking forward to adding more value to that relationship as we continue to grow with Polaris and its applicable segments. Our marine revenues for 2020 have eclipsed $205 million and are expected to increase with a ramp-up of the industry in 2021. It is noteworthy to announce that we have been working closely with Tracker Marine over the last 12 months. Tracker, one of the largest and most well-known boat brands and boat builders in the U.S., has decided to shift its marine furniture production from a vertical preference to Lippert through our tailor-made marine group. further strengthening our presence in the marine space. Over the long term, this collaboration will add business to several Lippert U.S. facilities, including a dedicated marine seating facility in Missouri near the Tracker campuses. We look forward to working with Tracker to develop a strong relationship and drive growth for both businesses. In addition to marine, our windows business in our adjacent markets, our third largest product line in the company, has continued to gain share in the commercial, bus, manufactured housing, and residential housing market. Our international businesses saw strong growth in 2020 as well, with revenues increasing 62% year-over-year, supported by the four acquisitions we closed in late 2019. The strength of these brands, coupled with their culture and innovation, wide-reaching footprints, and customer relationships in Europe have continued to help position Lippert as an industry leader overseas. The various European countries in which we operate, including Italy, the Netherlands, and the U.K., seem to be slightly behind the rapid pace of recovery we saw in the U.S., but still remain strong and showing opportunities for a great 2021. Overall, Europe is showing many of the same drivers of secular RV and recreational demand, and European consumers have increasingly turned toward the outdoor lifestyle for travel and vacation, while some airports have shut down due to the pandemic. 2020 retail caravan registrations in Europe increased almost 12%, with the largest market, Germany, up over 32%. Our RV, rail, and marine divisions in Europe are all forecasting significant growth over their 2020 numbers based on feedback they are getting from their customers. In addition, we continue to see great progress toward LCI European components being adopted by the U.S. RV OEMs. This is a trend we are really proud of and it helps that the U.S. OEMs really see us as even more of an innovator with the ability to bring these products to the U.S. market on a regular basis. We are very confident in the ability of our leadership teams to capture this demand and drive new growth across our international businesses. Innovation is one of our strongest competitive differentiators and remains at the center of everything we do, particularly as new customers increasingly seek out technologically sophisticated products, as well as products that appeal to new generations of campers. This trend has driven the success of our OneControl products, among others, which put RVers in control of their vehicle by enabling them to manage an RV's most important functions from their smartphone. Further, OneControl integrates seamlessly into our largest strategy to enhance the customer service experience, allowing our support teams to know immediately if a problem with an RV has occurred so that we can alert the customer. This will be especially helpful to new entrants still familiarizing themselves with their RV. We're also seeing strong demand for other innovative offerings that provide additional modes of support. including our tire link pressure and temperature monitoring and electronic sway control systems, equipping RVers with the ability to be in tune with these safety aspects of their vehicle and help provide them with a safer journey. We believe that safety products, which will be a significant focus for us over the next few years, will likely have the same impact in making consumers feel more comfortable buying RVs like they do automobiles. To lead our new product innovation, we recently announced the addition of our Vice President of Innovation, John Reimer. An industry leader and avid RVer who will help us drive forward our extensive catalog of industry-leading RV and marine-related innovations, products, functions, and features. By fostering a strong, cohesive culture with our business, we have been able to create dependable and dedicated teams that were able to power Lippert through the crisis brought on by the pandemic, and we could not be more thankful for each and every one of our team members. Unlike many companies, we provide leadership coaching to all leaders in the business and have dedicated resources for training that ultimately creates longer tenured leaders who understand what effective leadership looks like. We have seen firsthand how this ultimately drives higher retention and ultimately greater momentum in the business as a result. These initiatives have directly supported our operations for over seven years now and give our teams the skills needed to keep leadership evolving. It has proven to be especially effective during its most recent environment, which was one of the most toughest to manage through in our recent history. Ultimately, it was our strong cultural foundation that allowed us to supply our customers in the manner that we did. During these tough times, we also worked to ensure the safety of our team members while supporting the larger community surrounding LCI. We invested millions in personal protective equipment for our team members while altering production environments to keep people properly distanced. and were able to involve select teams in a COVID-19 vaccine testing phase ran by Johnson & Johnson. We also set up and dedicated an industry-first drive-through rapid COVID testing site for our team members. Our teams kept up our commitment to our community by providing over 67,000 hours of community service during 2020, despite an environment nearly impossible to serve in groups like we have in the past. We also led the industry with a significant gift to our local hospitals to help them hire mental health experts to provide much-needed help to the hardworking men and women on the front lines of our hospitals, those who have seen some of the worst of the pandemic. I could not be more proud of our ability to give back during these times of great need. With respect to capital allocation, we continue to remain receptive to strategic M&A opportunities. We are looking for great strategic fits with great leadership teams and solid plans for growth. At the same time, we are focused on integrating our recent acquisitions and paying down debt. Additionally, we are investing in innovation and optimizing our manufacturing footprint to ensure we maintain the appropriate capacity to meet the soaring demand for recreational products. In closing, I'd like to thank all of our team members, not only for their tremendous work and commitment to delivering quality products to our customers, but for also fostering a culture that has made Lippert so successful. We could not have achieved such amazing results without these incredible dedications, coupled with the strength and guidance of our leadership team. We look forward to continuing this tremendous progress as we headed further into 2021 and deliver further value for our shareholders. I will now turn to Brian Hall, our CFO, to discuss in more detail our fourth quarter and full year financial results.

Thank you, Jason, and good morning, everyone. Our consolidated net sales for the fourth quarter increased 39% to $783 million compared to the prior year, with acquisitions contributing 13% of the year-over-year growth and organic growth contributing the remaining 26%. Q4 2020 sales to RVOEMs increased 29% compared to the prior year due to the continued record RVOEM retail demand. When normalizing for the termination of our relationship with Furion, RV OEM sales increased by 39%. At the same time, sales to adjacent industries grew 20%, aftermarket segment sales increased 129%, and international sales increased 60% as the popularity of outdoor leisure continues to drive strong demand across many of our markets. We continue to work towards our diversification strategy goals, and we recently announced the acquisitions of Challenger Door and Viata Industries during the fourth quarter. Acquired revenues contributed $73.2 million across the business during the quarter, primarily CURT and polyplastics, driving strong growth in aftermarket and Europe. As we now last a year on the CURT and polyplastics acquisitions, forward-looking acquired revenues consist of Challenger and Viata, each representing about $80 million, or $160 million in total, of acquired revenues and split across RVOEM at 36% and adjacent industries at 64%. We expanded operating margins by roughly 140 basis points from the prior year period, largely due to the favorable impact of leveraging organic sales growth coupled with the impact of operational efficiencies driven by increased automation and lean manufacturing initiatives and partially offset by increased labor expense to meet heightened production requirements and the increasing cost of steel, aluminum, and freight. We anticipate the current headwinds from increased input costs to continue through the first half of 2021. While the pricing for many of our products is indexed to steel and aluminum costs, There remains the traditional lag time and effectiveness of approximately two quarters. Gap net income in Q4 2020 was $48.7 million, or $1.92 per diluted share, compared to $28.8 million, or $1.14 per diluted share, in Q4 2019, primarily due to strong growth in net sales as well as a favorable impact in the effective tax rate due to discrete adjustments. Adjusted EBITDA increased 54% to $88.1 million for the fourth quarter. This increase was also driven by leveraging the aforementioned heightened demand in retail RVOEM and aftermarket, as well as incremental revenue from recent acquisitions. Moving on to full-year 2020 results, sales to RVOEMs increased 3%, driven by the heightened retail demand for outdoor recreational products. As Jason mentioned, we expect an increase in wholesale unit shipments in 2021 compared to 2020. Further, current RVIA forecast for 2021 is 507,000 units, which would be an 18% increase compared to 2020. We remain acutely aware of the industry supply chain issues and are confident that our flexible business model will be able to adapt to any significant changes. Content per towable RV unit for the 12 months into December 31, 2020, increased $44 to $3,390, while content per motorized unit increased $192 to $2,479, excluding the impact of Furion in 2019. For comparative purposes, excluding Furion, content per towable RV for the full year 2019 was $3,346, and content per motorhome was $2,287. The content increase in towables was primarily driven by organic growth, including new product introductions, partially offset by the increased demand for entry-level products, which traditionally have less content per unit. In addition, price reductions passed to our customers during the last 12 months, primarily due to commodity index pricing. have negatively impacted content growth by approximately 2%. And we estimate significant volatility in OEM inventories have negatively impacted content growth by approximately 4%. As the second quarter was significantly impacted by the abrupt shutdown of production and subsequently shipment of product was impacted by supply chain disruption, the matching of LCI sales with the wholesale shipments has been temporarily diverged. Pro forma total content growth is estimated to be approximately 7% year-over-year. Sales to adjacent industries increased 4% to $688 million in 2020, and our aftermarket segment increased its total sales by 125% to $628 million, while international sales increased 62% to $237 million compared to the prior year. Acquired revenues were approximately $375 million for the full year 2020. Non-cash depreciation and amortization increased by over $22.6 million for 2020, while non-cash stock-based compensation expense increased just over $2.4 million for the whole year. We are anticipating depreciation and amortization expense to increase to $110 to $120 million in 2021, primarily due to increases in capital investments for capacity and efficiencies in 2021. Our effective tax rate for the full year was 24.4%, remaining relatively flat year over year. Gap net income for the full year 2020 was $158.4 million, or diluted earnings per share of $6.27, compared to $146.5 million, or diluted earnings per share of $5.84 in 2019. During 2020, we generated $231 million from operating activities while using $182 million for business acquisitions, $57 million for capital expenditures, and returning $70 million to our shareholders in the form of dividends over the year. Capital expenditures for 2020 included normal replacement CapEx along with $5 million in automation investments and over $21 million in growth initiatives as part of the operational improvements we have discussed. We ended the year with a net debt position of $686 million at December 31, 2020, roughly two times pro forma EBITDA, adjusted to include LTM EBITDA of acquired businesses. Leverage remained comparable to 2019 while enduring COVID shutdowns and two acquisitions late in 2020. We remain focused on maintaining a healthy balance sheet and continue to target long-term leverage of one to one and a half times net debt to EBITDA, as we work to integrate recently completed acquisitions, which we believe will contribute strong operating cash flows. We expect capital expenditures between $130 to $150 million in 2021, as we focus further on various smaller-scale continuous improvement and automation projects that support growth and continue to build capacity to support heightened production rates. As we continue to execute our acquisition strategy by integrating our latest acquisitions into our business, We are confident that we are well positioned for strategic growth heading into 2021. That is the end of our prepared remarks. Operator, we're ready to take questions. Thank you.

If you'd like to ask a question at this time, please press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. First question comes from Scott Stember with CL King.

Good morning, guys, and thanks for taking my questions. Thanks, Scott. Jason, in the release, I think your last comment was related to the OEMs seemingly taking less downtime. I guess some of the supplier issues incrementally are abating. Can you maybe just talk about that, the pace of improvement and where you would think that would be by the middle of the year of 21?

Yeah. All I can say, it's really noticeable. I mean, October, November, December, I mean, we were riddled with brands all over the industry being down one day to the next. It seemed like every day there was somebody else that couldn't work because of COVID or they shut down because of supply chain related issues. And in January, you just didn't hear about any of that. So, I mean, I haven't confirmed it, but I'm pretty sure that nobody took down days in January. So it's just a stark contrast from what we were seeing. And, you know, COVID-related cases were up significantly in October and November, so that was a big piece of it. And January has been very quiet around the county here. So, you know, I can't tell you, you know, or put it in numbers specifically, it was just a significant change. And then, you know, the big challenge will be you know, the 20 or so facilities that the OEMs are putting online new between now and the end of the year, which will add significant capacity. It's just, you know, getting those up and making sure those, you know, those are able to run cleanly.

Scott, I'd add to that. I think, you know, back in October, we were talking about a lot of these random shutdowns and just disruptions because of supply chain, et cetera. But to give you an idea, our chassis shipments, just the numbers of them from October to January have increased 12%. So I think things are running much more efficiently. We talked about it growing, you know, 10% or so by the time we got to January. And it's certainly, the industry's done a nice job of getting caught up and we were able to see that pull through.

Got it. And Brian, maybe on the gross margin, I know there's some seasonality in the fourth quarter when you compare it to the third quarter. But just maybe talk about how we should look at gross margins going forward. Seems like input costs are something that we have to keep an eye on. But just trying to get a sense of, you know, last quarter and third quarter, you were pushing W actually over 11% operating margins. Just trying to get a sense of where we should look for, you know, margins to be, you know, during 2021.

Yep. I think that we started talking a little bit early fourth quarter or late third quarter about some of our input costs rising, primarily steel and aluminum. Certainly labor has been challenging as well. Once you got into those late fall months, you know, as COVID kind of spiked here locally, you certainly had, we had to deal with that from an operations perspective as well. So you did see some margin deterioration from third quarter to fourth quarter. Some of it, like you said, due to the seasonality, but the rest of it due to some of these pressures on our input costs. I would expect that to continue to increase. I think our overall margin that we turned in in Q4, I think it's going to be a bit spotty throughout the course of the year because I think that, as you know, we have a lot of our steel and aluminum products tied to the pricing to our customers tied to some indexes. There's a little bit of lag there. So we've had some price reductions that were flowing through during 2020. And now in 2021, I think we're going to start to see things go the other way, but with a little bit of a lag there. We're also addressing some specific price increases to help out on some more unusual items, things like freight that skyrocketed here in the past few months as well. So all in all, I think we did a little over 8% in the fourth quarter. I think we'll see that grow a little bit, but then likely level out. and maybe decline some and then pull back up in the later months of the year. So I think we'll show some, our typical incremental margin, but then offset by, you know, some of these, you know, costs such as steel, aluminum, and freight primarily. But maybe, you know, I want to say if you took your incremental margin that we typically have somewhere around 20%, you know, maybe 1.5% at times you could see as a headwind. At least that's what we're seeing today.

And I'd add to that, Scott, just real quick, that additive to margins going forward, I mean, we had weeks during the last quarter Q4 where, you know, we had 10 to 20% of our workforce missing because of COVID trying to get just out the regular required volume. And You know, going forward, it feels a lot better. Certainly things could happen, but January was certainly a month that we didn't have anywhere near close to that. Haven't had that this month either. So, you know, as long as COVID doesn't wreak havoc in our operations, you know, we can get, you know, 95% plus of our workforce engaged in building product and not have, you know, 10 to 20% missing. Sometimes that adds huge to efficiencies, so.

Great. And just last question, Jason, you touched on or you mentioned the opportunity with Tracker. Sounds like a very nice opportunity. Could you maybe size up what or just frame out the size of the opportunity ultimately there?

Yeah, it's not too dissimilar from some of the other verticals we've taken over. We've done chassis verticals. We've done furniture verticals for people over the years, for our customers. And I think Tracker sees that they've been up here a lot. They see the opportunities in all product lines. As you're well aware, all the marine, all the RV businesses are looking for more capacity right now. If you can sub out a vertical, it's really not adding value. It helps create an immediate labor pool to build more boats or more RVs. You've got a company like us that's willing to lease space and put our teams around building out a vertical like this so that they can use that capacity for building their finished products. It's good for both. So, you know, they're a big boat manufacturer. They're the, you know, one of the largest in the country. So we're excited to start doing a lot of things for them, not just furniture.

Got it.

That's all I have. Thanks.

Thanks. Next question comes from Catherine Thompson with Thompson Research Group.

Hey, good morning. This is actually Brian for Catherine. Thank you for taking my questions. I guess I wanted to start with some of the prepared remarks kind of alluded to seeing those supply chain issues kind of continuing into 2020, sorry, 2021. I guess, could you maybe touch on what those issues actually are that are out there or could possibly be out there if that's COVID disruptions that still might be causing plants to shut down or if it's something just more fundamental with the industry? I guess, was that kind of in reference to Lippert specifically, or is that kind of just across the general supplier base? And then any kind of updated expectations on when it all could be back to normal?

Yeah, I think the last part of your question is a little bit more challenging to answer, but I think all the supply chain on the OEM side, I mean, we've all got certain struggles. I mean, freight's certainly the largest issue that's kind of hitting a lot of businesses, so We're all having to beg, borrow, and steal to try to figure out how to get product here from overseas. It's not really freight domestic. It's just freight overseas that's really the larger problem for the OEM suppliers. Steel is obviously challenging right now. You hear about a lot of problems. Businesses that are buying steel are challenged to get it. If you can find it, you're paying a lot more than what market is. Our business and our industry is relatively small. The steel users, some of the other raw materials that are being challenged right now. The one thing I love about our industry is we're pretty resilient. We're pretty resourceful. When there's problems and issues, we find a way to substitute. OEMs are generally pretty lenient on substitutions. So, you know, the industry makes substitutions pretty regularly so that we can continue to stay running. So I don't anticipate much of any disruption in production from supply chain-related issues. It's just probably going to be one of those things that just, you know, is poking at us for the next several quarters, and hopefully things start to even out. So... Hope that answers your question.

It does. Yeah, thank you for the color. I guess second question, I guess maybe could you guys talk about high level how to think about kind of some of the comps throughout 2021? I guess there'll be some interesting looking numbers, at least for Q2, and then you get to the back half, there'll be maybe some tough comps, but you're also expecting kind of some retail growth for 2021 as well. So maybe just some insights on how you guys are thinking about the quarterly comps throughout 2021 would be helpful.

Yeah, I think, you know, start with first quarter. You know, I do think that our January reported results are pretty indicative of what we're expecting for the quarter, other than March. You know, we were up 38% for January, and I think that, you know, February is likely to be similar. You know, as Jason mentioned, as more production comes online with the OEMs, that's certainly going to have an impact, but we're not expecting that here in the you know, recent months. But March then, you know, there was a shutdown, I think that last week or so in March. So that's where I think we'll see our growth rates start to pick up. Obviously, when you get into Q2, those are going to be some pretty significant growth numbers. You know, in the back half, I do think, you know, as I mentioned earlier, if our chassis shipments are up right now 12% from October to January, I think that tells you in the back half of the year, at least for Q3 and Q4, what we'd kind of expect. You know, as the industries work to replenish inventories across RVs and Marines, I'd expect those rates to continue to push into the back half of the year, plus whatever, you know, content growth we have on top of that. Thank you.

Next question comes from Fred Whiteman with Wolf Research.

Hey, guys. Good morning. Thanks for taking the call here. Could you just maybe touch on your expectations for the cadence of reported RVIA shipments over the next few months? I mean, you guys have alluded to this 12% increase in chassis a few different times. I think in the past you'd sort of talked about getting closer to that 50,000 unit number. in the start of the year? I mean, is that still realistic, or do you think that the supply chain disruptions have sort of pushed that type of delivery number farther into the year?

I mean, I think it's absolutely realistic. Again, part of that's just because, you know, supply chain and COVID haven't, you know, at least as of late in the last month and a half or so, haven't wreaked as much havoc as what we saw earlier in the prior quarter. So, Um, you know, they're also, like I said, uh, in the beginning of my remarks, they're, they're putting, you know, the OEMs are putting on just the RV side are putting up close to 20 new facilities online to build RV product, uh, RV finished products, um, over the course of the next four quarters. So some of those are going online right now. Uh, others will go online Q2 and Q3 and a few left, uh, that'll straggle on Q4. But that's a lot of facilities. They're going to add a lot more volume opportunity. I mean, the big challenge is going to be labor. Us, along with some of the other OEMs out there, are putting facilities outside of Elkhart County right now to help just make sure that we're distributing labor evenly and we're not creating bigger labor issues here that are bigger than the ones that already exist. So I think the OEMs and The suppliers are doing a great job to mitigate supply chain issues and feel that those numbers are totally realistic.

They'll get there. Great. And then could you just give maybe an update on the state of those semi-finished goods that you guys have talked about in the past? Is it sort of steady to where we were exiting the third quarter? Have you seen some improvement to where production is probably closer to actual shipments, or is there still going to be some variability there because of that supply chain impact?

Yeah, I think, I mean, personally, all the lots that I drive by on my way into work every day have, you know, there aren't as many units sitting out there at all. So I think that that's indicative of what, you know, Jason was saying earlier that, you know, supply chain's done a great job of catching back up. They've been able to get a lot more units out the door. I think if you look at what wholesale shipments did November, December, you certainly saw that kind of at least in my opinion, that glut of inventory that stacked up here for a couple months go out the door. Because I think wholesale shipments were outpacing what production levels were at that point in time. And fortunately, well, you can look at it as fortunately and unfortunately. I don't think we've built back inventories at the dealer level because, you know, it seems as though we're still seeing heightened retail demand. And as the every unit that's getting shipped out right now is being retail sold. So, you know, there's still a lot of work to be done there to replenish inventory. So these next couple months, I would anticipate there to be quite a few units get shipped. They'll produce and ship as many as they can. Great. Thanks, guys.

Next question comes from Daniel Moore with CJS Securities.

Thank you. Good morning. Jason Bryant. Just wanted to drill down a little bit into some of your commentary around, you know, inflationary input costs in relationship to maybe gross margin more specifically. So, you know, 25% gross margin, pretty strong by historical standards. Can we sustain that in H-1 given the inflation in steel, aluminum freight, where you expect a little bit of pressure? And then, you know, is there upside to that as we think about the full year?

Yeah, I think, like I mentioned earlier, I think first and foremost, our operating leverage has been really solid, both within the gross margin line, the leveraging of those overheads, as well as our SG&A. So I expect that to continue. Now, what is the headwind or these input costs? And like I said, I think in at least the next couple quarters, what we'd expect based on what we're seeing is that we'll continue to grab that incremental margin on the volume, but it's likely to be probably 150 basis points of headwinds, steel, aluminum, freight being the main drivers of that. Like I mentioned, we've got some price adjustments, but some of them lag a little bit, so I think it'll be a bit spotty, but I would expect to see that, you know, maybe 150 basis points or so. I hate to be too specific like that, but maybe 1% to 2%, so somewhere in that range. And then certainly, you know, what steel and aluminum does in the back half of the year, I think that's, you know, the forwards are pointing to it might calm down a little bit, but, you know, that's a big unknown. So back half, probably not as clear as here in the front half, and Like I said, I think we'd expect a little bit ahead when Q1, and then maybe some of that reversing in Q2 as some of our price adjustments catch up.

There's already been a significant amount of pricing going back to the OEMs, to the dealers, just because of all the volatility over the last couple quarters. The great thing, like I said, about the OEMs and the businesses, they're great at recontending and decontending around some of this so the inflationary impact doesn't hit the consumer too heavily. Although there has been some inflation in the product, it's probably not as great as what you might think. We take a lot of market share on top of that, so just with the growth in the business, we've We probably took more market share. I know we took more market share in the last couple quarters than we have in any other prior quarters in a while. So we've got a lot of good tailwinds heading in our direction. The big unknown will just be what's next, what shortages are going to pop up in the next couple quarters. And we just don't have that kind of visibility. But we'll deal with them as they come like we have the last couple quarters.

Got it. That's super helpful. And so if I'm hearing it right, we kind of think about your typical incremental margin, but then a, you know, 100, 200 basis point impact to EBIT margin from what that would be in the short term. Am I hearing that right, Brian? I'm sorry. I just want to be clear. Okay.

Yep. In the short term.

Yep. And then after market revenue, I mean, it remains off the charts. And Kurt, obviously, knocking the cover off the ball. Just talk about your expectations for aftermarket growth, maybe organically and overall for this year.

Yeah, so I'd say that, you know, aftermarket is clearly one of those areas we're continuing to turbocharge. We've been growing the teams there. We're expanding, you know, coverage into a lot of the marine space right now, whether it's the dealers or wholesale distributors in that world. That's not something we had focused a ton on prior to last quarter. We made a lot of changes around aftermarket to just be able to turbocharge our content. And, you know, it's still early innings for us in the aftermarket relative to, you know, our OEM business. So, you know, we feel like we've got a lot of ground to make up there. Unlike the OEM business, the aftermarket customers are asking us to supply anything and everything. Because we source so much overseas and we can get some of these buy-sell opportunities, products at probably a much better price because of the hundreds of millions we spend overseas, we're able to come in and compete pretty easily with a small mom-and-pop traditional players in the aftermarket. So we're expanding our product offerings and our content there, continuing to hit more direct-to-consumer and dealer stores. So it's pretty bright. Brian can expand on some of the top-line and bottom-line questions that you asked.

Yeah, I mean, I think the only thing I would add is that we saw amazing growth in 2020. I think moving on to 2021, to give you an idea, I think, you know, preliminarily January's aftermarket growth is a little over 30% as well. So it has continued into 2021. I know that from a CURT perspective, our backlogs have been, you know, significant for the last 8, 10 months. and really haven't seen much of a slowdown there. So those couple areas are things I would point to that we're expecting them to continue to be strong throughout 2021.

And again, remember that we've got to the tune of a few million RVs entering the aftermarket cycle because of the significant production over the last handful of years. That's what really catapults our revenues and bottom line in the aftermarket is all the repair and replacement and upgrades that are going to happen as used units change hands and as, you know, these new units that were new a year or two years ago come into the replacement RV aftermarket cycle in the next, you know, year to two years. So, I mean, it's big volume coming to the aftermarket in the near future. So that's what we've been, you know, readying ourselves for.

Perfect. I'll sneak in one more if I could just in terms of CapEx looks like it could be a strong investment year. We know about, obviously, the chassis automation project that you completed. Are there other discrete automation projects that you can kind of describe in terms of opportunities to create labor efficiencies, et cetera?

I'd tell you that we've got, you know, three or four smaller projects going on right now that had, you know, areas like, you know, windows and windows OUR WINDOW BUSINESS, OUR CHASSIS BUSINESS, OUR RV PRODUCTS AND ACCESSORIES BUSINESSES. SO, YOU KNOW, WE'RE ALWAYS EVALUATING THOSE, AND IF WE CAN, YOU KNOW, TAKE A SELL OF 20 TO 30, WHICH IS A TYPICAL AUTOMATION-TYPE PROJECT SIZE, AND GET IT DOWN TO THREE OR FOUR, AND, YOU KNOW, I THINK WE STILL HAVE 350 OPEN POSITIONS IN THE BUSINESS. SO THOSE REALLY HELP US WHEN WE'RE TRYING TO, YOU KNOW, disperse our great team members to other parts of the business as we automate, you know, some of the repetition that we've got all over the business. So I tell you, we always have three or four in the works. And, you know, we'll continue to do a few a year on the smaller scale. Got it. Very helpful. Yep.

Go ahead, Brian.

I'd just add to that that, yes, you're seeing a significant increase in CapEx. You know, the last couple years have been somewhat lower. after a few years of pretty aggressive CapEx. So, you know, a lot of it is capacity related, you know, trying to free up some space, add new lines. We've got, as Jason just mentioned, some of the opportunities that we're getting in new product lines or other product lines where maybe others have struggled. You know, we've looked to expand in a lot of those areas too. So, Um, it's probably, you know, a bulk of it is, is capacity related for 2021. All right.

Well, hopefully we can actually get out there sometime later this year and check out some of the projects. Thank you for the color.

Next question comes from Greg Kenison with Baird.

Yeah, thanks. Good morning. Thanks for taking my question. Um, you had mentioned a project with Bennington and obviously that strong relationship. The parent there is Polaris. Are you signaling at all that you've got some opportunities more broadly with Polaris beyond what you do with Bennington?

Yeah, I think that, you know, there's certainly opportunities there in the power sports world. I mean, we already supply through TaylorMade windshields and some of their side-by-sides and power sport vehicles there. windshields and glass. That's becoming a more popular option there, so we're doing more in that world, but certainly with all the manufacturing capabilities we have, as our relationship grows stronger with Polaris, there's more opportunities for us inside their broader organization. When we make an acquisition like this, like we did with Viata, that's got significant sales into Bennington and ultimately Polaris, it just gives us more ability to to work with our teams to partner up in a, in a bigger way.

Is it, is it too much to say that you're opening a new vertical and power sports and you've got RV, you've been expanding in Marine. Um, is it too early to say, Hey, that's a new vertical where you could do some more aggressive consolidation?

I mean, we feel like we're in the power sports world, you know, on the, on the AT, on the ATVs, at least with, with a windshield and side glass. So, We've been doing that for quite a while. It's in our wheelhouse. It's just a matter of expanding our product offering beyond glass in that area. I think that we will. It's just going to be a slow process. We've certainly got the people, the leadership, and the manufacturing capabilities and locations geographically to do that. We just need to get with people like Polaris and make those commitments on a you know, broader partnership type basis.

Thanks. And then you mentioned safety as a category. Maybe just, if you could, explain with a few examples where you could be headed in terms of safety.

I'm failing to understand what you're getting at there. Sorry.

I'm sorry, Jason. I thought you indicated that safety is It was a priority for your organization, and you thought that was a big opportunity.

Oh, I'm sorry. Okay, yeah, yeah. So safety products, right? Yeah, if you look at some of our new axle systems that we'll provide, you know, safer axle solutions for RVs, we just launched tire pressure management systems. It's an electronic pressure and heat sensor system. that goes in all the tires and wheels of RVs. So that doesn't exist today. Outside of the aftermarket, we're going to take a prep model to the OEMs so that they can prep their units for TPMS and then just do a plug-and-play in the aftermarket with our TPMS system. So autos have had TPMS standards since 2008, and it's time that RVs get there, and we've been working on the system for a couple years now. electronic sway control as part of our safety suite of products. So, you know, to be able to control sway electronically so that the driver doesn't have to do it manually is a big deal. One of the biggest fears about people buying towables is just the sway and towing the vehicle. So if we can help control that through electronic sway control, that's a big deal. So we've got, you know, four or five products that, you know, are launching and will be launched through the course of this year. And then we're just going to, you know, beat the safety drum and you know, get out there and help the dealers sell RVs based on the safety products that might be included or might be included in the aftermarket for the consumer to buy, just like people do when they go shop for a car. So we think we're going to lead in that area.

Thanks for clarifying that. Yeah, no, thank you, Jason.

Next question comes from Brett Jordan with Jefferies.

Hey, good morning, guys. Hey. Hi. You were mentioning sort of the growth in peer-to-peer rental, and I would imagine that drives aftermarket growth given rental units are rental units. Is there anything you can do, I guess, sort of more structurally to embed yourself with those rental organizations to be the aftermarket parts and services provider?

I'm glad you asked the question. We're working on that right now. We think that there's incredible opportunity there. Again, you go back to, you know, just – owners now that instead of owning an RV and only using it for 10 to 20 days a year, now they can run it three or four or 10 times if they want. What other things would you want in your RV that it didn't come equipped with? Maybe cameras, maybe some of the safety products, some of our cleaning products and things like that that we've got. It just gives us a whole new market. I mean, you talk about hundreds of thousands of owners that might be looking at, well, you know, if we market to them and tell them some of the things that they might consider adding to their RV or buying to give their renters a better experience, then, you know, I think that's better for us. So safety products, I think, are really important in that area. If I've got somebody using my RV, I don't know if they've really driven one or towed one before. I'd want to have some of those safety products on the on the RV to ensure a great experience, but also ensure that the, that the unit, you know, makes it back like, like it left. So, um, I think there's incredible opportunity there and we're working on, um, we're working on some things with the, with the metal companies right now, try to make it easy to just give them a, uh, owners of, uh, you know, a sheet or a menu to choose from to say, Hey, look, these are things that things you might want to consider if you're, if you're running your RV.

Great. Thank you. And I guess you commented that a lot of the RVIA shipments are being sold directly through given strong retail demand. Do you have any anecdotal color as to what you think retail inventory levels might be right now? I mean, relative to year over year or percentage of lot available for units?

Yeah. It's funny you ask because there was actually a video that went out on RV Business yesterday that Jason and I were watching this morning. And it's a I think a good example of a nice single-site dealership typically has 400 to 500 units on their lot at this time of year, and they have 70. So I think that it's pretty significantly depleted. I'm sure there's some markets where some of the larger consolidated dealerships have been able to build back inventories a little bit, but a lot of the kind of medium-sized locations we're hearing from our touchpoints they're significantly depleted. And essentially saying that every unit that they get from the OEMs, it immediately retails. Or if it is a stock unit, it's maybe a week or two later and it retails. So the demand is certainly there.

Okay, great. And then one quick final, I guess just to bucket the tracker opportunity, could you give us maybe a feeling for units and content per unit just so we can get an idea how big this marine growth is on one contract?

Yeah, well, they're a monster builder of pontoons and bass boats and fishing boats and things like that. So, you know, they're well over 20,000 boats a year, which is significant. So, you know, we're going to start out building some furniture for pontoons and, you know, continue to add to that product offering. And we know that we can, you know, any time a company's ever come to us and asked us to take their vertical, they just you know, the vertical is always underloved. It's, you know, there's no innovation. There's no, you know, there's no, it's just serving and distributing parts to other parts of that division. We have innovation departments. We have R&D departments. We have, you know, pretty sophisticated, you know, quality and engineering departments. So we feel we build better products than the OEMs that have those verticals can do themselves. So I think they'll see the value right off the bat. We're just getting started and, We'll provide more color as we go along in the future quarters, but we're excited about this relationship. They see the value in a lot of things. We're presenting the electric Bimini, which is a brand-new product of ours. It's been a manual Bimini shade cover for years for pontoons, and we have that technology. We're producing more and more of those, and eventually for a pontoon and an expensive product, people are going to want to push a button to get their shade up and down. Just those types of manual operations with components are going to go away, and we've got, you know, patented solutions for a lot of this stuff. So, you know, whether it's Bimini's or seating or some of the other components on the boats, we'll continue to make our case to, you know, provide those customers with, you know, products that add value to their proposition to the consumers.

Great. Thank you.

Next question comes from Sean Collins with Citigroup.

Yeah, great. Hi, Jason. Hi, Brian. Nice to speak with you. Good morning. Hey, Jason, I wanted to ask about one of your new initiatives around inbound calls. I know you mentioned that you made a new hire. around the large volume of calls you get. I think you referenced 60,000 calls. Can you just talk more about the nature of the calls that you receive, this new hire, the new initiative, and what the improved customer experience might look like? Thanks.

Yeah, so that's a great question. We made that change last year. We just wanted somebody from outside the industry that had great call center leadership experience from, you know, honestly some more sophisticated people call center type experience in other industries. So we brought Joyce on and we immediately changed the name of the care center and said the call center, everybody calls their service center a call center. So we want the customer to know that when they call in, we care about them. We've continued to, you know, we started the call center in 2013. We had a decentralized call centers for all of our product divisions. We consolidated the one in 2013 and then we've been growing that ever since. I mean, we've peaked at 75,000 communications between email and phone over the prior months. So 60,000 is about an average, but that's going to continue to grow this year. Half of those calls, over half of those calls are dealer personnel, consumers calling in because they've got components that need to be serviced. I mean, the one great thing about our aftermarket is you know, we build a lot of products and they just, you know, over time, whether it's an awning or an axle or a chassis, furniture, I mean, the stuff wears and tears and the dealers and consumers ultimately call in and ask how they can get service. So, you know, so we've got, you know, we've got over 300 people in our aftermarket division, probably 75 in our care center right now. And we handle typically those types of calls. We do get other calls, but most of them are made up of our retail and dealer partners that are calling to, you know, get some kind of repair or service or replacement done on our components that wear and tear in the field.

Great. That's helpful. That's an exciting development. Thanks for the call. I appreciate it. Yeah.

The last question comes from Steve O'Hara with Sedodian Company.

Hi, good morning. Thanks for squeezing me in here. Hi, just curious. I mean, I'm not sure if you guys talked about it directly. Maybe I missed it. But in terms of the wholesale production that you're expecting for 2021, does that roughly align with the RVIA? Or how do you guys feel about that?

Yeah, I would say, first of all, retail, as you know, is the big question mark. That's going to impact our ability to build inventories back up, going to impact our ability to meet the demand. We finished strong as an industry with over 500,000 units this last year. I think to You know me, Steve, I usually approach it pretty conservatively. I think to expect that to go up, that would be great. I think there's a possibility for that, but let's assume it stays flat from a retail perspective. But from a wholesale perspective, yes, I think that today with RVIs at 507,000 units, I think that there's certainly an opportunity to be north of that. As Jason mentioned, the 20 or so facilities that are expected to come online, that's certainly going to help us to get north of that. As you remember, we did 505,000 back in 2017, I think it was. And this is the first capacity that's been added since then. So So I think that that certainly gives us the opportunity to go north of that, assuming supply chain and everything can keep pace.

And again, we've talked a lot about RVs today, but we've got a lot of other parts of our business that aren't really hinging on what the RV business does. So the aftermarket business is going to continue to grow no matter what the market RV wholesale number is, and that's, you know, something we're excited about and going to continue to pour energy into our adjacent markets, our international markets. They're going to continue to grow. We're growing significantly in the utility and cargo trailer world right now in terms of components there. So we've got a lot of other good things going on, too.

Okay, yeah, I mean, could you hazard a guess in terms of maybe how many units, you know, the industry – needs to produce over retail in order to kind of get back to equilibrium. I mean, you know, it seems like if retail is up even just a little bit, you know, the industry has to produce, you know, in excess of that. And you're talking about something in the, you know, I would say, you know, let's say, you know, 520 to 550 range to kind of, you know, at least make a dent in some of the units that have been taken out. I mean, is that the type of number that, you know, is maybe – a possibility this year? And I guess the question is just on the CapEx. You know, my understanding was, you know, CapEx in the past was kind of added and, you know, at least on the OEM side, it was something that you could kind of pull back and then, you know, re-enter as you needed it. Is that something different where, you know, if we're doing, you know, 550,000 units annually or something like that. I mean, you know, how much capex are you looking at at that point, you know, kind of on a steady state basis?

I would say a couple things. You're correct in the numbers you were throwing out from an industry perspective, what we'd have to do to build inventories back. I mean, I think 120,000 plus units were taken out of the system over the last two years, which is pretty significant. So, you know, to... outpace retail to build inventories back. I think you've got to be in that $50,000, $70,000 type unit level to really get inventories reasonably close to where they should be. So that's certainly, depending on where retail is at, puts you in that $550,000 plus type category. So it's really going to be the capacity that can come online and watching retail and um you know see where that goes for for 2021 and beyond so um but from a you know an investment perspective i mean i would tell you i would tell you that from lci's view if you went back to 2017 um you know the industry was planning to go to 540 so i would tell you a lot of the capacity investments we made back then were to put us on pace to be able to deliver 540 000 units You know, ultimately, the industry never got there. We consolidated a few smaller facilities. But, you know, since then, you know, now we've kind of consolidated some things. We're in some bigger, nicer facilities to where we can add on and expand capacity. So I would tell you, you know, we're in that range for at least LCI from a capacity perspective. And the investments that we're doing are to take advantage of new opportunities and grow beyond that.

Okay. And maybe just a quick follow-up. Did you talk about, you know, what percentage your workforce is vaccinated and maybe what the outlook is there?

Yeah, we don't have data around that yet, but we'll have more update on that in the next quarter's call. Okay. Thank you. Thanks, Steve.

And at this time, I will turn the call over to Mr. Lippert for closing remarks.

We thank everybody for the questions and for joining us on the call, and we'll see you next quarter. Thanks very much. Bye-bye.

This concludes today's conference call. You may now disconnect.