Patrick Industries, Inc. (NASDAQ:PATK) Q1 2024 Earnings Call Transcript

Patrick Industries, Inc. (NASDAQ:PATK) Q1 2024 Earnings Call Transcript May 5, 2024

Patrick Industries, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, ladies and gentlemen, and welcome to Patrick Industries First Quarter 2024 Earnings Conference Call. My name is Darryl, and I’ll be your operator for today’s call. At this time, all participants are in a listen-only mode. The question-and-answer session will follow the formal presentation. [Operator Instructions]. Please note that this conference is being recorded. And I will now turn the call over to Mr. Steve O’Hara, Vice President of Investor Relations. Mr. O’Hara, you may begin.

Steve O’Hara: Good morning, everyone, and welcome to our call this morning. I’m joined on the call today by Andy Nemeth, CEO; Jeff Rodino, President RV; and Andy Roeder, CFO; Kip Ellis, President, Powersports Technology and Housing; and Matt Filer, SVP, Finance is also here for Q&A. Certain statements made in today’s conference call regarding Patrick Industries and its operations may be considered forward-looking statements under the securities laws. There are a number of factors, many of which are beyond the company’s control, which could cause the actual results and events to differ materially from those described in the forward-looking statements. These factors are identified in our press releases, our Form 10-K for the year ended 2023 and in our other filings with the Securities and Exchange Commission.

We undertake no obligation to update these statements to reflect circumstances or events that occur after the date the forward-looking statements are made. I would now like to turn the call over to Andy Nemeth.

Andy Nemeth: Thank you, Steve. Good morning, everyone, and thank you for joining us on the call today. As we finished the first quarter of the 2024 fiscal year Patrick remains in a position of strength, as a result of the work our team has put in day in and day out and the strong performance and results that we have generated, while diligently managing our business and balance sheet. Our success would not be possible without the dedication of our incredible team members, and I thank them for their tremendous efforts and focus. Our family of trusted, independent brands building better component solutions is guiding our model as we strive to be the supplier of choice in the outdoor enthusiast and housing markets. Our accretive growth strategy has evolved over the years through our team’s relentless pursuit of great customer service and building innovative high-quality product solutions.

We have become a key supplier to RV, marine, manufactured housing, and now Powersports OEMs alike, and we believe our ability to scale and adapt to our customers’ needs is unmatched. As we have further refined our business objectives, we identified and executed on the appeal of a more diversified end market ecosystem, which is proving resilient, especially in these uncertain market conditions. Our first quarter acquisition of Sportech further solidifies the foundation in the Powersports industry and serves as another platform for future strategic and organic growth. We are excited by the promising potential in this space, particularly in the utility side-by-side segment on which Sportech focuses. The Sportech acquisition brings in a team aligned with our purpose as passionate outdoor enthusiasts dedicated to creating highly engineered, innovative products in close partnership with our valued OEM customers.

See also 9 Largest Private Military Contractors in the World and 15 Best Places to Retire in West Virginia.

Q&A Session

We are thrilled with the initiatives that Patrick and Sportech teams have already set in motion and the future growth potential we see ahead of us. Examples of our drive to immediately deliver synergies post-closing involves our team at Rockford Fosgate hosting Sportech to showcase the benefits of being connected to the Patrick ecosystem. And how our businesses are able to collaboratively leverage their processes and expertise, bringing additional value to their respective customers. We also invited our key plastics, metals, and harness and dash businesses to Sportech for a brainstorming session, including a production line walk-through to identify avenues of opportunity between business units, their best practices, and potential areas for collaboration, including logistics, sourcing and material synergies.

While collaboration remains a crucial tenet of our success through our business model, we strive to maintain each business’ individuality and passion as they drive forward, keeping the entrepreneurial spirit alive. We believe this strategy is key to our future success and empowers our businesses and the collective Patrick family to achieve new heights. We continue to seek out entrepreneurial businesses with strong, culturally-aligned leadership teams, solid organic growth prospects and accretive margins. Our ability to execute at the operational level at our brands exemplifies our balance sheet and working capital management, for which we also drive accountability. Our team has done a great job of working with our customer partners to manage our inventories and ensure we also remain focused on delivering strong cash flows, while maintaining a disciplined leverage position.

Our inventories are balanced and well maintained, and our leverage position has already improved from just two months ago, following the Sportech acquisition, the largest acquisition in the company’s history. Now moving on to our financial results. Our first quarter revenues increased 4% to $933 million. And on a trailing 12-month basis, our consolidated revenues were approximately $3.5 billion. Our net income in the first quarter improved 16% to $35 million, and net income per diluted share was $1.59. Excluding acquisition transaction costs, purchase accounting adjustments, our first quarter adjusted net income was $39 million and adjusted diluted earnings per share grew 31% to $1.79. Our team continues to anticipate and adjust to market and macroeconomic forces through the management of our highly variable cost structure, and our model performed well during a seasonally slow period also as a result of acquisitions completed over the past year, operational efficiencies gained through automation and better throughput and our diversification among other items, as shown by our continued solid margin performance.

Excluding acquisition transaction costs, purchase accounting adjustments in both periods, operating margin improved 70 basis points to 7.0% and adjusted EBITDA margin increased to 110 basis points to 11.9% in the quarter. On an administrative level, I’d like to welcome Andy Roeder, our new CFO, who joined us in March. Andy has tremendous experience in the outdoor enthusiast space and brings his impressive skills and expertise into the Patrick family. We’re pleased to have Andy on our team supporting our businesses growth objectives, while ensuring our balance sheet and financial foundation remains strong. I’d also like to thank Matt Filer, who filled the interim CFO role with confidence in execution and helped us successfully deliver on our operational and strategic plans.

Matt has resumed his role as Senior Vice President of Finance, and we look forward to his continued contributions. I’ll now turn the call over to Jeff, who will highlight the quarter and provide more detail on our end markets.

Jeffrey Rodino: Thanks, Andy. Good morning, everyone. We continue to experience dynamic conditions across all of our primary end markets. RV and MH trends have improved modestly after reaching what we believe was the bottom of the cycle in 2023. While shipments have improved in the market, interest rates continue to negatively impact demand of our end consumers and dealers across our markets as ownership and online costs remain relatively high. As a reminder, in the outdoor enthusiast space, RV has historically been first market to enter and exit economic cycles and the RV market typically precedes the recovery in marine and Powersports. In the first quarter, RV wholesale shipments have seen some sequential and year-over-year improvement.

We except these positive trends to continue in the near-term, give the need for additional inventory and preparation for spring selling season and the coming 2025 model year change. However, the durability of positive trends will depend on retail sell-through. Our first quarter RV revenues increased 15% to $421 million when compared to the same period in 2023 and represented 45% of consolidated revenue. RV content per unit on a TTM basis was $4,859, off by about 9% from the record level we achieved for the first quarter of 2023. On a positive note, RV content per unit on a TTM basis increased sequentially in Q1 of 2024 from Q4 of 2023. According to the RVIA, RV wholesale unit shipments increased 9% to approximately 85,900 units from the first quarter of 2023.

We currently estimate first quarter retail registrations were down approximately 14% to an estimated 73,100 units in the quarter. Our estimates further indicate that TTM dealer inventory weeks on hand at the end of Q1 of 2024 have increased by two to three weeks to approximately 20 to 22 weeks as dealers plan for the upcoming selling season. This is well below the historical averages of approximately 26 to 30 weeks. On the marine side of our business, OEMs have remained very disciplined in their production, which will help lessen the response time between inventory sell-through and replenishment in the eventual recovery. We expect to see our marine business bottom out in Q2 and then begin to stabilize in Q3 and into Q4, especially as consumers and dealers await the new model year product.

We believe in the long-term durability of the marine industry as outdoor enthusiasts continue to see the appeal of boating and spending time on the water with family and friends. Our first quarter marine revenues were up 35% to $155 million, representing 17% of consolidated sales. This change in sales is in line with our expectations in the quarter, especially when considering our mix towards ski and wake and pontoon. We estimate wholesale powerboat unit shipments declined 34% to approximately 38,400 units from Q1 of 2023 with estimated ski and wake and pontoon unit shipments down approximately 52% and 41%, respectively. We currently estimate first quarter retail powerboat shipments were down approximately 10% to an estimated 31,200 units. Our estimated marine content for wholesale unit on a TTM basis was $4,049 compared to 4,433 in the same period last year.

On a sequential basis, our first quarter content was roughly flat compared to the fourth quarter of 2023. It is important to note that in the prior periods, we reported both marine and Powersports revenue in our marine market, impacting both our marine revenue and content per unit. The current and prior-year figures have been recalculated for revenue and content per unit to reflect these adjustments. Our estimates indicate that the TTM dealer inventory weeks on hand at the end of Q1 of 2024 have increased approximately two to three weeks to an estimated 30 to 32 weeks. This is well below the historical average, which we estimate at 36 to 40 weeks on hand. Our housing businesses, both MH and residential site built demonstrated the resilience of our diversified platform and remained steady and performed well despite the headwinds in interest rates as consumers demand for affordable housing remains strong.

Multifamily housing continues to experience softness, while single-family housing starts have improved. In Q1, our housing revenue was up 5% to $275 million, representing 29% of consolidated sales, and manufacturing which represents approximately 57% of our housing revenue in the quarter, we increased the content per unit on a TTM basis by 1% to $6,422. We estimate MH wholesale unit shipments increased 13% in the quarter, total residential housing starts for Q1 improved 1%. As we begin reporting on Powersports business, our focus will primarily be on the side-by-side golf cart and motorcycle sectors of the industry, and our market commentary will reflect this focus. Powersports is a broad space. And unlike our other end markets, there is no third-party source for industry-wide data on wholesale shipments.

Although, our focus has shifted to side-by-side space, which includes golf carts, following the Sportech acquisition, we have had a presence in side-by-side and motorcycles, primarily through Rockford Fosgate’s premium audio offerings. Of course, as we expand our presence in this space, the metrics we track will evolve along with our commentary to more accurately reflect our business within the industry. Ultimately, our intention is to provide business-relevant insight into the markets we serve is then providing an outlook on the broader Powersports industry as a whole. Anecdotally, Powersports dealer inventory levels appear elevated, particularly in the recreation segment. However, on the utility side of the industry, demand appears to be more resilient.

This, coupled with Sportech’s promising backlog supports our optimism as we move into this year and beyond. The demand for creature comforts like HVAC requires the doors and closure enclosures for tech manufacturers. With the potential to add audio and other high-value product solutions we produce down the road, both to the OEMs and in the aftermarket. Our Powersport revenues were $83 million in the quarter, which represents 9% of our first quarter 2024 consolidated sales, including approximately two months of Sportech revenue, which outperformed expectations. On the innovation front, our dedicated advanced product group, which we highlighted in the fourth quarter is off and running and remains intensely focused on collaborating with OEM customers, evaluating best-in-class solutions two and three model years out, in the RV, marine and Powersports market.

We believe we are well timed with this strategic initiative as OEMs generally focus inward on product design and evolution during periods of softer retail demand. Two examples of our leading innovations as a testament to our progress Patrick’s brands won two innovation awards this year at the Discover Boating Miami International Boat Show in February. TACO Marine won an innovation award for their open water internal and collapsible carbon fiber outrigger poles. Their sleek design and increased functionality results in more natural movement of bait in the water. We continue to believe both RV and boating experience can be enhanced through the use of carbon fiber products, which we have launched along with the potential of our outdoor enthusiast market.

SeaDek also won an award for their patented lighted SeaDek, which can embed RGB lighting into their products providing additional opportunity for customization in marine flooring and padding. The sliding takes the superior traction of EVA foam decking, coaming pads and step pads, SeaDek is known for to a whole new level of comfort and visual appeal. I’ll now turn the call over to Andy Roeder, who will provide additional comments on our financial performance.

Andrew Roeder: Thanks, Jeff, and good morning, everybody. First, I’d like to thank Andy, Jeff, Matt and the rest of the team here for such a warm welcome. I’m thrilled to become part of the Patrick family at such an exciting time, and I’m ready to work with the stellar team here, maintaining our solid financial foundation and supporting Patrick’s continued drive toward profitable organic and strategic growth. Now on to our financial results. Our consolidated first quarter net sales increased 4% and to $933 million, driven by 9% growth in RV wholesale shipments, an estimated 13% increase in manufactured housing wholesale shipments and our acquisition of Sportech, which together more than offset the impact of an estimated 34% decrease in marine wholesale powerboat unit shipments.

Gross margin increased 30 basis points to 21.9%, which was the result of our strategic diversification, acquisitions, larger mix of higher engineered products and cost reduction initiatives, coupled with our investments in automation and continuous improvement initiatives. The first quarter gross margin includes 10 basis points of non-cash purchase accounting charges from the inventory step-up related to the Sportech acquisition. SG&A expenses increased $3 million or 3% to $85 million in the first quarter of 2024, but decreased 10 basis points as a percent of sales. The year-over-year increase in expense reflects transaction costs related to the Sportech acquisition. Excluding the nonrecurring acquisition transaction costs associated with the Sportech acquisition, SG&A expenses as a percent of sales decreased 60 basis points versus the quarter of 2023.

Operating expenses were $146 million in the quarter compared to $138 million last year, primarily due to higher amortization costs and the impact of acquisition-related expenses on SG&A. Operating income grew $3 million to $59 million, while operating margin improved 20 basis points to 6.4%. Excluding acquisition transaction costs and purchase accounting adjustments related to acquisitions, adjusted operating margin improved 70 basis points to 7% in the first quarter. The improvement in operating margin was driven by higher revenue from our RV and housing businesses, coupled with the acquisition of Sportech among other factors previously discussed. These positive factors, while partially offset by the impact of lower marine revenue and higher amortization expense again reflected benefits of our strategic diversification.

Net income increased 16% to $35 million, which equates to $1.59 per diluted share. Adjusting for the acquisition transaction costs and purchase accounting adjustments in both periods, adjusted net income improved 29% to $39 million or $1.79 per share. Our reported and adjusted EPS for the first quarter of 2024 include approximately $0.01 per share in additional accounting related dilution from our 2028 convertible notes. We have hedges in place which are expected to reduce or eliminate any potential dilution of the company’s common stock upon any conversion of the convertible notes and/or offset any cash payments, that company is required to make in excess of the principal amount of any converted notes. For reporting purposes, these hedges are always anti-dilutive and therefore, cannot be included when reporting earnings per share.