LCI Industries

your call today. There'll be an opportunity for questions at the end of the presentation. If you would like to ask a question, then please press star followed by one on your telephone keypad. I will now hand you over to your host, Lillian Etskorn, to begin. Please go ahead.

Good morning, everyone, and welcome to the LCI Industries third quarter 2023 conference call. I am joined on the call today by Jason Lippert, President and CEO, and Kip Emmerheiser, VP of Finance and Treasurer, We will discuss the results for 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 could 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 our 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 of 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, and good morning, everyone, and welcome to our third quarter 2023 earnings call. Over the last 20 years, this team has worked very hard to transform Lippert from a manufactured housing chassis and roofing supplier to a diversified, innovative global supplier of some of the most core and highly engineered RV, marine, and aftermarket products offered to OEMs and their consumers. By 2008, our business had transitioned from 100% manufactured housing to almost 90% RV. We then leveraged our talented team and created a strategy that would take us into Europe, building products, transportation, aftermarket, and marine over the next decade. Our successful diversification strategy is what has enabled us to experience results this year that would not have been possible had we stayed only in our traditional markets. It is this successful execution of our diversification strategy that has transformed us into a dynamic Fortune 1000 company. With respect to Q3, we continue to encounter a challenging operating environment that, while pressuring the top line, exhibited the durability of our diversified businesses. Our aftermarket segment and adjacent industries OEM revenues are outpacing RV OEM, exceeding 55% of revenues for the quarter, a trend we expect to continue as we extend our capabilities into growing our markets outside of RV. Not only did these revenues outpace our RV OEM business, we saw strong results in these businesses for the quarter. When you look at our overall business, in 2019, our top line was approximately $2.4 billion in sales. Even with the RV business down almost 50% this year, we have successfully grown our top line as our current trailing 12-month revenue eclipsed $3.8 billion. Our aftermarket business has been a particular highlight, delivering nearly 500 basis points in margin expansion for the quarter as we capture demand for repair, replacement, service, and upgrade revenue opportunities in the RV, automotive, and marine aftermarket. The aftermarket business in general has helped really balance our portfolio, providing some solid counter-cyclical revenues. We also differentiated ourselves through strategic investments over the years to build high-level manufacturing capabilities, enabling us to develop and bring to market solutions and products with complex engineering and manufacturing requirements. We are not a commodity supplier. In fact, many of our processes require specialized teams and equipment capable of handling most sophisticated requirements. Our global manufacturing footprint that supports these operations and teams, along with the product breadth and manufacturing capabilities, cannot easily be replicated. This, coupled with our longstanding reputation for quality service and deep-rooted and decades-long relationships with our customers, have helped to establish Liver as a leader in the outdoor recreation space. Operationally, we remain focused on optimizing our cost structure to support our long-term profitability. Our leadership teams continue to implement cost-savings initiatives and continuous improvement projects to drive ongoing efficiency throughout our business. Through calendar year 2023, we have already undertaken 17,000 continuous improvement projects across our business platforms. We have flexible capacity in place to adjust production quickly, to match constant changes in demand, even with a high level of skew variability across the RV business, while at the same time providing support to areas of our business that are outside of typical industry cyclicality. Additionally, we are improving working capital, bringing down inventories by $238 million a year today to bolster cash generation. These effective actions have continued to solidify our financial profile and balance sheet, helping to provide a strong foundation needed to manage through near-term challenges while enabling us to capture growth opportunities as conditions improve. Lastly, and most importantly, new business commitments for 2024 across our business total approximately $185 million. We believe these are tremendous organic and market share wins for next year. Moving to RV OEM, sales decreased 26% during the third quarter of 2023 compared to 2022 due to decreased wholesale shipments. Although the RV market remains pressured, dealers are telling us that inventories are right side and in many cases, lower than where they would typically be at these retail lines. It is also important to note that OEMs have remained very disciplined with production rates over the last quarters as retail shipments have outpaced wholesale shipments now for nine straight months. During the quarter, content for total RV decreased 11% from prior year to $5,192, while content for motorhome RV for the quarter decreased 3% from prior year to $3,705. I want to emphasize that while RV unit selling prices have declined, we do not anticipate much of an impact from any deep contenting trends. The content declines this quarter can largely be attributed in-text pricing pass-throughs versus elimination of any of our content. Whereas our content increased in past quarters due in part to index price increases, we are now seeing the reverse effect in Q3. Also worth mentioning is that over half of the $185 million in commitments for new business for 2024 that we just spoke of earlier is coming from our RV business. Most of our RV organic growth is either innovative first-to-market product content that customers are excited to get their hands on or content that is completely integral to the vehicles like chassis, awnings, furniture, or windows with new features and benefits, neither of which can easily be replaced by going to another supplier. I'll address our R&D highlights in a bit, but as we continue to drive investment into product development, we believe we will keep growing organic content well into the future as we have historically. It is important to note that content per total RV in late 2019 was right around $3,400 per unit, demonstrating our ability to drive new organic content over the long term to $5,200 per vehicle. There has been some chatter about other players in the space potentially starting to build chassis, including Thor, one of our top customers and partners. I'd like to get out ahead of these false reports. In recent weeks, I've had the opportunity to connect directly with the Thor leadership team, including Bob Martin and Todd Wolfer, who have confirmed that they have no plans to build mobile chassis in the foreseeable future. Taking it a step further, they've reiterated the importance of continuing to strengthen this longstanding 25-plus year relationship with Lippers. We are confident that demand for our chassis and the rest of our wide range of best-in-class products will keep us positioned as an industry leader while enabling us to continue to capture new market share. And lastly, when it comes to competition, we feel our market shares speak for themselves. We are best-in-class competitors and are winning because we have best-in-class value for our customers. And at the end of the day, our customers choose to do a lot of business with us based on that perceived value. Our aftermarket revenues grew $231 million, up 5% versus the prior year as channel inventory stabilized and we added new market share. Impressively, aftermarket revenues have remained year-record levels on a trailing 12-month basis, and operating margin grew to 15%, up 470 basis points compared to the third quarter of 2022. Our aftermarket leadership and team have done a fantastic job of growing this business along with its services, products, and customer relationships over the past decade since we launched our aftermarket divisions. Most Lippert RV products are front and center when it comes to the types of parts that eventually need repair and replacement. A fact which we believe makes our aftermarket strategy very viable is we have significant content on the OEM vehicles, which ultimately drives the choice of replacement products in the aftermarket. The resiliency of the repair and replacement opportunities, particularly in the downturn, should continue to support the strength of our aftermarket and overall business, helping us capture more share in a $10 billion-plus addressable market. A critical driver of our aftermarket has been our customer service and support teams and call center, giving us a major advantage over other aftermarket suppliers. Over 300 specialized support team members are in place to directly engage consumers, dealers, distribution partners, and OEM customers across the globe to quickly solve technical problems, helping the consumers spend more time on the road, the water, and outdoors rather than in the repair shop. Additionally, in July, we held our third annual Lippert Getaway event for RVers, this time in Island Park, Idaho. Through events like these, we are able to speak with the RVing community in person and collect feedback that we leverage to fuel future innovations around products and services. Other customer events like Lippert Scouts, Campground Project, Lippert Ambassadors, and product giveaways continue to benefit our relationships with RVers as we work to foster a well-connected community that continues to be a solid champion in so many ways for our brand. Turning to North American adjacent markets, third quarter revenues were down 14% compared to prior years, primarily due to the softness in the marine retail environment. Although marine markets have slowed, we remain focused on expanding our marine product catalog with products like our shallow water anchor systems, thrusters, windshields, seating, and electric biminis for all classes of boats, which the electric biminis continue to see rapid adoption and is on its way to becoming a marine industry standard. We are also seeing strength in our other adjacent markets like transit and school bus, rail, utility trailer, and building products. We've been able to expand into these adjacent areas by leveraging the same core manufacturing competencies we've developed over the years in our core businesses. We have seen great progress in our residential windows as well as our axles and suspension for the utility trailer markets. This quarter, we are also launching our first transit bus seating products for the largest transit bus manufacturer in North America. This product has a large potential addressable market, over $100 million, with our existing bus customers. All in all, our adjacent market categories have never had more momentum than they do today. Moving outside of North America to our European business, we had another quarter of growth as our international business grew 7% and supply chain headwinds have decreased abroad, driving increased shipments to meet pent-up demand. Our international business continues to be an innovation incubator as we design and market sophisticated products such as pop-tops, windows, bedlifts, doors, and skylights. These types of products have the potential to strengthen our competitive differentiation in the U.S. with easy access to our proven European products, designs, and our production facilities there. Once we see a high level of adoption rate of European products by U.S. customers, we work to transition the manufacturing of those products stateside as we have with our bedlifts, pop tops, and acrylic windows. We look forward to driving further growth internationally as this business continues to contribute to our overall performance and diversification. Innovation is the key driver of our content growth engine, differentiating our business by bringing new and exciting products to our customers in each of our core markets. With roughly 150 team members in our business dedicated to innovation and product development, we have developed our innovative expertise and resources into a huge competitive advantage. Few peers and competitors have come close to the investment we have made into building out these R&D capabilities. Presently, we are making significant traction with new and existing products, such as our hot water heaters and new furnace, which has sparked high demand as Furion continues to add to our portfolio. Also, our Furion refrigerators and air conditioners have seen double-digit market share gains in the last 12 months. Furion has also debuted industry-first 18K air conditioner that has completely grabbed the attention of our OEMs as a result of its higher capacity, efficiency, and reduced noise level. Another new product we recently brought to market is double-pane acrylic doors for refrigerator cabinets, which are being adopted by supermarkets across Europe over the last month. As I mentioned earlier, we consider the best new adjacent market product introduction in years to be our transit bus seat, set to ship this year to our largest transit bus customer. Our other innovations continue to perform well as they enter mainstream use, like our brand-new hydraulic leveling system, one-control auto-setup app, independent suspension axles, acrylic windows, and built-in shade windows. Perhaps one of our most pronounced and transformational product launches for the RV and utility industries is our anti-lock braking systems, or ABS for short. ABS has not been readily available to the U.S. or RV manufacturers until our most recent cost-effective design. We are making the compelling argument that ABS is the safest option out there for brake technology on all total RVs. Since launching, we have 14 RV brands committed to or using ABS. Our EBS is engineered and built in Detroit, Michigan by our talented manufacturing and engineering teams. We also successfully launched the Solera Off-Grid Series Solar Awnings, through which we created a solar array integrated with our awning fabric, capturing the attention of the growing number of off-grid enthusiasts. As we keep building out our portfolio, we are finding that each of these innovative products help us better meet a diverse range of customer needs, further increasing Lippert's presence in the outdoor lifestyle while continuing to grow our contemporary unit. As I've said many times, our culture, continuous development of our leaders, and external contributions to our surrounding communities are part of the foundation that keeps us successful over the long term. We believe a strong culture starts with experienced and caring leaders at the top who are willing to be developed themselves and work to create opportunities for other team members so that they can become leaders in their own right. Our in-house leadership development programs and coaches give our team members resources and opportunity to grow personally and professionally. Through our efforts to coach and inspire our team members to reach new heights, we have achieved an annualized voluntary turnover rate of only 25%, which, considering the environment we are in, puts us in the industry's best retention category. Throughout this 10-year journey, we have seen that an effective culture leads to higher retention, and higher retention proves the key metrics of our business, which are quality, safety, efficiency, and innovation. Our team comes to work every day ready to tackle the challenges with a heavy dose of discipline and passion, really amplifying our belief that LIPR can continue to leverage its strong, highly functioning culture to be an overwhelming competitive advantage. Outside of our internal culture, we have also been greatly supporting the communities that surround us in a very meaningful and intentional way. In the first nine months of 2023, LIPR team members performed over 100,000 hours of community service at hundreds of charitable organizations across the globe. Over the course of 2023, approximately 75% of our 12,000 team members participated in at least one serving event. This quarter, in addition to the community service events we do that take place weekly, we collaborated with the Detroit-based nonprofit Life Remodeled. As part of this collaboration, 40 of our Elkhart-based leaders took a bus to Detroit to join our Sterling Heights Innovation and Electronics team to repair and update the facilities at Life Remodeled. We are pleased to see our company make an impact in the communities we live and work in and look forward to continuing company-wide impact as we hopefully inspire other companies to do the same along the way. Regarding capital allocation, to maintain a strong balance sheet, we are keeping our focus on generating significant cash to pay down debt amidst challenging operating conditions, while also investing in innovation and operational enhancements such as our automation projects to drive enhanced efficiency, quality, and profitability throughout the business. We are still receptive to strategic M&A and have several opportunities in the pipeline, but given the current environment, we are staying focused on keeping a strong balance sheet and making growth investments. Of course, if a deal is strategic enough and the timing is right, we will not hesitate to acquire as we did this year with Marine Trailer Performance and Vessar Pro. As we continue to diligently monitor our expenses, we have significantly pared back our CapEx, which we expect to equal approximately $60 million this year. which is lower than last year by approximately $70 million and targeted on high return investments, including automation enhancements to our business. All in all, we expect that we will generate in excess of $440 million cash from operating activities in the full calendar year of 2023. We consider that an astounding win considering the challenging industry environment we've seen this year. In closing, I'd like to extend A sincere thank you to all of our team members around the business for their hard work in this tough operating environment. I'm encouraged by the growth I've seen from our team, both personally and professionally, as we continue to work towards long-term growth while delivering value for all of our stakeholders. Without our fantastic team members and leaders that contribute to the business in the way that they do, we certainly wouldn't have the strong business we have today. I will now turn to Lillian Netskorn, CFO, to give more detail on our financial results. Lillian? Thanks.