Patrick Industries, Inc.
Q4 2020 Earnings Call Transcript

Published: 11 Feb 2021

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Patrick Industries, Inc. Fourth Quarter 2020 Earnings Conference Call. My name is Jesse, and I'll be your operator for today's call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. And I will now turn the call over to Ms. Julie Ann Kotowski from Investor Relations. Ms. Kotowski, you may begin.

[Julie Ann Kotowski:]

Good morning, everyone, and welcome to Patrick Industries' Fourth Quarter 2020 Conference Call. I am joined on the call today by Andy Nemeth, President and CEO; and Jake Petkovich, CFO.

[Andy Nemeth:]

Thank you, Julie Ann. Good morning, ladies and gentlemen and thank you for joining us on the call today. Before we start, I would like to take the opportunity to welcome and recognize Jake Petkovich, our Chief Financial Officer, joining our quarterly earnings call for the first time. We are extremely excited to have Jake on the Patrick team and look forward to his leadership, creative thought process and positive impact on our culture and our business in the years to come. Jake brings a wealth of experiences to us in the areas of financial management, investment banking and M&A from across many industries. Additionally, I'd like to thank John Forbes for his tremendous enthusiasm, engagement, energy and passion, as he assumed the role of Interim CFO. John's commitment to Patrick is just incredible, evidenced every day in his interactions with our people and his contributions to our organization reflect his dedication to our team and leadership spirit. On the COVID-19 front, our team has adapted incredibly well to the changing operating environment and safety protocols implemented with resilience and energy and we continue to prioritize the health, safety and well-being of our team members. This team has worked and continues to work tirelessly to enable us to respond to ongoing strong demand for our products and services with demanding production schedules. Our core values, which are central to our business model have been the foundation for our humble culture, and made it possible for us to align together to care for one another during this incredibly dynamic time. Continued strong retail demand tailwinds and interest in RV and boating activity reinforces our positive view of the momentum and strength of our leisure lifestyle markets, which represent 72% of our fourth quarter revenues.

[Jake Petkovich:]

Thanks Andy and good morning everybody. Our consolidated net sales for the fourth quarter increased 41% to $773 million, driven by increases in all four of our primary end markets. Our leisure lifestyle end markets continue to benefit from the popularity of RV and marine in a COVID-19 environment, while our industrial and MH markets benefited from a strong housing and remodeling environment and the resolution of MH COVID-19 production hurdles. Revenue from our leisure lifestyle markets which are comprised of RV and marine increased 51% with RV and marine revenues up 52% and 48% respectively. RV content per unit increased 2% to $3235 per unit and estimated marine content per unit increased approximately 24% to $2098 per unit. Revenues from our housing and industrial markets increased 19% in the quarter, with MH revenues up 9% versus the prior year, and industrial revenues up 35% compared to the prior year. MH content per unit decreased 1% to $4,580 per unit, reflecting the impact of our exit of certain low-margin product lines. Gross margin in the fourth quarter was 18.4% increasing 30 basis points compared to the prior year. The gross margin improvement was primarily driven by benefits of leveraging our fixed costs against a strong increase in revenue, but was partially offset by tight labor conditions and related wage increases necessary to maintain quality and consistent delivery of our products to end markets. Operating expenses were 10.4% of sales compared to 11.5% in 2019, due to our leveraging fixed operating expenses as sales increased. Warehouse and delivery expenses decreased 70 basis points due to a lower mix of MH sales in the quarter. SG&A expenses were 5.3% of sales in the quarter, a 20 basis point decrease compared to the prior year, again, primarily reflecting the benefit of leveraging our fixed costs against increased sales. Operating income of $62 million increased 73% in the fourth quarter and operating margin of 8% increased 150 basis points, primarily due to factors previously described. Our diluted earnings per share in the fourth quarter was $1.64, up from $0.86 in the prior year. Our overall effective tax rate increased to approximately 26% for the fourth quarter of 2020 compared to approximately 22% from the prior year, mostly due to a decrease in share-based compensation deductions. For the full year 2020, our overall effective tax rate was 25.6% up from 24% in 2019. Looking to cash flows, we generated approximately $160 million of operating cash flows for the full year of 2020, a decrease of 17% compared to the prior year. The decrease was attributable to our strategic investment in working capital to support the anticipated OEM production ramp-up in January 2021, as well as the timing of cash collection from customers at year-end. Our investment in increased inventories in anticipation of a strong start to fiscal 2021 was $59 million, and we collected approximately $21 million of receivables within two days after year-end collections we typically collect before the year-end. Strategically, we further invested $306 million in seven strategic acquisitions in 2020. In addition, in alignment with our disciplined capital allocation strategy, and dividend policy, we invested $32 million in capital expenditures for the full year 2020, to support capacity expansion and automation to support growing end market demand. We returned nearly $24 million to shareholders in the form of quarterly dividends and over $23 million in the form of share repurchases. We had approximately $350 million of total liquidity at the end of December, including $45 million of cash on hand and full access to the remaining unused capacity of our revolving credit facility of $270 million. We have no major debt maturities until 2023. Our operating cash flows position us to capitalize on strategic growth opportunities, return capital to our shareholders and maintain our disciplined capital allocation strategy with attention to our long-term leverage profile. Our leverage position at the end of the year was 2.4 times net debt to EBITDA. Strong trends in our markets our sound and flexible capital structure, our disciplined leverage position, and cash flows have positioned us extremely well for growth in our markets. We expect a continuation of recent end market growth trends and preferences in 2021. For 2021, RVIA currently estimates an approximately 17% increase in wholesale unit shipments to 503,000 units with an upside range of 515,000 units. We currently anticipate marine wholesale to be up 20% to 30% over 2020 COVID-impacted shipment rates on retail that is estimated to be flat to up low single digits. Based on these estimates and continued strong retail demand, we believe channel inventories in both RV and marine markets will remain well below recent historic levels and will not be calibrated to the new normal until late 2021 or 2022. In the manufactured housing and industrial markets, we currently expect MH wholesale unit shipments to increase in the low mid-single digits in 2021, and new housing starts to continue their strong trajectory of high single-digit to low double-digit growth in 2021. Our financial plan remains consistent with the growth expectations and opportunities Andy previously discussed. We have continued to invest in our capabilities to ensure that we can meet increasing OEM demand as the markets grow at a rapid pace. Geographic diversification and scalability will enable us to support and capture the growth of our addressable end markets. Our strong cash flow and liquidity support investments in our end market platforms. We estimate $40 million to $45 million of CapEx for 2021, which reflects increased investment in automation projects to offset the expected continued tight labor market, which will enable us to continue to support growth of all of our end markets. That completes my remarks. Andy?

[Andy Nemeth:]

Thanks, Jake. Overall, we are proud of our team's performance for fiscal 2020, and we are very excited about the prospects for fiscal 2021 and beyond. Our culture, core values, and the dedication, passion and commitment of our more than 8,700 team members, who have worked tirelessly to strive to exceed our customers' expectations is both, energizing and motivating, as we drive the execution of our strategic plan and capital allocation strategy. We continue to invest in human capital management initiatives to develop, retain and ensure the well-being and growth of our team members, who are critical to bringing our products to market. Our financial flexibility, resources, liquidity and balance sheet strength, enable us to opportunistically pursue strategic acquisitions, to expand the portfolio of brands we offer to our customers. And invest in strategic CapEx and automation to further drive capacity, efficiency, synergies and continuous improvement initiatives. In addition, our highly variable cost structure provides us with the flexibility to stay nimble and ahead of changes in today's dynamic macro environment. As we look ahead to 2021, we believe favorable demographic, macroeconomic and secular tailwinds will lead to continued strong demand in our end-markets, which provide tremendous quality of life benefits in both, the COVID and post-COVID environment. And finally, the ongoing support we receive from our customers, suppliers, Board of Directors and shareholders will help us increase long-term shareholder value, by serving our customers at the highest level, investing in and protecting our talented and dedicated team members, dealing ethically and responsibly with our business partners, and supporting our local communities. This is the end of our prepared remarks. We are now ready to take questions.

[Question-and:]

[Operator:]

Thank you. We'll now be conducting the question-and-answer secession. Our first question is coming from the line of Scott Stember with CL King. Please proceed with your question.

[Scott Stember:]

Good morning guys, and congrats on a fantastic way to finish up the year.

[Andy Nemeth:]

Good morning.

[John Forbes:]

Good morning.

[Scott Stember:]

We're hearing that, some of the OEMs in January have started to increase their production rate somewhat. It seems that part of it has to do with the COVID rates and the Northern Indiana region, starting to abate. Can you talk about, what you're seeing on that front? And also, I don't know if you gave what your expectations for retail and wholesale are, within the RV space for this year.

[Andy Nemeth:]

Sure, Scott. This is Andy. As it relates to the production rates increasing, I think that, the industry has done a fantastic job in partnership, really with each other, to make sure that we're doing the best we can to provide a very, very safe operating environment, for our team members really across the spectrum. And so, I think, we've seen production rates increase. I think a lot of the companies have gotten their labor, better positioned through the fourth quarter, as we move into Q1 and have been able to increase their productivity into January and into Q1. So, I think it's a little bit -- it's a combination of both probably the COVID piece, but more so I think that everybody is kind of flexing. In typical fashion, the industry does a great job of adjusting to market conditions. And I think that's just really reflective of that. So, we anticipated January to be strong. And I think we're definitely encouraged and excited about what we're seeing.

[Jake Petkovich:]

Yes. Scott for the, 2021 outlook just to, reiterate that, we're aligned with RVIA on a 17% to 20% increase for wholesale which is at, 503,000 to 515,000 units. We think retail is probably flat to low-single digits up, which still if you think about that the delta it still presents a little bit of this equilibrium and balance. And keeps the supply channel from being fully filled up and presents pretty nice 2021 for us as well.

[Scott Stember:]

Got it. And regarding capacity and production you guys have done a great job of putting a lot of automation in place, ahead of time to help you right now. Are you in a position that you need to do more of that? Or potentially add physical capacity? Or are you good for whatever the industry throws at you for 2021?

[Andy Nemeth:]

We're continuing to adjust our model. And we're going to continue to invest in automation as we move forward. I think as global demand picks up, we view labor continuing to be something that's going to be a challenge. But everybody is really doing a great job of working through that. And we've seen our automation initiatives take place and take hold. And be able to allow us that increased capacity. So, as we move through Q1 and Q2, some of the automation initiatives that we pulled forward last year I think start to come online. We're excited about the ability to be able to flex some. But I think we're going to continue to look at that. As we look at the growth trends the opportunity the capacities that are coming online and that will be coming online we're going to make sure that we're in a position to flex up with our customers.

[Scott Stember:]

Got it. And then last question before I jump back in the queue on margins. Can you talk about how labor raw materials input costs how we should look at that going forward? And are you -- I know in the past you have talked about 30 to 50 basis points of operating margin expansion. Are we talking about at least that being a floor for 2021?

[Andy Nemeth:]

Sure. This is Andy again on a couple of fronts. As it relates to materials, materials were fairly stable during the course of 2020. In fact, we gave price decreases during the year in 2020. And so as we're looking at kind of demand right now we would tell you that materials are -- we're seeing some potential price increases coming but we're going to certainly work with our customers to mitigate those as much as possible in balancing in partnership with them. And so materials are probably -- we're expecting to go up a little bit as we move through at least the first half of the year at this point in time. Labor in the back quarter -- the back two quarters of 2020 was definitely a headwind. That -- we believe that labor cost us probably 40 bps on the gross margin side in Q4. But we see that abating as we move through Q1 and Q2 as we get our arms around our automation initiatives. And so I think as we look at kind of overall for 2021 with our model and the expectations that we see today or the estimates based on our industry knowledge our market estimates we think that yes the 30 to 50 is a floor. We think we should be at 50 bps or more on operating income for 2021.

[Scott Stember:]

Got it. Thanks again guys.

[Andy Nemeth:]

Thanks Scott.

[Operator:]

Thank you. Our next question is coming from the line of Daniel Moore with CJS Securities. Please proceed with your question.

[Daniel Moore:]

Jake, Andy, good morning. Thanks for taking questions. Can you give us a sense for just including the acquisitions what overall revenue growth was -- look like for the month of January and whether or not Q1 should -- probably would look a little higher given the easy March count?

[Jake Petkovich:]

Yes. Well, Daniel, maybe we take a little bit of a backwards look before we think about forward. We think about 4Q we had -- of the $223 million of growth we saw on the topline about 21% of that is industry. 9% or about $47 million of that is the acquisitions that we have announced for the year. As you know we had a couple of here hit in Q4 as well and the balance of that becoming organic. As we think about January going forward it's certainly come out strong. And as you probably undoubtedly heard from some other folks we expect to continue to see that strengthen here as we transition through Q1. But all things being equal, to your point we have a pretty good comp against next year and we expect to be up meaningfully against them.

[Daniel Moore:]

Got it. That's helpful. And the -- just shifting to the marine space a little bit. You touched on -- you've got similar trends to RVs. Can you kind of rehash where you see inventories entering the year at similar levels to RVs? And do you see OEMs kind of running all out and investing more to increase capacity in the marine space as they are in RVs?

[Andy Nemeth:]

Sure Dan. This is Andy. Yes we expect to see marine manufacturers running. The OEM is running all out. I think we will see investment in capacity. And it's a very, very similar picture to what we see in RV as it relates to inventory and what is going to be needed to restock the channel and we again believe through 2021 and into 2022. A lot of the marine OEMs, at this point in time, are sold out through their 2021 units and 2021 model year. So, at this point, again, we expect again a very strong restocking for 2021 and then as well like I said into 2022.

[Daniel Moore:]

Got it. And then just in terms of cash generation how should we think about inventories normalizing over the course of the year? Do you think we'll stay at more elevated levels here for the next few quarters or start to work those down?

[Jake Petkovich:]

Well, we -- that's a great point Dan. I appreciate the question. We -- as we mentioned in the prepared remarks and you saw in the numbers, we built a little bit of inventory coming into the end of 4Q as we saw real acceleration in production. And part of that was just as a natural lift of the business. We're going to build some working capital. But also there was a lot of proactive thought as to making sure we're in a good posture as we transition through December into what we expected to come out and has proven to be a strong January to be in a position where we could ensure that we're serving our customers and providing them what they need. So a little bit of an increase there, I would say, about $20 million to $25 million of kind of deliberate build in inventory against what we might normally have seen which of course pressured a little bit of what we show for our operating cash flow for 4Q versus maybe what we talked about a little earlier in the year, but it started to normalize. As you said, we've -- the way I would think about it is, as we came into the end of the year, we were running at a pretty strong run rate as an industry. And using the RV industry as a proxy, we estimate somewhere near that 500,000 unit per year kind of run rate and we built a balance sheet to support that. So I think what you should probably expect as we transition through 2021 and assuming that we -- RV for example comes into the band that I had mentioned to Scott then I think you'd see our inventory would definitely normalize and probably get into to a regular cadence through our working capital.

[Daniel Moore:]

Very helpful. Last for me is, if we think about sort of the higher end of the RVIA range 20-ish in terms of shipments for this year just as far as capacity is concerned, great to hear your comments around labor, are there any supply chain components or other things you've got your eye on that could be an inhibitor to just getting to that type of production level? Or -- we're not that far off in December already. So just wondering about your confidence about your -- the industry's ability to produce that many units assuming demand holds up.

[Andy Nemeth:]

Sure Dan. This is Andy. We're confident that the industry will be able to produce that level based on capacities and run rates that we're seeing today. And I think there's upside potential even on the RVIA numbers. There's a few little hotspots out there, as there have been over the last couple of quarters. Everybody's got something here or there. But I would tell you that again the resilience and the adaptability of the supply base in the channel is incredibly strong and very, very nimble. And so I think that we're going to continue to see the supply base adapt to the opportunities to enhance capacities for the manufacturers. So, we feel confident about the RVIA numbers.

[Daniel Moore:]

That's great. Excellent. Appreciate the color. Congrats and I'll circle back with any follow-ups. Thank you.

[Andy Nemeth:]

Thank you.

[Jake Petkovich:]

Thanks, Dan.

[Operator:]

Thank you. Our next question is coming from the line of Craig Kennison with Baird. Please proceed with your question.

[Craig Kennison:]

Hey, good morning. Thank you for taking my questions. It's been a good call here answering a lot of questions, but maybe wanted to jump into your content per unit outlook. I know we have this trend at least in the RV market where first-time buyers are driving ASPs lower, but your content per unit is still growing. At what point do you think we might see ASPs start to rise as maybe some of those first-time buyers come back and buy a higher-end unit? And how does that roll into your content per unit outlook for your various end markets?

[Andy Nemeth:]

Sure Craig. This is Andy. I think from a content perspective, we feel really good about where we're at today, where we're positioned, the investments that we've made in automation to be able to enhance capacity and grab market share. And so I think we feel good about the ability to continue to grow content both organically and strategically. I think as it relates to ASPs and new buyers, we're excited about the fact that there's a lot of new buyers entering the space today and still very excited about it. And so our view would be is that, I certainly don't want to speak for any of the OEMs or the dealers. But our perception would be is that ASPs are going to stay pretty stable, maybe go up a little bit towards the back half of the year and into next year. And as we do start to see kind of this upgrade cycle, which we saw a little bit of it last year that could drive ASPs up as well. But overall, again, I think we're very confident and excited about our opportunities as it relates to grow our content in all market sectors.

[Craig Kennison:]

And then getting back to the kind of inflation question, could you come -- summarize where some of your largest commodity exposure lies? And then how quickly are you able to pass along increases or decreases? I know you in particular partner very closely with your OEM partners to make sure that it's fair on both sides. But I'm wondering to what extent there's a lag there.

[Andy Nemeth:]

We pass along prices fairly quickly, Craig. I would tell you that we do expect to see a little bit of uplift in materials here and we're going to work with our customers with that. We want to mitigate it as much as possible. Within 30 days or so we'll move up or down depending on where the markets go. We really try and partner with the customers to mitigate the impact of price increases. And so I'd tell you that we're going to continue to work with that and we're going to continue to partner. And the other thing that we see as well out there is that the manufacturers do a great job of when they have forward-looking information as it relates to commodity movements. They do a great job of pushing product in and out to be able to mitigate the impact call it content or de-content if you will certain product lines for other product lines that are going up to be able to flex and maintain balance as it relates to their pricing structure. So we're going to continue to partner with the OEMs in that fashion.

[Craig Kennison:]

And lastly if I missed it Jake, I'm sorry but what's your CapEx outlook for 2021?

[Jake Petkovich:]

We are -- $40 million to $45 million.

[Craig Kennison:]

Great. Thank you.

[Jake Petkovich:]

Thanks, Craig.

[Operator:]

Thank you. Our next question comes from Steve O'Hara with Sidoti. Please proceed with your question.

[Steve O'Hara:]

Hi. Good morning. Thanks for taking my question.

[Andy Nemeth:]

Good morning.

[Steve O'Hara:]

Good morning. Just on the -- if you look at your growth within RV versus maybe the wholesale numbers that were out there big jump versus the industry. And is that just the acquisitions? Should we still be thinking, kind of, obviously organically maybe industry plus three to five percentage points? Is that still the right way to think about it? Or is there something else that's happening at least maybe in the near-term with the acquisitions that's going to boost that temporarily?

[Andy Nemeth:]

Sure. Steve, this is Andy. I think as it relates to content and our ability to grow organically the 3% to 5% is definitely a good estimate. I think the capacity initiatives and automation that we're putting in place like I said pulling forward CapEx into the back half of last year for 2021 and 2022 are going to provide our opportunities to continue to grow organically and our team is definitely focused on that. And so honestly there's not a lot of acquisition activity in those numbers today. So we've been able to drive that organic growth in partnership with our customers and really through the dedication of our team, but also the commitment to driving automation across our business units.

[Steve O'Hara:]

Okay. I mean -- and maybe sticking with the -- maybe just directionally in terms of 4Q versus 1Q. I mean, I think, it's typically been kind of a year-over-year growth. And obviously some of that's probably driven acquisition. But I mean that should be similar-- that should be -- maybe what's the outlook for the first quarter on the RV side in terms of production and things like that? Is there -- is it kind of similar -- does it look similar to the fourth quarter? Or is it going to be -- do you think it's significantly higher?

[Andy Nemeth:]

I think that the RV manufacturers like I said, earlier have increased production capacity and people are getting their arms around the labor situation. And so, we expect RV production to increase in Q1 at this point in time. And we're definitely seeing that through January and into February. So, our estimates would be that again, there's definitely strong demand out there and strong production levels in Q1 already.

[Steve O'Hara:]

Okay. And then maybe just lastly on the -- not to beat a dead horse, but on the RVIA kind of retail outlook, and I mean, it seems like even if you're kind of flat to -- even if you're flat to down, I guess on the retail side, you could still be pulling out inventory. I mean that seems -- and I mean, it seems like the dealers are -- I think it was 46% expected to be up nicely this year, about half are going to be expected flat. But I mean it seemed like there's pretty good confidence that 2021 would be a pretty good year for them. I mean, what's your thought on -- if we're kind of flat to up, do you expect the industry to pull out units again? Or is it going to gear up to meet that demand level?

[Andy Nemeth:]

Well we retailed in 2020 over 500,000 units. And so, on wholesale production, that was right around 430,000 units for 2020. And so, we're -- the inventories are definitely low and light right now for 2021. And so, if we continue to see let's just say retail is up -- flat to up at a minimum of 500 -- call it 515,000-ish to 530,000 units on retail, we would expect that there -- it's still going to be in this depleted inventory position for the balance of 2021 and positions 2022 very well. So, again, I think that as we look at all out numbers, we feel like the restock is going to take some time.

[Steve O'Hara:]

Okay. All right. Thanks a lot.

[Andy Nemeth:]

Appreciate it.

[Operator:]

Thank you. We have no further questions at this time. I'll now turn the call back over to Ms. Julie Ann Kotowski for further remarks.

[Julie Ann Kotowski:]

Thanks, Jesse. We appreciate everyone for being on the call today, and look forward to talking to you again at our first quarter 2021 conference call. A replay of today's call will be archived on Patrick's website, www.patrickind.com under Investor Relations. And I'll now turn the call back over to our operator.

[Operator:]

Thank you. Ladies and gentlemen, this concludes today's teleconference. Thank you for participating, and you may now disconnect.