Patrick Industries, Inc. (NASDAQ:PATK) Q4 2023 Earnings Call Transcript

Patrick Industries, Inc. (NASDAQ:PATK) Q4 2023 Earnings Call Transcript February 8, 2024

Patrick Industries, Inc. beats earnings expectations. Reported EPS is $1.41, expectations were $1.39. 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’ Fourth Quarter 2023 Earnings Conference Call. My name is Paul, and I’ll be your operator for today’s call. [Operator Instructions] Please note that this conference is being recorded. 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 am joined on the call today by Andy Nemeth, CEO; Jeff Rodino, President RV; and Matt Filer, Interim CFO; as well as Kip Ellis, Patrick’s President, Powersports and Housing, who is available for Q&A and is joining us remotely. 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 which — 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 2022 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. As we look back on fiscal 2023, I’m incredibly proud of the efforts our team has shown as they continue to deliver solid and resilient performance and results in a challenging environment. Despite sharply lower shipments across our end markets as we face macro and industry headwinds attributable to high inflation and interest rates, our business generated strong revenue, margins, profits and cash flow, particularly when compared to the pre-COVID time period when our business was less diversified. For the full year, we achieved record gross margin, delivering on our operating margin target and generated record free cash flow. To highlight the evolution of our business and the benefits of the strategic diversification and investments we’ve made, we’ll compare the full year’s 2023 results with full year 2019.

This year, RV wholesale unit shipments declined 37% and were 23% lower than 2019. Despite the materially lower unit volumes and less favorable environment, total revenue in 2023 was 48% higher than 2019. Gross margin was 450 basis points higher and operating margin was 90 basis points higher. EPS was 69% higher and free cash flow was more than twice what we produced in 2019 on significantly higher interest rates. We expect to continue to drive our growth trajectory with the execution of our strategic plan, and our team’s hard work and determination has continued to position us to actively pivot where necessary to stay nimble and flexible. Our foundation is solid as we spent the year, streamlining our model and placing our company in a great position not just to weather the uncertain macro environment, but to proactively grow our company through our successful diversification and automation strategy, among other strategic and capital initiatives.

We optimized our cost structure based on current run rates in our markets, paid down debt, actively managed and reduced our inventory and improved our operating efficiencies. We invested in our financial and operational infrastructure through software and IT automation and new product innovations. In 2023, we allocated capital to ensure our company is ready for future end market improvement while preparing us financially and structurally to make bolt-on and more significant acquisitions that align with our future growth objectives. In 2023, we acquired Patrick Marine Transport, a leader in marine transportation that complements our existing RV transportation businesses. In early January 2024, we acquired Sportech, our largest acquisition to date, which adds significant scale in powersports, increasing our total addressable market, enhancing our business’s runway for growth and improving the diversity of our revenue, profit and cash flow.

On the human capital side, we continue to support our people in 2023 as we quietly and thoughtfully invested in leadership development training, while also continuing to meaningfully get back to our communities through our philanthropic efforts and team member engagement. As an organization, we have elevated the way we think about our RV, marine and powersports end markets to the outdoor enthusiast space. At Patrick, we are enthusiasts. We are active in the outdoors, enjoy camping, RV-ing, boating, fishing, motorcycling, off-roading and other recreational and leisure lifestyle activities. Our team’s passion is evident in what they love to do, the solutions they provide and the care shown while building them. Our team members are proud to represent their brands and of their commitment to our customers.

Whether on the road, off the road, on the water or at home, we believe in empowering people to live their passion to the fullest, which drives our goal to be the supplier of choice to the outdoor enthusiast space. Financially, we have maintained a strong balance sheet and generated significant free cash flow through focused investments and prudently managing working capital. We have no major debt maturities until 2027. We ended 2023 with approximately $780 million of total liquidity, and we remain flexible and ready to pivot in response to market conditions and customer needs. We continue to be optimistic about Patrick’s future and ability to generate free cash flow, which was reflected in our Board of Directors’ decision to raise our fourth quarter dividend by 22% to $0.55 per share.

We returned $61 million to shareholders during the year in the form of stock repurchases and dividends and had $77.6 million left authorized under our current repurchase plan at the end of the fourth quarter. Looking forward to 2024, we are confident in our team’s ability to navigate short-term headwinds and capitalize on opportunities to continue to profitably grow our company. We believe the first half of 2024 will look similar to the last few months of 2023 in respect to industry and macro trends. With some promising upside potential in the second half of 2024, especially if there is interest rate relief for both retail and floor plan financing. We will continue to utilize the appropriate levers to optimize our operations and maintain our strong financials, including maintaining a disciplined leverage position and prioritizing paying down debt after the Sportech acquisition while still having the opportunity and ability to grow the company through targeted acquisitions and capital investment.

As we think about strategic growth opportunities for 2024 and beyond, we continue to see the appeal in the premium segment of the outdoor enthusiast space. And with our acquisition of Sportech, we have solidified our presence as a leading component solutions provider of the powersports market. We expect to continue to strategically and organically expand our presence in RV, marine and powersports in conjunction with our strategic focus on the broader outdoor enthusiast space and the aftermarket. The end result, we are positioned well as we start 2024 with ample liquidity and a solid capital structure and are poised and ready to accelerate our company’s growth. Highlighting our financials. Our fourth quarter revenues were $781 million and net income was $31 million or $1.41 per diluted share.

For full year 2023, we generated revenue of $3.5 billion, leading to net income of $143 million or $6.50 per diluted share. As we noted in the press release this morning, the quarter’s results include approximately $0.08 of onetime nonrecurring charges related to severance, facility consolidations and significant tornado damage to 2 of our facilities in the Nashville, Tennessee area in December, net of favorable fair value measurement adjustment. For the full year, we estimate these nonrecurring items [indiscernible] approximately $0.21 per share. And finally, highlighting our increased focus on driving our business and business performance in alignment with our Better Together culture, we have implemented several exciting changes and enhancements to our organizational structure, reflecting the strength of our bench and elevating the responsibilities of several of our team members.

Jeff Rodino has been named President of RV in addition to his current responsibilities. Kip Ellis has been named President of Powersports and Housing. Rick Reyenger has been named President of Marine. Hugo Gonzalez has been named Executive Vice President and Chief Operating Officer; and Charlie Roeder has been named Executive Vice President of Sales for the organization. I’m extremely energized and excited about the incredible talent in our organization and congratulate our senior team on their new roles. I’ll now turn the call over to Jeff, who will highlight the quarter and provide detail into our end markets.

Jeff Rodino: Thanks, Andy, and good morning, everyone. If there are 2 key themes that define our markets in 2023, they were inflation and interest rates, which negatively impacted end consumers’ desire to finance their purchases of RVs, boats, and houses while also increasing floor plan lending rates and limiting dealers’ willingness to hold excess inventory across our markets. We believe the RV market bottomed in 2023 and our analysis suggests inventories are lean in the field. We are optimistic about potential trajectory of the RV market with the peak selling season just around the corner in the spring. Our teams, along with the OEMs across the market are poised and ready to meet demand with many exciting innovations coming to the market for model year 2025 introductions later this year.

For 2024, generally, we believe our end markets are operating at below normalized levels, and there has been real growth over the past several years in consumers’ affinity for the outdoor enthusiast space. Post pandemic, an increasing number of consumers see the benefits of enjoying the outdoors with family and friends, including 25 million new camping households from 2020 to 2022 according to KOA, which should positively impact normalized demand for years to come. Looking at the RV industry, RV OEMs have continued to show incredible operating discipline to keep inventories lean, while preparing for future growth. Our strategy in the RV space continued to be centered around our goal of providing best-in-class customer service and a growing portfolio to OEMs through our full solutions model, therefore, helping them innovate and build quality units across a spectrum of feature and price.

Our fourth quarter RV revenues decreased 14% to $353 million, representing 45% of consolidated sales. RV wholesale unit shipments of approximately $75,000 in the quarter decreased 3% as OEMs continue to maintain tight control on their output as they strictly manage dealer inventories. RV retail registrations declined an estimated 10% in the quarter to approximately 62,600 units, implying a restock of about 12,000 units to dealer inventory during the period. From a seasonal standpoint, the fourth quarter is a typical restock period. For the full year, industry destock approximated 66,000 units by our estimate. We estimate overall RV dealers inventories are 15 to 18 weeks on hand, up from third quarter levels but well below historical prepandemic averages of 26 to 30 weeks.

Our RV content per unit decreased 9% on a full year basis to $4,800 per unit due to our team having passed along pricing where appropriate and a higher ratio of entry-level units being produced. Throughout my career in the RV industry, I’ve witnessed a number of cycles and from my perspective, consumer demand for smaller, more affordable units tends to lead the broader industry’s recovery. On the marine side of our business, the industry continues to see softer demand as end consumers face higher monthly payments given the current rate environment. Unlike the RV market, where our end markets revenue tends to be highly correlated to the overall shipment mix, our marine revenue is slightly more concentrated towards higher dollar, particularly the fiberglass and ski and wake segments, which began to see more pronounced softness from the production perspective in the back half of the year, compared to the broader marine market.

We expect to continue to feel the effects of the mix through the first half of 2024, but we also expect to weather this softness due to the diversified portfolio within the marine and RV space and help offset the impact. Despite short-term challenges, we believe the long-term durability of trends within the high-value premium segment of the marine industry that we serve. Our marine revenues decreased 32% to $174 million and represented 22% of our fourth quarter consolidated sales. The decrease was driven by reduced wholesale shipments particularly in the ski and wake, which was down almost 40% in the quarter. We estimate total industry wholesale unit shipments decreased 24%, while retail unit shipments declined an estimated 4% to 6%. We believe the delta between the wholesale and retail can be explained by the OEMs and dealers’ reluctance to carry excess inventory given high floor plan cost and limited visibility into consumer demand.

Until a clear improvement in consumer sentiment emerges, we expect dealers to remain cautious on increasing their inventory weeks on hand. We’ll get a better sense of the trajectory of the year during the upcoming boat shows. We estimate overall marine dealer inventories are 27 to 29 weeks on hand, slightly up from the third quarter, but below historical prepandemic averages of 36 to 40 weeks. Our estimated marine content per wholesale unit decreased 5% on a full year basis to $4,803 per unit, primarily due to our mix towards the premium end of the segment, particularly ski and wake and fiberglass being down greater than the industry aggregate. In the housing market, our team has continued to perform well given their ability to scale to customer demand.

Our housing businesses are reliable revenue platform, and we believe both manufactured housing and site-build housing have a long-term growth potential as we support OEMs and builders alike, offering numerous products to meet their evolving needs. We continue to expand our extensive offering with products like energy-efficient water heaters, furnaces and sealed HVAC duct systems for OEMs seeking to exceed government sustainability guidelines on manufactured homes. Looking at residential housing, while multifamily experienced softness in the second half of 2023, with some projects pushed out a quarter or 2, single-family housing saw more positive trends and was up in both third and fourth quarters. Looking ahead to 2024, we see potential for the industry to continue to grow should economic pressures recede.

Revenues in our housing market, primarily tied to MH and single-family and multifamily residential housing decreased 11% to $254 million, representing 33% of consolidated sales in the fourth quarter. Our revenues in single-family and multifamily markets tend to trail starts by 6 to 9 months given our product timing to installs on new units. MH wholesale unit shipments decreased 2% and our full year content per MH unit increased 2% to $6,372 per unit. Total residential housing starts for the fourth quarter increased 2% and single-family starts up approximately 22% and multifamily starts down approximately 27%. Interest rates and inflation continue to impact housing across our sectors. Although we won’t be reporting on powersports end market revenue until next quarter, I want to touch briefly on the industry as we head into 2024, especially given our recent acquisition of Sportech.

Similar to our outdoor enthusiast end markets, dealers appear to be facing inventory challenges due to softening demand and higher interest rates on base level units in particular. That said, our growing powersports portfolio is skewed towards the premium utility segment, which, as noted by recent earnings reports from industry OEMs appears to be less impacted currently. We see promising potential given its durability, coupled with the increased demand for additional creature comforts like HVAC, which can be added once Sportech’s cabin and closures are installed. We remain encouraged as we enter into 2024 and begin to report on our powersports progress. We have a vested interest in the powersports industry for several years, kicked off by our acquisition of the Progressive Group in 2016.

We bolstered our powersports presence with our acquisition of Rockford Fosgate and Wet Sounds and remain excited about the long-term prospects for our powersports platform solidified by our acquisition of Sportech. Before turning the call over to Matt, I wanted to highlight the evolution of our team’s work on innovation and higher engineered product. In 2020, we took a deliberate step to enhance the strength of our acquisition by placing additional focus on expanding the breadth of innovative products and solutions we provide across our markets, prioritizing collaboration with our customers to solve their problems and participate more deeply in their design processes. A recent example of a data-driven advanced product development strategy is the expansion of our aftermarket offerings by SeaDek, a leader in marine nonskid flooring.

Through customer-facing market research and testing, we identified a strategy to present our SeaDek technology to the RV space and offer a superior alternative to traditional step tread covers. Our SeaDek treads are constructed from a durable UV-resistant closed-cell EVA foam that does not absorb water and is weather-resistant and shock and sound dampening, and are fully customizable with names and logos. SeaDek recently obtained license rights from the NCAA to offer personalized step treads and other related products customized with your favorite team’s logo. In addition to the investments we are making in our Advanced Product Evolution group, which we discussed on our last call, to truly lock arms with our OEM partners and drive solution-based innovation for the foreseeable future, we’re going to significantly increase our focus on the overall customer experience in 2024 and beyond.

We believe synergies and harmonies that we can develop with our customers in alignment with our customer-focused philosophy can truly drive positive innovative experience for our end users of our products and embed our brands as leaders in introducing and providing innovative solutions for our customers. An exciting initiative our marine businesses have been working on is expanding the proprietary technology solution that we discussed early in 2022. We have driven volatile organic compounds, or VOC reduction, and we are in the process of expanding this solution to 2 of our most prominent businesses in our — in the marine industry with implementations expected to be completed in the first half of 2024. This will allow us to share our value analysis, value engineering with our OEM customers, further reducing VOC emissions and improving the raw material utilization while increasing the quality of our processes.

Finally, as Andy mentioned, I’m excited about my new role in addition to my current responsibilities and the tremendous focus we are placing on driving our organization’s strategic objectives and growth plan. Our team is phenomenal, a pleasure to work with and totally aligned with our unyielding dedication to serve our customers, communities and team members. I’ll now turn the call over to Matt, who will provide additional comments on our financial performance.

Matt Filer: Thanks, Jeff, and good morning, everyone. Our consolidated net sales for the fourth quarter decreased 18% to $781 million, driven by a decrease in wholesale shipments across our RV, marine and MH end markets. For the full year, net sales decreased 29% to $3.5 billion. The decline in sales was driven by continued discipline among RV OEMs as they maintained low production levels, along with marine OEMs aggressively cutting production in the second half of the year to ensure inventory balance in the field. We note that on a full year basis, 2022 is the toughest comparison in the history of our company, representing records for both sales and earnings per share. Full year marine revenue decreased 11% to $924 million, while RV revenue decreased 42% to $1.5 billion.

Within our housing business, which is comprised of our MH and industrial end markets, our revenue decreased 17% to $1 billion for the year. Gross margin was 22.9% in the fourth quarter and increased 180 basis points from the prior year as a result of prudent labor and material management, our diversified business model and our continued investment in higher engineered, higher-margin products. For the full year, gross margin increased by 90 basis points to 22.6%. Warehouse and delivery expenses declined 9% in the fourth quarter and 12% for the full year versus the respective periods last year. For the fourth quarter and full year, respectively, SG&A expenses declined 12% to $68 million and 9% to $299 million. As a percentage of sales, SG&A and warehouse and delivery expenses increased due to lower sales and the difference in the operating expense profile of our marine businesses due to the nature of their higher engineered products.

Operating income for the fourth quarter declined 15% to $57 million and declined 48% to $260 million for the full year. The decrease is primarily attributable to the previously described factors. We continue to manage our cost structure prudently, while investing in innovation and growth opportunities. Operating margin was 7.3% in the fourth quarter, a 20 basis point improvement from the prior period. Full year operating margin was 7.5%, down from our record level in 2022, but in line with our previously articulated outlook. Net income in the fourth quarter was $31 million or $1.41 per diluted share compared to $1.68 per diluted share last year. 2023 diluted EPS was $6.50, a decrease of 52% versus 2022. As Andy noted, after accounting for a favorable onetime fair value measurement adjustment, our fourth quarter results included approximately $0.08 per share of onetime nonrecurring items related to severance facility consolidation and costs related to a tornado, which hit 2 of our Tennessee facilities in December.

For the full year, the impact of onetime nonrecurring items totaled approximately $0.21 per share. Our overall effective tax rate was 26.6% for the fourth quarter and 25.3% for the full year. We expect our overall effective tax rate for 2024 to be approximately 25% to 26%. Operating cash flow was $115 million in the fourth quarter. Despite the decline in full year net income, operating cash flow for fiscal 2023 was virtually comparable to fiscal 2022, finishing at $409 million. And as Andy noted, our prudent financial management and seller team helped to generate free cash flow of $350 million despite the various headwinds we faced in the year. We remain committed to our disciplined capital allocation strategy. At the end of the fourth quarter, after paying down $87 million on our debt, including $85 million on our revolving credit facility, we had approximately $780 million of total net liquidity, including $768 million of unused credit capacity.

Total net leverage was slightly under 2.4x. Purchases of property, plant and equipment were $12 million for the quarter and $59 million for the year. We continue to prioritize growth opportunities while investing in automation and operational efficiencies, which place us in an advantageous position as we navigate 2024 and beyond. For 2024, we will continue to reinvest in the business and drive long-term value for shareholders. We currently estimate 2024 capital expenditures to be between $70 million and $80 million. Including our second quarter acquisition of Patrick Marine Transport, we invested $26 million in acquisitions in 2023. As discussed on our recent Sportech acquisition call, we continue to be active in M&A and remain focused on seeking attractive entrepreneurial culturally aligned acquisition targets.

During the quarter, we repurchased approximately $7 million or 90,800 shares and returned $12 million to shareholders in the form of dividends. For the full year, we repurchased $19 million in stock and paid dividends of $42 million, resulting in $61 million in total cash returned to our shareholders. As Andy mentioned, our Board of Directors voted in November to increase our quarterly dividend to $0.55 per share, reflecting continued confidence in our ability to generate cash flow and continue to profitably grow our business. We still continue to execute our balanced capital allocation strategy and remain opportunistic in our share repurchases while maintaining strong financials and reinvesting in the company. In 2023, we performed well despite a tough macroeconomic and industry backdrop.

We remain diligent in managing our company’s financial health by prioritizing a strong balance sheet and generating solid cash flow, empowering us to deploy capital when opportunities arise. We will continue our pursuit of operational excellence, striving to serve our valued customers at the highest level. In our RV market, we estimate 2024 wholesale unit shipments to range between 330,000 and 350,000 units. We expect dealers to remain cautious on ordering until better visibility into demand emerges or interest rates decline or a combination of the 2. We currently expect full year retail shipments to be down approximately 5% to 10%, implying approximately 350,000 units. In our marine market, we estimate 2024 retail to be flat to down mid-single digits and wholesale units for our overall product mix to be down 5% to 10%, representing a one-for-one model currently.

While we believe marine dealer inventories are below historical norms, we expect dealers to remain cautious in the face of inflation and high interest rates and will likely attempt to carry less inventory than they might historically. On the housing side of the business, we estimate MH wholesale shipments to be flat for 2024, with retail sales absorbing available wholesale production on a real-time basis. In our residential housing end market, we estimate 2024 new housing starts to be flat versus 2023. Given the current end market outlook we’ve outlined, we estimate our 2024 operating margin will improve by 30 to 50 basis points versus 2023. We currently expect operating cash flow of $390 million to $400 million, resulting in free cash flow of approximately $310 million or more and implying a very attractive free cash flow yield.

Should our end market dynamics deviate materially from our forecast, we will react accordingly as we did last year and this could cause our results to differ from our current expectations. On January 24, we announced the closing of our $315 million acquisition of Sportech, which was funded through cash on hand and our existing credit facility. At closing, our total net leverage ratio was approximately 2.9x, and we expect to reduce this ratio down to our target range of 2.25 to 2.5x within the next 2 to 3 quarters. As noted in the press release for the closing, we expect to incur acquisition-related onetime pretax costs of approximately $7 million, which we plan to exclude from our adjusted EPS when we report our first quarter 2024 results. That completes my remarks.

We are now ready for questions.

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Q&A Session

Operator: [Operator Instructions] Our first question is from Mike Swartz with Truist Securities.

Mike Swartz : Maybe just to start off with the EBIT margin target that you outlined for ‘24. Maybe just give us a sense of some of the puts and takes there. I’m assuming mix will be slightly negative, but I assume that includes — that also includes the Sportech acquisition. I guess that should be additive. But what are you anticipating for amortization as well from that business? Maybe give us just the moving pieces there?

Andy Nemeth: Sure, Mike. This is Andy. So when you think about the puts and takes and where we sit looking as we’re looking into 2024 right now, I think we feel good about, first of all, where we put the company as it relates to the structure. We’ve leaned the operations out, spent the fourth quarter kind of really making sure that we were lined up for the current run rates as they exist in our markets today. And as we’re looking forward we’ve made a little bit of movement on our forecast as it relates to RV shipments with some potential marine improvement that — from where we were at before and the mix that we’re seeing. And so all the puts and takes kind of net to what I would say, opportunity for us to be able to leverage, especially as we look out further into the back half of next year.

And so we’re positioned to operate at the current run rates with our margin profile and expect to pick up as we noted, 30 to 50 basis points. I think when we look out and see the opportunities for some up-contenting when we see the opportunity for some increased shipments due to the potential retail environment improving in the back half of the year, we feel good about the ability to leverage this model and drive incremental margins. So there’s a lot of puts and takes when you think about just sitting where we’re at today, looking out, but they net to what I would say is us being very well positioned to operate at current run rates. We can certainly make adjustments if we need to on the downside, but we feel like things have bottomed out, and we will be able to leverage that on a go-forward basis as the conditions improve.

Mike Swartz : And just clarification, Andy. That outlook for the 30 to 50 basis points in growth does include Sportech. And I guess what is the assumption for amortization since you don’t back that out when it comes to EPS?

Matt Filer: Yes, Mike, this is Matt Filer. We’re looking at about $15 million for amortization of the Sportech acquisition annually.

Mike Swartz : Okay. Okay. Great. And then just a second question, as it pertains to the quarter, the 18% decline in revenue. Could you — as we typically do, could you give us the kind of the moving pieces there between M&A and pricing?

Matt Filer: Sure, Mike. So the 18% revenue decrease for the quarter, if you look at that, it’s about 11% down on industry. And then from an organic standpoint, we’re down 8% and acquisitions had a positive 1% impact. And when we break out that organic impact, pricing is down 9%, and we have a share increase of 1%.

Operator: Our next question is from Craig Kennison with Baird.

Craig Kennison: It’s been a very helpful call, of course. But I wanted to pursue this powersport channel, if we could. I mean if there’s a channel that deals the most at risk, its powersports in terms of how much inventory is out there and maybe trends in some of these end markets. I know you have some confidence based on just your mix of higher-end consumers where the affluent consumer is doing better, I guess. But how much have you stress tested your acquisition for just potential weakness and potential destocking? We frankly have seen destocking risk hit a lot of different acquisitions and categories and I want to make sure we’re stress tested on that one.

Andy Nemeth: Sure, Craig. This is Andy. I’ll kick it off, and then I’ll turn it over to Kip as well for some additional color. But as we looked at certainly the Sportech model and what got us confident in the ability to be resilient, especially during a time like this, was certainly the up content on Sportech, the utility concentration that Sportech has and the premiumization of the units that we see. And so we’ve definitely seen in all of our markets the price-sensitive consumer has been impacted and that’s where, again, across markets, we’re seeing more, let’s just call it, volatility or softness. And so on the upside, though, with the utility vehicle segment and we looked at the backlog that Sportech has in their portfolio today, especially with new product introductions and some of the upfitting that was supposed to take place in ‘22 and ‘23 that didn’t get through the system, we’ve got ourselves confident with some of the volatility that could be there as it relates to some potential softness and feel pretty good about the model that we’ve put together.

So again, we stress tested that model. We liked the business. The team is extremely talented, well-connected with the customer base, but we got comfortable with their mix and their backlog and opportunity with the upfit models. And so Kip, if you have anything else to add, certainly, feel free to chime in.

Kip Ellis: Yes. Thanks, Andy. I think it’s been [indiscernible] we’ve got to know the Sportech team better and appreciate how they look at the market. It’s very much an innovation-driven company and the take rate on the products they’re bringing to market, the cabin closure concept is something that we’re seeing expand beyond some of the players that are get covered in the market, the bigger players to broader spectrum of the manufacturers. So we see some growth potential there with our new products. But to reiterate what Andy said, they do a nice job of taking a look at the data they’ve got available to them to get a sense of what they see from a mix from the OEs and how these premium fitups play into that. And we do see resilience in the backlogs.

And so we’re very much aware of what’s been reported from an inventory standpoint for side-by-side and the recreational sports side of the business, the baseline pieces in the market and the impact of finance rates and what have you on consumer attitudes towards that. There’s certain bits of incentives that have been extended by the OEs to assist with that, but continued strength and recognition for the runway that what Sportech sees from order backlog standpoint. So I feel like we got a good grasp of that. Is there a potential for a cycle down the road, certainly possible, but the trajectory they’ve got from an innovation standpoint and the improving share and take rate that they see platform to platform something that gives us further encouragement.

Craig Kennison: Yes. And just as a follow-up, is this a category where you might be able to convey your share gains through a content per unit like metric? Or is the unit side of that equation just too hard to pinpoint?

Kip Ellis: We’re working on just that, something we take pride in across our leisure lifestyle, what we term leisure lifestyle perform outdoor enthusiast markets now, RV and marine, in particular. Obviously, there’s less visibility of wholesale data within this particular space. And because it’s such a fast-growing and evolving platform space, the differentiation at the time of registration for retail sometimes difficult to pinpoint, but Sportech does have the ability to see line rates and see mix and on a historical basis, looked at it as well. So as we prepare to report out on a quarterly basis, what’s going on in our powersports segment, we will be assembling a look at that and continue to refine it to get a better appreciation.

But the data is a little more difficult without a question to come across, but we feel like because they serve essentially the full spectrum of players in the space they’ve got visibility of what’s going on from platform to platform.

Operator: Our next question is from Daniel Moore with CJS Securities.

Daniel Moore : Maybe just start off with kind of the near-term outlook. You mentioned H1 could look a lot like — H1 ‘24 look a lot like H2 ‘23. If we take Sportech out for the moment, how would you describe your expectations for Q1 in terms of revenue, margins, earnings relative to the Q4 results you just reported?

Andy Nemeth: Sure, Dan. This is Andy. I think as we look at where we’re running today, continuing run rates consistent with what we saw in Q4 and Q3. We’re really kind of projecting that through the first quarter. We do expect incremental margin improvement quarter-over-quarter, first quarter to first quarter, second quarter to second quarter. And so we’re kind of looking at our model today, like I said, we’re positioned very well to operate at these levels. We’ve leaned the organization to be streamlined to operate at these levels with opportunity for incremental uptick if we do see that take place in the wholesale shipments. But we’re being cautious in our modeling right now as we look at the business, but we’ve sized it appropriately.

And again, like I said, we will be able to flex that up very, very quickly, and we’re positioned well from a liquidity perspective. We’re ready to take care of our customers in the event that they do — we do see some flex up.

Daniel Moore : Very helpful. And in terms of Sportech, excluding — I appreciate the color around the charges, excluding those kind of onetime do you expect it to be accretive right away in Q1? And how do we think about the kind of impact to the full year?

Andy Nemeth: Absolutely, we expect it to be accretive, net of the onetime charges. And again, we feel like where we’re at today and what we’re seeing in the order book, we fully expect to be on plan at this point.

Daniel Moore : Got it. Maybe just kind of longer term, when you put — add Sportech layered in and along with the automation and cost reduction initiatives you’ve made, when you think about gross margin, operating margin over the next 3 to 5 years, once your kind of primary core end markets have recovered to more normal demand in shipment levels, where do you see those — where do you see kind of the opportunity or where those gross and operating margins level off over a long-term perspective? I appreciate it.