LCI Industries

Good morning and welcome to the LCI Industries Q1 2023 earnings call. My name is Sam and I'll be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you'd like to ask a question, please press star followed by one on your telephone keypad. I'd now like to turn the call over to Lillian Etzkern. Lillian, please go ahead.

Good morning, everyone, and welcome to the LCI Industries first quarter 2023 conference call. I am joined on the call today by Jason Lippert, President, CEO, and Director, and Brian Hall, Executive Vice President. We will discuss the results of the quarter 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 security 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 our earnings release and in the Form 10-K and 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.

Thanks, Lillian. Good morning, everyone, and welcome to LCI's first quarter 2023 earnings call. Before I begin, I want to take a moment to welcome Lillian to the Lippert team as our new chief financial officer. Her financial acumen combined with deep industrial and manufacturing expertise make her an excellent addition to Lippert as we focus on delivering our next chapter of growth. We are excited to have her join our family and look forward to working together to drive our business forward for years to come. With that said, let's turn to our first quarter results. Coming off a record year and considering we are navigating a challenging RV environment, we started 2023 with solid results, delivering robust content growth and sequential margin expansion. Through our focus on operational discipline and flexibility, execution on diversification, and company-wide commitment to innovation. We've been able to manage through declines in North American RBOAM production to support the profitability of our business. We delivered 973 million in revenues in the first quarter, down 41% compared to record results in the prior year, but up 79 million from the prior quarter. Net sales from acquisitions completed in 2023 and 2022 contributed approximately 28.5 million in the first quarter. Our aftermarket, marine, international, and other adjacent businesses are performing much better than RV and made up a combined 63% of overall revenues in the quarter. As I've noted before, Lippert has never been more diversified in the down cycle, moving from manufacturing almost only RV products to building content for a wide variety of markets, including marine, international, automotive, aftermarket, and mass transportation. I'm confident that continued execution on the strategy will keep us on the path about performance and consistent profitable growth over the long term. We are also seeing the benefits of the improvements implemented throughout our operations in recent years under the guidance of our seasoned leadership team. As RV industry production has declined, we've been able to adjust manufacturing costs quickly to align capacity while also making meaningful reductions to our overall cost structure, totaling $300 million in the past 10 months. Additionally, Through solid working capital management, we significantly reduced our inventories during the quarter by $120 million, enhancing cash generation and strengthening our overall financial position. Moving into RV OEM, sales decreased 62% during the first quarter of 2023 compared to 2022, largely due to decreased wholesale shipments mentioned earlier. As expected, OEMs are continuing to adjust production schedules to better align with moderating retail demand and keeping dealer inventories at appropriate levels. Despite near-term declines, retail demand has remained similar to pre-pandemic levels, and early indicators from winter and spring retail point to healthy consumer interest. Secular trends, such as the growing Gen Z demographic and younger buyers, and the growth of peer-to-peer rental RVs continue to bring new consumers to the outdoor lifestyle, underscored by the 67 million North Americans planning an RV trip this year, a 16% increase over 2022 based on RBI aid data. Our reputation for quality and culture of innovation have continued to help us capture market share and drive strong content expansion. During the quarter, content per total RV increased 21% from the prior year to $5,881, while content per motorhome RV for the quarter increased 27% from the prior year to $3,985. As we capture consumer demand for sophisticated products like refrigerators, ABS suspensions, air conditioners, pop tops, chassis, and windows, With the upcoming model changeover in mid-23, we are already seeing successful content gains in the next generation of RV models of about 200 million based on current run rates. In the first quarter, we kicked off our partnership with ATW, the largest utility trailer builder in the country, supplying axles for their entire trailer lineup. These types of partnerships with premier manufacturers go a long way to help strengthen the Lippert brand and give us a great entry point to add even more content over the long term. Our newest axle facility consisting of about 150,000 square feet opened last quarter in Texas to support this new partnership in the South. Moving to aftermarket, revenues decreased 13% year over year, primarily due to lower sales in the automotive aftermarkets. The need for products like mattresses, awnings, suspensions, air conditioners, and appliances have created massive opportunities for growth, particularly as we see increased spend as people upgrade their RVs illustrating the value of our recent acquisitions like Virion, Girard, and Way. We expect appliances, one of our newer product categories, to particularly support growth in the next three to five years, as approximately 2 million RVs begin to enter the repair and replacement cycles. Further, we've also worked to build out our automotive aftermarket offerings, highlighted by the recent introduction of the forefront grill guard and bull bar, specifically designed for the Ford Bronco, adding Lippert content to an iconic SUV model. The approximate 500,000 RVs entering the repair and replacement cycle each year help to extend growth trajectory of our RV aftermarket business. Aftermarket continues to add a countercyclical support, helping to offset the impact of the RV business when production tips. We believe what was originally a $1.6 billion addressable market a decade ago is now closer to $5 billion, and that we've never been in a better position to capture that market share and expand content. Our mission to deliver a first-class customer experience has become very impactful with the expansion of aftermarket. In the first quarter, Lippert took on approximately 300,000 communications, calls, and cases on top of 1.2 million for the entire year of 2022, showing the incredible demand for customer support as consumers make repairs and upgrades to their vehicles. With the summer season right around the corner, the Lippert teams have significant opportunity to interact with customers and collect in-person feedback critical to enhancing our innovative offerings, as well as to provide support for a large portfolio of products and services. We attended a few rallies earlier this quarter, and Lippert representatives met with RV enthusiasts from around the country. Finding ways to creatively engage campers and RVers has led to a great return on investment for our business, helping us to build real trust and relationships with people who not only keep coming back to the Lippert brand, but also are out there advocating for us while they are on the road. Turning to the North American adjacent markets, first quarter revenues were down slightly, largely driven by some softness in the housing and trailer markets. We are just now starting to see some softness in marine, but it's important to note that near-term declines in marine should be more subdued than what we're seeing in RV due to the fact that marine production has been far steadier and did not rapidly increase like the RV production over the past couple of years. Our marine and other adjacent markets have been providing critical support to our overall performance, particularly in January when RV production was almost totally shut down. Transit and school buses are also a big part of our adjacent markets, and those markets are starting to see stability this year. We're also continuing to develop our marine customer experience programs as we head into the summer boating season. Our captains group now boasts over 2,400 members. Our passion for innovation combined with our focus on customer experience should continue to drive this segment as we expand our product offerings and execute on our diversification strategies. Our international business was nearly flat for the first quarter of 2023 compared to 2022, with supply chain constraints finally beginning to ease. European customers are receiving critical parts like RV chassis and starting to replenish inventories to meet pent-up demand. On another positive note, our international businesses continue to be an innovation incubator, highlighting Lippert's ability to design and market sophisticated products that should be popular with North American customers. Pop-top units were once almost exclusively known as European products, but have now gained traction in the U.S. and add meaningful content to the B-van markets, one of the fastest growing markets in the RV space. In addition to pop-tops, our acrylic window products are starting to gain popularity in RVs as well. becoming yet another avenue to generate revenue and content growth using our great European product lineup. We'll keep leveraging these types of introductions across our global footprint, and with supply issues winding down, we expect our international businesses to provide a positive impact to our performance heading further into 2023. I'll now move on to our innovation highlights. We believe our focus on innovation and building our R&D capabilities is unparalleled in our industry. Consumer choice is driving the evolution of content, and with younger generations more attracted to the outdoor lifestyle than ever, we've increased our focus on innovative products that will match their interests. Our offerings like new leveling systems, new window systems, new slide outs, pop tops, ABS suspension, new awnings, electric bimini's, as well as one control camera technology and tire pressure management systems have helped us strengthen our competitive advantage and drive long-term market share expansion. Many of these products just mentioned have very newly developed market share, and we believe we have a great runway with these products over the long term. In addition, we are continuing to work towards a partnership around electrification components and products to make sure that we have a seat at the table around all things electrification of towables and the RV market. Last year, we launched ABS brakes for our RV and utility trailer axle systems, which we believe has been one of the most well-received and best tech product introductions in Lippert's 30-year history. We're now at a 70,000 unit run rate with ABS, which represents 20% of the market, and we expect our market share to continue to increase significantly over the next five years as we believe this technology we've developed for the industry becomes standard safety equipment on all RVs. Based on the feedback that we've received, we have found that consumers are very interested in more products like our ABS brake technology that have a laser focus on safety. Many of you know that our culture is the main differentiator here at Lipper and very critical to our success. As we have stated in previous quarters, we believe that a strong culture starts with experienced and caring leaders at the top who work to create opportunities for our team members so they can become leaders in their own right. Our emphasis on in-house leader development has enabled team members to become the next generation of leaders at Lippert. We believe, as I've said before, great leadership directly impacts the outcome of retention, and higher retention is directly correlated to increases in innovation, safety, efficiency, and quality, all of which are key drivers of success of any business. In the first quarter, we hosted our annual packout event in Northern Indiana. More than 1,500 LCI team members showed up and packed over 108,000 items that were donated to the Boys and Girls Club of Elkhart and St. Joe counties, as well as other organizations and local schools. It was yet another opportunity to demonstrate how business can be a force for good, utilizing our teams to make an impact in the communities where we live and work. Additionally, we launched our Serve with Purpose platform to create meaningful serving opportunities to connect RVers to each other and nonprofit organizations through purpose-driven volunteering that we believe will forever change the communities where people camp. LIPR currently has six serve ambassador families across the U.S. who travel full-time and help advance our community serving goals, ultimately bringing the RV community closer together. RVers everywhere are loving the fact that we are taking the initiative to help connect them to serving opportunities while they are camping. Overall, we cannot be prouder of these accomplishments and our global team's efforts to give back to those in need. We look forward to our culture initiatives having even more impact in the rest of 2023. Moving on to capital allocation, we are focused on fortifying our balance sheet through cash generation and diligent management to maintain ample liquidity with modest leverage. We are executing a balanced deployment strategy, continuing to pay down debt and at the same time investing in innovation, and operational enhancements that should drive efficiency, quality, and profitability throughout our business. We are still receptive to strategic M&A opportunities, but are focused on keeping a strong balance sheet and making growth investments in our business. In the first quarter of 2023, we purchased a small axle manufacturer in Texas that helped us expand capacity in that market. We also allocated $7 million to growth and automation CapEx, and while our spending will be down in 2023, we still expect to spend some additional dollars on targeted high return investments the remainder of the year. In closing, I'd like to reiterate that we believe Lippert is in a good position to deliver strong results over the long term. Our diversification strategy, cultural foundation, operational focus, and our ability to quickly flex our operations puts us on a path to deliver long-term value for customers and shareholders and to further our leadership in the outdoor and recreation space, as well as other diversified markets that we are in. I'd like to thank all of our incredible teams for their hard work this quarter, and we look forward to delivering further progress throughout 2023. Finally, I'd like to thank Brian Hall for the hard work and dedication he has shown over the course of his tenure at Lippert. Brian, best of luck, and thank you for all that you've done for our business and our teams. I'll now turn to Lillian Eskorn, our CFO, to give more detail on financial results. Lillian?