LCI Industries

Lillian Etskorn, please go ahead. Good morning, everyone, and welcome to the LCI Industries fourth quarter and full year 2023 conference call. I am joined on the call today by Jason Lippert, President and CEO, and Kip Emmenheiser, 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 FCC. 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, except as required by law. So with that, I would like to turn the call over to Jason.

Thanks, Lillian, and good morning, everybody. Welcome to our fourth quarter and full year 2023 earnings call. Last year proved to be an eventful year for Lippert as we worked to extend our position as an industry leader while navigating a challenging environment around the RV and marine businesses. Despite continued softness in the RV industry throughout 2023, along with a slowdown in the marine industry in the second half, our consistent execution on diversification priorities and steadfast commitment to operational discipline helped to lift our performance. As we faced these headwinds, our teams took action by leveraging our operational expertise, deep customer relationships, and robust culture of innovation to drive the business forward. Looking at the full year, We closed 2023 with $3.8 billion in revenues, declining year-over-year from last year's $5.2 billion in revenues, due largely to lower RV OEM and marine industry production levels, as dealers work to right-size inventories in both markets. That said, it is important to emphasize the durability of our business. As many of you know, we have significantly diversified Lipper beyond recreational vehicles into transportation vehicles, marine, automotive, residential, and the related aftermarkets, as well as into Europe. and that effort is now paying dividends. In fact, over the past five years, we have successfully executed our strategic playbook by growing revenues in new markets by nearly 60%, which has bolstered our diversification. And this quarter, that growth was underscored by the strength of our growing aftermarket businesses. To be clear, these results would not have been possible if we focused our attention on the RV space alone. Instead, by applying our core manufacturing competencies To gain a foothold in adjacent markets, we have created a range of what we believe are countercyclical revenue streams with a combined $11 billion plus in total addressable growth opportunities. We're working hard to continue to grow these opportunities both organically and through acquisitions, and that sales from acquisitions completed in 2022 and 2023, the majority of which are focused outside of North American RV, contributed approximately $74 million of revenue in 2023. Looking ahead, customer demand for high-quality, innovative content has resulted in new business commitments for 2024 of approximately $200 million out of any business losses. Moving forward, we continue to prioritize making improvements to our operations and optimizing our cost structure to support the long-term profitability of our business. We believe we have invested more capital into automation than any other player in the space, totaling over $100 million over the last few years. With the added benefit of 20,000 continuous improvement projects completed in 2023, we have improved our flexible and efficient manufacturing footprint through which we can quickly adjust production in line with constantly shifting demand levels in the cyclical market. Additionally, we worked through the last few quarters to consolidate certain facilities and decrease fixed costs. We believe that our advanced manufacturing capabilities serve as a major competitive moat for our business that would take decades for any competitor to replicate. while also positioning us to drive profitable growth as RV and marina OEM production begin to normalize in the coming quarters. Despite our great progress in reducing operating costs, we are constantly exploring opportunities to drive market improvement. We also have been focused on strengthening our balance sheet, reducing inventories by $261 million this year and delivering $527 million in cash flows from operations in 2023. This disciplined approach has further solidified our financial profile and balance sheet during a very challenging period. establishing a stable foundation that should allow us to weather any near-term challenges and capitalize on growth opportunities that lay ahead. During the fourth quarter, content per total RV decreased from the prior year to $5,058, while content per motorhome RV for the quarter was $3,506. Similar to the prior quarter, these content declines can largely be attributed to index pricing reduction versus actual reduction of any of our content. Including the impact from index pricing, we saw market share content gains of 8.5%, largely driven by our consistent focus on new products and market share wins. Looking at 2024, we anticipate that $130 million of the $200 million in new business I mentioned earlier will be RV new market share and content gains. While RV unit selling prices have declined, I want to again emphasize that we do not anticipate much of any impact of the contenting trends as our stickiness is driven by several factors. From axles, chassis, windows, furniture, slides, leveling and beyond, we have built our reputation on creating essential and innovative products for RVs that cannot easily be removed or replaced by another supplier. We believe that our domestic manufacturing footprint also adds significant value for OEMs and sets us apart from other suppliers, domestic and international. Our domestic factories typically require just a weekly time in order to supply product to our customers in our markets. For many customers, we often build products on demand for emergency needs, which products can be completed in a day or two. We're easily able to provide inventory to OEMs on a just-in-time basis, where if they were to order these same parts from overseas suppliers, our customers would need to plan out much further than they do now, as well as carry much more inventory, which often leads to obsolescence. Additionally, we have a team of highly trained technicians that travel across the nation to help our dealers with service and train on all of our products, a unique capability not many other suppliers have. We have found that dealers value this servicing capability to the point that they will push OEMs to use LIPR content versus our competitors that cannot provide the same support. This fact is even more relevant on some of our more complex products we build. There's been a lot of talk about competition lately, as well as customer verticals, and our response to that is simply this. In the last 30 years, I've had the privilege to help lead this business. We've developed a great strategy with amazing teams, and we have a great track record of winning business. Competition isn't new for us. We feel we are great at beating competitors as our market share and history prove that we win more battles than we lose. And while we can't predict the future, we do know that our strategy and teams have a successful recipe to win competitive battles. We're also confident in our ability to continue growing our market share, both in RV and across our adjacent markets. Our deep-rooted industry relationships, broad portfolio of innovative products, and reputation for best-in-class quality and service have helped us create value in a way we believe cannot be replicated. Despite lingering chatter around heightened competition and new entrants, these differentiators have and should continue to keep us positioned as an industry leader while driving long-term market share expansion. Now, I'd like to highlight some of our recent announcements. First, we established AmeriMax for mobility, a new joint venture with Euromax for mobility, Europe's leading supplier of aluminum products for RVs. This partnership combines our well-established North American RV connections with Euromax's vast manufacturing knowledge provide one of the most diverse product catalogs with industry-leading customer service to a broader range of recreational and transportational vehicle customers. We will soon be announcing some exciting new products that this joint venture will launch for RV OEMs in an effort to change the game for metal siding on RVs. Secondly, we teamed up with Keystone Cougar, the best-selling fifth wheel in the country, to showcase our ABS brake technology on Cougar RVs at the Tampa RV Super Show last month. Hosted on a racetrack in Tampa, we gave a live demonstration to RV ambassadors and Keystone RV leadership on how much of a difference ABS can make for safely towing both travel trailers and fifth wheels in adverse road conditions. We're excited to continue finding new ways like these to partner and collaborate with well-known brands and bring even more innovative content to the outdoor recreation markets. Now on to aftermarket. Our aftermarket net sales were $881 million for the year, down 1% compared to 2022. yet up 10% in the fourth quarter as we continue to expand market share. We are proud to have achieved a 370 basis point increase in operating margins for the full year due to improved mix along with tailwinds from continued operational efficiencies. With millions of vehicles entering the repair and replacement cycle in the coming years, our aftermarket will have some amazing opportunities. As our OEM market share has increased substantially over the last 10 years in all of our core product offerings, it stands to reason that more and more aging units Enter the repair and replacement cycle in the near term. They will ultimately require more Lippert replacement parts in the aftermarket. Lippert, CURT, Ranch Hand, Solera, and Furion are just a few of our popular brands that are playing critical roles in fueling this bottom-line strength and top-line growth. Our automotive aftermarket brand, CURT, sold just shy of 1 million hitches during the year, a 6% increase over 2022, and continues to account for just over half of our total aftermarket sales. Appliances remain a massive opportunity, and products like Furion water heaters, refrigerators, and air conditioners have seen double-digit market share gains in the last 12 months. Looking ahead, we expect to see gains in mattresses, furniture, and awnings as consumers refurnish used RVs. Most people don't realize that the used RV market sales are, on average, over 600,000 to 700,000 units per year, which represents a huge opportunity for our aftermarket products and services. Our steadfast focus on service has also continued to fuel our growth. In addition to providing support through our large, dedicated service center, we're always looking for ways to engage customers and dealers, gathering feedback to improve our products. We've had amazing success with using the Lipper Technical Institute to host maintenance training for technicians and RV owners alike, helping people to learn how to extend the life of their vehicle and fix issues so they can spend more time on the road and help others along the way. During the quarter, we also returned to the Stuttgart Retail Show, connecting with European consumers to unveil some recent Furan appliance and other innovations. Events like this, along with our other initiatives like Lippert Scouts, the Campground Project, the Lippert Ambassadors, they help us to build our relationships with the well-connected outdoor community, driving trust and long-term loyalty to the Lippert brand. Turning to the North American adjacent markets, 2023 revenues were down only 8% compared to the prior year. This decline was primarily due to softness in the marine retail environment, particularly impacting pontoon sales, where we sell the majority of our marine content. Marine production dropped sharply in the fourth quarter as OEMs began working to right-size inventory channels. We're expecting this softness to continue into the next two quarters of 2024, with marine sales likely to decline for the year. That said, we do expect a shorter downturn in marine versus what we have seen in RV, and we will focus resources this year to continue to develop new marine products as well as tighten efficiencies and processes. This year alone, we expanded our marine product catalog with products like our shallow water anchor systems, glass systems, thrusters, new seating, and electric feminis for many classes of boats. We plan to continue these types of innovations in 2024 to bolster ongoing organic content growth. We're seeing strength in our other adjacent markets like transportation, supported by acquisitions like Buster and MTP. Outside of these acquisitions, we continue to successfully expand into other adjacent areas by leveraging our existing manufacturing competencies from our other core businesses. Our residential windows as well as our actual products continue to gain share, and the recent launch of our first transit bus seating product and bus chassis stretching is off to a great start. We're also making solid traction through our partnership with ATW, which is on the path of contributing 1 million axles annually. We've also nearly completed construction and rollout of equipment of our world-class glass and acrylic processing center. With approximately 65 million in automated equipment and building space under one roof, we soon will be able to process hundreds of thousands of pieces of glass per month for the housing, RV, marine, power sports, and commercial glass industries. This fully automated facility is the future of our window and glass processing and should give a significant moat relative to any other competitor out there. This project is one of many that demonstrates our ability and willingness to invest in the future of quality manufacturing. Moving outside of North America, our international business grew 4% as supply chain headwinds decreased abroad, driving increased shipments to meet pent-up demand. Products like our pop-top acrylic windows, bed lifts, doors, electronics, and skylights continue to highlight how our international footprint works as an incubator for innovation across our brand. These products have the potential to bolster our competitive advantage in the US as they continue popularity with USOEM. We also initiated a new leadership structure in the Europe business, elevating four-season leaders with extensive backgrounds in these recreation markets who will strive to take our international presence to the same leading position we have in North America. As you all know, innovation acts as one of the primary drivers of our content expansion. We have invested in our R&D capabilities at what we consider to be an unparalleled rate that we believe will continue to help us develop world-class products and keep our competitive edge. More importantly, we are also focused on making improvements to existing products, adding more content at a higher price point. This gives us a massive long-term opportunity to drive content growth as there are numerous products in our portfolio that we're able to improve upon. Further, these are typically unique products that are both integral to vehicles and cannot be commoditized, helping us avoid decontenting by OEMs. A prime example of our innovative capabilities driving our market share expansion can be seen in our transformational ABS system I mentioned earlier. ABS brakes were not readily available or affordable in the U.S. for RV production until we brought them to market. Since launching, we now have about 10 high-profile RV brands using ABS, with more in process of committing to it, growing our market share into the double digits with a total addressable market of $150 million to $200 million. We're finding that RVers vastly prefer having ABS on their vehicles due to the added level of safety and peace of mind it provides, helping us gain traction with the OEMs. In addition to ABS, we launched several products in 2023 that have great momentum heading into 2024. Some of the more notable developments were our 4K window series with integrated shades, a new high-capacity, quiet AC, we called it Chill Pill, new leveling, bus seating, furnaces, a new line of electric Bimini's, and so much more. In 2024, one of our largest innovation announcements is that we are launching a brand new line of slide outs for OEMs. As we expand our portfolio, we plan to continue introducing innovative products to cater to a wide range of customer needs, which should drive long-term content growth while expanding our presence and impact across the recreational markets. We believe that our enduring success all stems from our strong culture. This starts at the top where we have skilled, empathetic leaders dedicated to fostering team members' professional and personal growth. We've implemented several programs to foster development, leading to one of the highest retention rates in the industry. Over the years, we have found that higher retention has a direct and meaningful impact on quality, safety, efficiency, and innovation, all things that we believe are very critical for any good business. Externally, we are actively engaged, supporting the communities where we work and live. In 2023, our team members contributed over 125,000 hours of community service worldwide, involving numerous charitable organizations. We are proud to note that around 75% of our 12,000 strong workforce participated in at least one of these service events throughout the year. As we aim to enhance our collective impact, we hope to inspire other organizations to contribute similarly to their communities. We delivered what we consider to be an amazing cash generation of $527 million in operating cash flow in 2023, considering the challenging conditions we have been working through, and we expect to keep up this progress in 2024. In turn, we have strengthened our balance sheet, maintained ample liquidity, while paying down $277 million in debt. While we've cut down capital expenditures, we are continuing to prioritize spend in R&D, automation, operational excellence, M&A and other high return investments to support profitable growth for our business. In closing, I would like to thank all of our team members across the globe for their dedication to overcoming significant challenges and moving our business forward over the last year and a half. Any good business that experiences extreme cyclicality can't make it through without great teams, and I believe we have the best. I'm incredibly encouraged by the development I've witnessed in our teams over the past year, both personally and professionally. as we work together to serve customers and deliver value to all of our stakeholders. We look forward to continuing this progress as we position Lippert for growth in 2024. I will now turn to Lillian Hitzkorn, our CFO, to give more detail on our financial results. Lillian?

Thank you, Jason. Our consolidated net sales for the fourth quarter decreased 6% to $838 million compared to the prior year period, primarily impacted by a reduction in North American RV and marine production as well as decreased selling prices, which are indexed to select commodities, partially offset by acquisitions. Our operational improvements and diversification strategy has partially mitigated the impact seen from lower wholesale shipments in the quarter. Sales to North American RV OEMs declined 11%. Excluding both North American RV OEM and Marine OEM, our business increased 8% compared to the prior year period. Our diversification strategy and continued pursuit of operational improvements had not only provided near-term support, but a strong platform to drive long-term growth. The decline in Q4 2023 sales in North American RV OEMs was again driven by a decrease in wholesale shipments, which was influenced by current dealer inventory levels, inflation, and rising interest rates. Content per total RV unit decreased 17% to $5,058, while content per motorized unit decreased 14% to $3,506 compared to the prior year period. Again, these content declines are largely attributed to index pricing pass-throughs versus elimination of slipper content. We have continued to increase our organic content and market share through our focus on innovation. In Q4 2023, our organic growth contributed approximately 5.4% year-over-year LTM content per unit. Sales to adjacent industries declined 9% versus the prior year, driven by the 41% decrease in marine sales. Marine content per powerboat decreased 27% to $1,244 primarily due to price decreases associated with year-over-year declining input costs and changes in product mix. However, sales were positively impacted by acquisitions and pricing adjustments for our transportation products. Q4 2023 sales to the aftermarket increased 10% compared to the prior year period, driven by increased repairs and replacements and continued growth in automotive products. helping to illustrate the counter-cyclical nature of the business. International sales increased 4% year-over-year as supply chain headwinds decreased abroad, driving increased shipments to meet pent-up demand. This increase was also driven by an estimated 2% positive impact for exchange rates in the quarter. Growth margins were 19.2% compared to 16.4% in the prior year period, primarily due to positive mix shifts on lower sales volume, partially offset by the timing of sales price reductions contractually tied to commodity prices. Operating margins increased compared to the prior year period, driven by decreased material commodity costs and effective fixed cost leverage. The aftermarket business delivered solid operating profits in the quarter at 8%, which is an 860 basis point improvement over the prior year. GAAP net loss in Q4 of 2023 was $2.4 million, or $0.09 loss per diluted share. This is compared to a net loss of $17.1 million, or $0.68 loss per diluted share, in Q4 of 2022. EBITDA increased 248% to $35.6 million for the fourth quarter compared to the prior year period. Moving on to full year 2023 results, sales to North American RV OEMs decreased 47% to $1.5 billion, driven by decreased wholesale shipments. Sales to North American adjacent markets decreased 8% to $1.1 billion in 2023 driven by softened marine production. North American aftermarket decreased its total sales by 1% to $814 million, while international sales increased 4% to $414 million compared to the prior year period. Acquired revenues were approximately $73.6 million for the full year of 2023. Non-cash depreciation and amortization was $131.8 million for the year ended December 31, 2023, while non-cash stock-based compensation expense was $18.2 million for the same period. We anticipate depreciation and amortization in the range of $130 to $140 million during the full year of 2024. For the 12 months ended December 31, 2023, Cash generated from operating activities was $527 million, with $62 million used for capital expenditures, $26 million used for business acquisition, and $106 million returned to shareholders in the form of dividends. We have had a strong focus on generating cash and continuing to improve working capital, with an emphasis on decreasing inventory. This has resulted in a decrease in inventory of $261 million in 2023. We made net repayments on our long-term debt of $277 million in 2023, including prepayments of $37.5 million under term loan principal. These term loan prepayments were applied to pay in full the scheduled principal amortization payments through Q1 of 2025. and are projected to save us approximately $1.9 million in annual interest expense based on the rates in effect at the end of 2023. At the end of the fourth quarter, we had an outstanding net debt position of $781 million, which is 2.7 times pro forma EBITDA, adjusted to include LTN EBITDA of acquired businesses and the impact of non-cash and other items as defined in our credit agreement. Overall, we are seeing positive signs in total revenue, both sequentially and year over year. For the month of January, sales were up 13% to $308 million versus January of 23, primarily due to more RV production days in 2024 compared to the prior year. This was partially offset by a significant decline in marine sales in the month compared to 2023. We are expecting marine softness to continue into the next two quarters of 2024, with marine sales likely to decline for the year. We are pleased to see February RV orders increase and anticipate that these positive trends will continue throughout 2024. During the year, we will also continue to grow the aftermarket and adjacent businesses through both organic and inorganic methods, while the RV industry regains its footing. Regarding RV wholesale shipments, we estimate a full year range of 325 to 350,000 units. As we look forward, we are focused on maintaining a strong balance sheet and targeting a long-term leverage of one and a half times net debt to EBITDA. For the full year 2024, capital expenditures are expected to be in the range of 55 to 75 million dollars. We are confident in Lippert's ability to deliver long-term profitability and value for all of our stakeholders. Our strategic approach, coupled with investments in innovation, facilities, and our team, will further drive our success and enable us to achieve long-term, sustainable, profitable growth. That is the end of our prepared remarks. Operator, we're ready to take questions. Thank you.