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EDITED TRANSCRIPT
PATK - Q2 2017 Patrick Industries Inc Earnings Call
EVENT DATE/TIME: JULY 27, 2017 / 2:00PM GMT
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C O R P O R A T E P A R T I C I P A N T S
Andy L. Nemeth Patrick Industries, Inc. - President
Joshua A. Boone Patrick Industries, Inc. - CFO, VP of Finance and Secretary-Treasurer
Julie Ann Kotowski Patrick Industries, Inc. - Director of Financial Reporting & IR
Todd M. Cleveland Patrick Industries, Inc. - CEO
C O N F E R E N C E C A L L P A R T I C I P A N T S
Daniel Moore CJS Securities, Inc. - MD of Research
Erin Welcenbach Robert W. Baird & Co. Incorporated, Research Division - Analyst
Rafe Jadrosich BofA Merrill Lynch, Research Division - Associate
Scott Stember CL King & Associates, Inc., Research Division - Senior VP & Senior Research Analyst
Stephen O'Hara Sidoti & Company, LLC - Research Analyst
Timothy Conder Wells Fargo Securities, LLC, Research Division - MD and Senior Leisure Analyst
P R E S E N T A T I O N
Operator
Good morning, ladies and gentlemen, and welcome to Patrick Industries Inc. Second Quarter 2017 Earnings Conference Call. My name is Cynthia,
and I will be your operator for today's call. (Operator Instructions) Please note that this conference call is being recorded.
I will now turn the call over to Julie Ann Kotowski from Investor Relations. Ms. Kotowski, you may begin.
Julie Ann Kotowski - Patrick Industries, Inc. - Director of Financial Reporting & IR
Good morning, everyone, and welcome to Patrick Industries Second Quarter 2017 Conference Call. I am joined on the call today by Todd Cleveland,
CEO; Andy Nemeth, President; and Josh Boone, CFO.
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 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 2016 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, except as required by law.
I would now like to turn the call over to Todd Cleveland.
Todd M. Cleveland - Patrick Industries, Inc. - CEO
Thank you, Julie Ann, and thank you all for joining us on the call today. This morning we'd like to discuss the Company's second quarter and six
months 2017 results and provide an update on the major markets we serve and an overall business outlook.
The second quarter 2017 carried consistent momentum from the first quarter in the form of robust demand patterns in the RV, MH and Marine
industries, and the Company's revenues and operating performance in the second quarter and the first half of 2017 was right in line with expectations.
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JULY 27, 2017 / 2:00PM, PATK - Q2 2017 Patrick Industries Inc Earnings Call
On the top line, our revenues increased 29% in the second quarter and 27% for the first 6 months over the prior year periods. On the bottom line,
our net income per diluted share in the second quarter and first half of 2017 grew 15% and 22%, respectively, over the prior year, and included the
impact of the issuance of 1.35 million shares in our first quarter equity offering.
Our results are the reflection of the continued execution of our operational, tactical and strategic growth initiatives and plans, which include the
successful execution and integration of key acquisitions and the expansion initiatives over the last 18 months, a focus on capacity planning, talent
engagement, leadership, teamwork and targeted capital deployment in aligned with our discipline capital allocation strategy.
Now I'll turn the call over to Andy, who'll further review our markets and performance.
Andy L. Nemeth - Patrick Industries, Inc. - President
Thank you, Todd. Not only did we see continued market strength in the second quarter of 2017 in our primary markets, but we also continued to
strategically leverage the strengths of our operating and financial platform in alignment with our strategic growth initiatives.
With our recent acquisition of 3 separate companies under the Leisure Product Enterprises umbrella in April 2017, and several marine-related
acquisitions prior to that, our growing presence in this market is becoming more significant, representing 7% of our second quarter sales and 5%
year-to-date. The Marine market complements our current portfolio of products and core competencies and is a natural fit within the growing
popularity of the recreational and leisure lifestyle. We also recently announced in July 2017, the acquisition of Wire Design, which complements
our existing wire harness brands and capabilities with product knowledge, design and engineering expertise, high-quality product lines and
opportunities to increase capacity and support of our growing markets.
Now let's turn to some specific statistics on each of the industries we serve.
Our sales to the RV industry represent our largest segment, accounting for 69% of our second quarter 2017 sales. This industry continues its strong
year-over-year improvement with the sixth consecutive quarter of double-digit growth in wholesale units shipped. Since 2010, the second quarter
has traditionally represented the largest number of wholesale units shipped, averaging approximately 29% of total annual shipments, and wholesale
shipments grew 15% in the second quarter over the prior year.
Leading that growth was the towable market, which represents approximately 88% of all units shipped. In line with recent trends, travel trailer
shipments led the way, increasing 18% in Q2 2017, and comprising approximately 76% of all towable units shipped.
Fifth wheel unit shipments increased 14% in the quarter versus the prior year period, marking its fourth consecutive quarter with double-digit
growth. The motorized sector of the industry, which represents approximately 12% of all RV shipments, grew 12% through the second quarter of
2016 and was led by Class Bs and Cs, which were up 19% in the quarter, while Class A shipments declined slightly in the quarter. Year-to-date, RV
wholesale unit shipments are up 13%. Comparatively on the retail side, combined domestic and Canadian retail shipments through May are up
11% versus 2016. This growth mirrors wholesale led by travel trailers and Class B and C motorhomes, increasing 13% and 24%, respectively, and
statistically points to our balanced inventories in consistency with prior year as we continue to move through the 2017 selling season.
As we previously mentioned, we have continued to expand our presence in the adjacent Marine market through acquisitions and organic growth,
beginning with the acquisition of Charleston in late 2014, followed by Better Way Products in February 2015, BH Electronics in July of last year, and
our most recent acquisition of Leisure Products in April of this year, which consists of 3 Marine component suppliers, namely Marine Concepts,
Florida Marine Tanks, and Marine Electrical Products. We believe our combination of design, engineering and manufacturing capabilities along
with our increasing geographic footprint and comprehensive product offerings bring a unique value proposition to our customers in the Marine
space, allowing brand individuality and continuing opportunities to write fully integrated solutions to the Marine OEMs.
Our sales to the Marine industry primarily focus on the powerboat sector of the market, which is comprised of 4 main categories: Fiberglass,
aluminum, pontoon, and ski and wake. In 2016, fiberglass accounted for approximately 39% of the sector, aluminum 32%, pontoon was 25% and
ski and wake was 4%.
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JULY 27, 2017 / 2:00PM, PATK - Q2 2017 Patrick Industries Inc Earnings Call
According to the National Marine Manufacturers Association, it is estimated that there are approximately 11.9 million registered powerboats in
U.S. Retail sales and wholesale shipments in this market are seasonal and are traditionally strongest in Q2 and Q3. This market has been making a
steady recovery averaging single to mid-digit annual growth rates since 2010. Powerboat retail shipments grew 9% in 2016, and through June
2017, industry data indicates the powerboat sector to be up an estimated 3% compared to the prior year period.
On the manufactured housing side of our business, MH sales represented 13% of our total revenues in the second quarter. We estimate growth in
this industry of approximately 11% compared to the prior year. The Company's industrial revenues, which represent 11% of our consolidated
revenue base in the quarter, increased 18%, reflecting both acquisition and organic growth. Residential housing starts were up 1% from the second
quarter of 2016 and 4% on a year-to-date basis.
As we head into Q3, we expect continuing strong demand patterns and consistent seasonality with prior years. In September, the RV OEMs will
hold their annual open houses for dealers, which have been a norm of the business mark for almost a decade. Coming off of a successful 2017
model year season, the model year changes for the upcoming 2018 selling season will be wrapping up in anticipation of these shows. And as a
result, we expect some potential seasonal softening in the RV industry consistent with historical trends beginning in the third quarter and extending
through October with an anticipated pickup in order rates as we head into the fourth quarter.
In early June, the RVIA revised their current full year outlook and now project RV wholesale unit shipments to surpass 472,000 units in 2017, and
to grow beyond 487,000 units in 2018, generating annual growth rates of approximately 10% and 3%, respectively. These anticipated wholesale
shipment growth rates are evidence of the continued strong affinity customers have for travel and leisure lifestyle. We remain bullish on the industry
as a whole, and as we head into the model change and dealer show season in the third and fourth quarters.
The Marine model is similar to that of the RV model as both are based on and supported by the consumer's desire for an increasingly active, outdoor,
leisure-based, family-oriented lifestyle, and we expect continued upside opportunity and potential for both continued industry growth, and for us
to continue to grow in this market strategically, organically and through expansion.
On the MH side, we are currently forecasting an approximate 15% growth in MH wholesale unit shipments for 2017, and expect to see continued
year-over-year improvement with limited risk in the near term and the industrial markets represent a breadth of product opportunities for us to
capitalize on our core competencies both through acquisition and organic market penetration. The NAHB is predicting full year 2017 housing starts
to increase approximately 5% compared to 2016.
On the expansion front, the robust growth in the RV market has led to production expansion efforts and investments from the major OEMs to meet
the increased demand, and we have and expect to continue to make investments in our workforce, facilities and acquisitions to align with and
support these efforts. Our expansion facilities in the Pacific Northwest for lamination and softwoods as well as solid surface operations in Southern
California and Mississippi are all up and running and meeting or exceeding plan.
Overall, we remain focused on driving value to the disciplined execution of our capital allocation strategy and supporting our customer's growth
initiatives through strategic investment and capital expenditures and facility improvement initiatives as we head into the second half of 2017 and
throughout 2018.
I'll now turn the call over to Josh, who will provide additional comments on our financial performance.
Joshua A. Boone - Patrick Industries, Inc. - CFO, VP of Finance and Secretary-Treasurer
Thanks, Andy. Our net sales for the second quarter increased $92 million or 29% over the prior year period to $407 million, reflecting growth in all
4 of our primary markets, the impact of acquisitions completed in 2016, and through the first half of 2017 as well as market share, geographic and
product expansion efforts. Our 2017 acquisitions of Medallion Plastics in March and of Leisure Products in April contributed approximately $18
million to our second quarter 2017 consolidated sales.
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JULY 27, 2017 / 2:00PM, PATK - Q2 2017 Patrick Industries Inc Earnings Call
Our RV revenues were up 23% in the second quarter, reflecting an increase in wholesale shipments of 15%. On a trailing 12-month basis, our RV
content per unit increased 9% from $1,930 per unit to $2,103 per unit. On the Marine side, our revenues nearly quadrupled versus the prior year
and represented 7% of our second quarter 2017 sales, up from 4% in the first quarter. Our MH revenues increased 30% for the quarter on estimated
unit shipment improvement of 11%. Our MH content per unit on a trailing 12-month basis increased an estimated 16%, from $1,827 per unit to
$2,115 per unit. And finally, our industrial revenues were up 18% in the quarter. The increased industrial revenues were driven by a 1% increase in
new housing starts in the second quarter, the acquisitions we completed in 2016 and in the first half of 2017 and our continued focus on leveraging
growth synergies across the organization, product portfolio expansion and the entrance into new markets and geographic regions.
Our gross margin in the second quarter was 17.6%, up 10 basis points from 2016. The gross margin was positively impacted in the quarter by the
leveraging of our fixed costs on increased revenues and synergies related to acquisitions, offset by the negative impact of higher labor costs as we
continue to combat the tight labor market in the Midwest.
Operating expenses increased to 9.3% of sales in the second quarter of 2017 compared to 8.7% in the prior year. Warehouse and Delivery declined
20 basis points, and SG&A increased as a percentage of net sales to 5.4% from 4.7% in the second quarter of 2016. Intangible asset amortization
increased 20 basis points as a result of our continued acquisition activity.
Factors contributing to the higher SG&A in both the second quarter and the first 6 months of 2017, include the investments made in certain
leadership roles and employee talent and retention to support our continued strategic growth plans for 2017 and beyond. Additionally, as previously
discussed, certain acquisitions completed in 2016 and 2017 have a higher SG&A expense profile relative to Patrick's overall SG&A expense profile.
Operating income increased $6 million or 20% in the second quarter compared to the prior year. Operating margins in the second quarter were
8.3% compared to 8.9% in 2016, primarily due to the factors previously described.
Our net income per diluted share in the second quarter of 2017 was up 15% to $1.28 compared to $1.11 in the prior year. The 15% increase included
the impact of the additional shares issued related to the equity offering in the first quarter of 2017. Absent the additional shares, net income per
diluted share would have increased 25% compared to the second quarter of 2016. The adoption of the new accounting standard related to
share-based payments resulted in an increase to our previously reported second quarter 2016 net income and net income per diluted share of
$300,000 and $0.01, respectively. The comparable amounts for the second quarter of 2017 favorably impacted net income by $900,000 and $0.05
per diluted share, respectively.
Now turning to the balance sheet. Our total assets increased approximately $154 million from December 31, 2016, primarily reflecting the growth
in our business, the addition of acquisitions and the related seasonal working capital ramp-up in the first half of the year. Our leverage position
relative to EBITDA was at 1.5x at the end of the second quarter, down from just under 2x at the end of 2016. Unused availability under our current
facility, including cash on hand at the end of the first 6 months of 2017, was approximately $196 million. For the first 6 months of 2017, we generated
approximately $19.4 million of operating cash flows compared to $19 million in the first 6 months of 2016. Cash flows in the first half of the year
were impacted by normal seasonal increases in working capital to support the strong revenue growth. In addition, due to the timing of the end of
our fiscal quarter compared to the payment cycles of certain of our customers, cash flows from operating activities do not reflect the receipt of
approximately $25 million in cash payments related to trade receivables within the days following the end of our fiscal quarter.
Our capital spending in the first half of 2017 of approximately $9 million, focused on strategic investments in capacity and geographic expansion,
increased efficiencies as well as new process and product development. For the full year 2017, we are currently estimating our capital expenditures
to be approximately $16 million with the potential increase of another $4 million identified for capacity and expansion efforts to support the
continued strength and momentum in our markets.
Finally, on the stock repurchases front, there were no share repurchases in the second quarter of 2017. We intend to continue to evaluate and
strategically consider share repurchases for the remainder of 2017.
That completes my remarks. Todd?
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JULY 27, 2017 / 2:00PM, PATK - Q2 2017 Patrick Industries Inc Earnings Call
Todd M. Cleveland - Patrick Industries, Inc. - CEO
Thanks, Josh. Overall, we remain optimistic about the expected continued industry growth and potential, both throughout the remainder of 2017
and 2018 and beyond, as we look ahead to leveraging our solid financial talent and servant leadership platform in strengthening our position in
the markets we serve. We're focused on increasing our product offering and value proposition to our customers as we further expand our presence
in all of our primary markets and continue to build on the momentum of the industries we serve. Positive demographics, strong retail trends and
demands in the family-oriented leisure and recreational lifestyle markets, improving consumer credit, equity market strength and resilience and
consumer confidence all play a significant role in the ongoing growth we anticipate.
In addition, the strategic acquisitions we made in 2016 and thus far in 2017, both increased our scale in existing markets and further opened doors
to new markets within our geographic footprint, most recently within the Marine arena. Our acquisition pipeline continues to be full with acquisition
opportunities across all 4 of the primary markets we serve, and we have the wherewithal and capacity to continue to grow our business and bring
new, innovative product lines to our existing customer base and to customers we've not yet reached.
Our disciplined execution goals continue to be focused around driving our organizational strategic agenda in utilizing our capital allocation strategy
to strategically grow our business, increase our customer awareness for the breadth of products we provide, make investments in our workforce
and capacity initiatives both to support and grow our businesses and brands and drive shareholder value. I'm confident in the ability of our team
members to continue to execute on our strategic plan.
In addition, the ongoing support we receive from our customers, 6000-plus team members, suppliers, Board of Directors, banking partners and
our shareholders who we're privileged to serve, have afforded us the opportunity to strive for our goals of providing the highest level of quality,
service and shareholder value.
This is the end of our prepared remarks. We're now ready to take questions.
Q U E S T I O N S A N D A N S W E R S
Operator
(Operator Instructions) And our first question comes from Scott Stember with CL King.
Scott Stember - CL King & Associates, Inc., Research Division - Senior VP & Senior Research Analyst
Good morning guys and congratulations on another great quarter. Can you guys just give what the total incremental acquisition revenues were
in the quarter? And what the organic sales growth was?
Joshua A. Boone - Patrick Industries, Inc. - CFO, VP of Finance and Secretary-Treasurer
Yes. Scott, this is Josh. So for -- our acquisitions completed in 2017, we had $18 million in revenues for the quarter. Our organic growth for the
quarter was 15%, including industry growth. And if we backout industry growth, we had market share organic growth of 3%. So really strong quarter
for us on the top line, including our organic growth.
Scott Stember - CL King & Associates, Inc., Research Division - Senior VP & Senior Research Analyst
Got it. And it clearly looks like some of the de-contenting issues that we've seen over the last 1.5 years are starting to abate, fifth wheel shipments
are picking back up. Can you maybe just talk about your thoughts about that as we head into the second part of the year?
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JULY 27, 2017 / 2:00PM, PATK - Q2 2017 Patrick Industries Inc Earnings Call
Todd M. Cleveland - Patrick Industries, Inc. - CEO
Yes. Scott, this is Todd. Yes, we've seen stronger shipments definitely on the fifth wheel side while the low-end towables, we feel we're still going
to be a significant part of the market and continue to grow. The fifth wheels have definitely continued to rebound. So we're pretty happy with the
way things are coming together overall from a shipment standpoint.
Scott Stember - CL King & Associates, Inc., Research Division - Senior VP & Senior Research Analyst
Got it. And on the operating margins, are we still thinking as in last quarter that we could be up 30 to 50 basis points by the end of the year?
Joshua A. Boone - Patrick Industries, Inc. - CFO, VP of Finance and Secretary-Treasurer
So Scott, this is Josh. Yes, we expect margin expansion for the second half of the year on the operating line. In the quarter, we had some impact
still from the labor component that's starting to abate significantly with investments that we've made. We probably had about 20 basis points in
the quarter impact on the labor line, impacting our margin. We expect that to continue to decrease throughout the remainder of the year. But we
would expect absent the 20 basis points impact to the labor that we're going to experience on an annualized basis this year that we could get to
30 to 50 basis points for the 2017.
Scott Stember - CL King & Associates, Inc., Research Division - Senior VP & Senior Research Analyst
So that's including or not including the labor issues?
Joshua A. Boone - Patrick Industries, Inc. - CFO, VP of Finance and Secretary-Treasurer
Not including. 30 to 50 bps, not including the labor impact. That would offset that.
Scott Stember - CL King & Associates, Inc., Research Division - Senior VP & Senior Research Analyst
Okay, got it. And just one last final one, and then I'll jump back in the queue. Maybe just talk about the boat side, or the Marine side. It clearly --
you're building up some very nice synergies there, maybe just talk about the margin profile of this business versus the RV, industrial, and MH and
some of the opportunities going forward?
Andy L. Nemeth - Patrick Industries, Inc. - President
Scott, this is Andy. We're very excited about the Marine space. There's a lot of similarities with what we see in the RV space related to vertical
integration opportunities at the customer level for us to be able to continue to provide value and quality solutions and fully integrated solutions
to the OEMs. So we're very excited about that. As it relates to the margin profile, overall, we would say that we view the margin profiles as accretive
to overall Patrick consolidated numbers and opportunities. So again, I think that there is continued expansion opportunity there, organically,
through acquisition and as well on the margin side.
Scott Stember - CL King & Associates, Inc., Research Division - Senior VP & Senior Research Analyst
Great. That's all I have. Thank you.
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JULY 27, 2017 / 2:00PM, PATK - Q2 2017 Patrick Industries Inc Earnings Call
Operator
And our next question comes from Daniel Moore with CJS Securities.
Daniel Moore - CJS Securities, Inc. - MD of Research
Good morning. Thanks for taking the questions. Just wanted to touch in -- drill down a little bit on your comments regarding Q3, you mentioned,
typical seasonal slowing in Q3 through the October timeframe as we get into new models and the RV open house, do you still expect shipments
to be up year-over-year? Just wanted to kind of see if we can drill down on that statement a little bit?
Andy L. Nemeth - Patrick Industries, Inc. - President
Dan, this is Andy. Yes, we expect shipments to be up. There's a little bit of choppiness in Q3 related to the show season. We've also got less days in
the quarter. So we look at Q3, things do slow up a little bit as the OEMs get units ready for the shows. And so again, I think we're going to see
continued strong demand, continued improved shipment levels, but we're heading into kind of that Q3 timeframe where we do see things kind
of pull back just a little bit.
Daniel Moore - CJS Securities, Inc. - MD of Research
So slowing growth but still positive growth year-over-year?
Andy L. Nemeth - Patrick Industries, Inc. - President
Yes.
Daniel Moore - CJS Securities, Inc. - MD of Research
Got it. That's helpful. Any sense for your revenue growth for the month of July?
Andy L. Nemeth - Patrick Industries, Inc. - President
We really don't give forward guidance on that, Dan, but what I would tell you is that everything is according to plan right now as it's related to Q3
and our expectations.
Daniel Moore - CJS Securities, Inc. - MD of Research
Got it. And on the margins in Q2, you touched on SG&A, gave a lot of color around labor. Anything else unusual? You've obviously completed some
larger acquisitions, any sort of one-time items or costs that you might call out in the SG&A line in Q2?
Joshua A. Boone - Patrick Industries, Inc. - CFO, VP of Finance and Secretary-Treasurer
Yes. Dan, this is Josh. With the acquisition of Leisure Products relatively larger on the acquisition scale for us, we did have some one-time costs
related to the transaction costs associated with it and purchase accounting. To the tune of about $500,000 or $0.02 of EPS in the quarter, and that
was actually split closer to gross margin and SG&A. So it impacted both gross margin and SG&A.
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JULY 27, 2017 / 2:00PM, PATK - Q2 2017 Patrick Industries Inc Earnings Call
Daniel Moore - CJS Securities, Inc. - MD of Research
Got it. Helpful. And we talked about Marine, can you just spend a minute and talk -- just reminding us -- you've cobbled together -- the really
interesting overall solution products set. Just tell us where exactly you are playing in Marine? What your content per boat looks like, if you have
that type of data available? And is 7% a reasonable proxy or run rate for the overall percentage of revenues that is now embedded in the Marine
space? Thanks.
Joshua A. Boone - Patrick Industries, Inc. - CFO, VP of Finance and Secretary-Treasurer
Dan, I'll comment first on that. So our revenues for the quarter on the marine side was 7% of sales, up from 4% in Q1 and little over 2% the prior
year. But we didn't feel the full effects of Leisure Products in the quarter. So on a go-forward basis, I think it'd be still high single digits, but closer
to 8% to 9% on a full annualized basis. When we released -- when we did the acquisition of Leisure Products, we talked about annualized revenues
in the Marine space of $125 million at time of acquisition, so closer to that 8% to 9%.
Andy L. Nemeth - Patrick Industries, Inc. - President
Dan, this is Andy. I'll just add on a little bit to that. We expect growing contribution from the Marine space as we continue to head forward. There's
a lot of opportunity. We're really in the early stages of what I would call the Marine model development related to, again, the opportunities that
are there, us to be able to continue to expand our footprint. Right now, we're playing in the fiberglass, electronics, dash panel, product space. We're
also -- with Leisure Products we picked up, fuel tanks as well as tooling design and much more fiberglass capabilities and capacity as well as design
engineering expertise for us to be able to really bring value to the Marine OEMs related to, again, that fully integrated product line. And so again,
we feel like there's a lot of opportunity there. As it relates to content per boat, we're really -- we haven't accumulated that yet, we're in the process
of putting that together. But our Marine model is really in the early stages of development at this point.
Daniel Moore - CJS Securities, Inc. - MD of Research
Got it. Helpful. And then lastly, as that feeds in to, that's obviously been a big area focus of M&A. You've already essentially put the proceeds of the
recent equity offering to work. What is the pipeline look like going forward? Is Marine the primary, sort of the paramount in terms of likelihood for
further deals? And are there larger deals in the pipeline that you could execute over the next 6 to 12 months? That's it. Thanks.
Todd M. Cleveland - Patrick Industries, Inc. - CEO
Yes. Dan, this is Todd. Yes, our pipeline is full and really full in all of the markets that we serve. So we've been sifting through a number of potential
acquisitions, both small and large through the first half of the year. And obviously, we've executed on a number of them. The opportunities continue
to be extremely strong. And we're really excited about the potential not only in the Marine industry but also in the other industries we serve. And
I'd just add on top of that, probably the thing that gets me most excited is our ongoing opportunities that we have, we've expanded through
acquisition over the past 4 or 5 years, pretty regularly, but as you've seen our organic growth and our expansions through regional locations has
improved, along with the team's ability to execute on other areas of our capital allocation strategy, including strategic CapEx to eliminate bottlenecks
and also reduce labor cost has been put into play. And those are all things that we've preparing for really for the latter part of '16 and through '17
here, and we're really looking forward to seeing that -- those pieces continue to contribute along with our acquisitions.
Daniel Moore - CJS Securities, Inc. - MD of Research
Got it. Appreciate the color. Congrats again on another quarter of solid growth. Appreciate it.
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JULY 27, 2017 / 2:00PM, PATK - Q2 2017 Patrick Industries Inc Earnings Call
Operator
And our next question comes from Rafe Jadrosich with Bank Of America.
Rafe Jadrosich - BofA Merrill Lynch, Research Division - Associate
I just want to follow-up on the M&A question. Can you just talk about your capacity to pursue further M&A? I think that the LPE acquisition was
obviously a little bit bigger than ones you've done in the past. Can you just talk about the capacity you have going forward?
Andy L. Nemeth - Patrick Industries, Inc. - President
Yes. Rafe, this is Andy. We have a lot of capacity. One of the reasons that we went forward with our equity offering and the expansion of our credit
facility in the first quarter was to really position ourselves to be able to take advantage of the strong pipeline that Todd had referred to. And so we
had a lot of -- we had acquisitions in our sights kind of as we kind of moved through Q1 and Q2. Certainly, we've got tremendous opportunity with
the full pipeline today to be able to continue to execute consistent with what we've done in the past. And so we'll tell you that our view is that
we've got ample dry powder to be able to continue on our strategic plan.
Rafe Jadrosich - BofA Merrill Lynch, Research Division - Associate
Okay. And then just on the gross margin outlook for the rest of the year. Can you just give us some color on how we should think about the labor
market tightness that you've spoken about, when we start to maybe lap that? And then the input cost outlook in some of the labor efficiency
initiatives that you've had?
Joshua A. Boone - Patrick Industries, Inc. - CFO, VP of Finance and Secretary-Treasurer
Yes. This is Josh. So we'll start to lap kind of the labor inefficiency impact we felt in Q3. That's when we really started to feel the impact of that last
year with the strong shipments we felt in Q3 of last year. So we're lapping that from a comp standpoint. And so we got the benefit of that and also
the investments we've made in capacity and strategic CapEx to abate those, the labor impact, that tight labor market. So we should still -- we should
see the impact of that year-over-year in Q3 and Q4 as we proceed throughout the rest of the year. As far as the input cost, the commodity prices
have ticked up a little bit and we are seeing that, but we don't expect a material impact on the margin line associated with that.
Rafe Jadrosich - BofA Merrill Lynch, Research Division - Associate
Just for the back half of the year, would that -- when you put that all together, should we expect gross margins to be up slightly?
Joshua A. Boone - Patrick Industries, Inc. - CFO, VP of Finance and Secretary-Treasurer
We would. On a year-over-year basis.
Operator
And our next question comes from Erin Welcenbach with Robert W. Baird.
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JULY 27, 2017 / 2:00PM, PATK - Q2 2017 Patrick Industries Inc Earnings Call
Erin Welcenbach - Robert W. Baird & Co. Incorporated, Research Division - Analyst
Good morning. Thanks for taking my questions as well. My first question is just related to what you're hearing from your OEM and other industry
contacts in terms of dealer inventory levels and retail sell-through?
Todd M. Cleveland - Patrick Industries, Inc. - CEO
This is Todd. I'll take that one. We've heard really nothing but positive coming out of the OE's. Obviously, they've continued to add facilities to take
care of retail demand. And just as recently, as I think last week or the week before, Thor announced a further expansion on their side, on the
motorized side. So we're seeing continued facility expansion to take care of retail demand. And really if you take a look at the retail pull throughs
thus far through the statistics that we have, we're right on track or exceeding past trends as it relates to retail demand as far as keeping up or
exceeding in the last couple of months that of the OEM manufacturing. On top of that, I think the other thing -- the other delta that has come into
play is that the Canadian market has continued to strengthen. And as a result, they were down significantly last year year-over-year, and their
demands and retail demand has strengthened. So that's -- it's a solid plus for things on the retail side.
Erin Welcenbach - Robert W. Baird & Co. Incorporated, Research Division - Analyst
Great. I just want to dig into your recent acquisition of Wire Design a bit. Do you see any opportunities to get into wire harness manufacturing for
other industries in addition to the Marine market?
Todd M. Cleveland - Patrick Industries, Inc. - CEO
Yes, this is Todd again. We definitely do. We've got, over the course of the last, I guess 1.5 years here, we've assembled a group of companies that
actually -- we have intentions of kind of synergizing, and definitely one in particular, KRA, which came in last year offers us the opportunity to
definitely have the inroads to go into other markets. Obviously, we're going to be extremely supportive of the existing industries that these
businesses are supporting currently, but we believe there are some true opportunities to expand that in the months and years ahead.
Erin Welcenbach - Robert W. Baird & Co. Incorporated, Research Division - Analyst
Great. Thanks for taking my questions.
Operator
And our next question comes from Tim Conder with Wells Fargo.
Timothy Conder - Wells Fargo Securities, LLC, Research Division - MD and Senior Leisure Analyst
Thank you and congrats gentlemen. A couple of items. Todd or Andy, who ever wants to take this. Last year, there really wasn't a pause in the
September, October period and you alluded to that there could be this year. But given the ongoing strength of the market, what would you say,
if you want to put a probability to it, is there the potential where there might not be again that much of a pause this year?
Todd M. Cleveland - Patrick Industries, Inc. - CEO
I think that's definitely the case. I mean a lot depends on some of the retail numbers that come in, in June and July here. We're anticipating them
being strong. I think what Andy was alluding to is that from a year-over-year comp standpoint, even if you take a look at last year's numbers, I mean
they were up significantly for us. So we're anticipating those numbers to be up, again, this year. I think what we were -- or what Andy was talking
and referring to more was just seasonality trends that we see after an extremely strong shipment that we see in usually Q2. So we definitely think
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JULY 27, 2017 / 2:00PM, PATK - Q2 2017 Patrick Industries Inc Earnings Call
that as long as retail stays strong, which we anticipate, we're definitely looking at a quarter-over-quarter gain in line with what we've seen thus far
this year.
Andy L. Nemeth - Patrick Industries, Inc. - President
Tim, this is Andy. I'll just add a little bit more color as well. Last year, August, September shipments were up 30%-plus and 20% respectively. We
expect to see increased shipments, I don't know that we're going to see those type of numbers at this point. We're certainly planning and really
working on capacity to be able to position ourselves well for that, but I don't think we're going to see those types of increases this year. We do
expect increase year-over-year though.
Timothy Conder - Wells Fargo Securities, LLC, Research Division - MD and Senior Leisure Analyst
Okay, that's helpful. And then given what you're seeing at this point and then starting on the new model years both for RV and Marine, what type
of general pricing increases are you able to get at this point?
Todd M. Cleveland - Patrick Industries, Inc. - CEO
Yes. Tim, this is Todd. We don't go out with just general price increases, but we have passed along price increases related to raw material cost and
also labor cost. So we've managed things in partnership with the OE's, both on the Marine and RV side in a way that we hope it's a win-win for both
of us. And -- but we did obviously, and have like we normally do, adjust pricing accordingly based on raw material and labor challenges that we
are faced with.
Timothy Conder - Wells Fargo Securities, LLC, Research Division - MD and Senior Leisure Analyst
Okay. And then -- and, Todd, you alluded to that you're going to be lapping here the labor cost increases and with the measures that you've put
in place with CapEx and some other programs. How are you planning on a go-forward basis here? Any additional programs, measures to, I guess,
get out even more in front of that? And then in conjunction with that question, do you anticipate any additional new geographic manufacturing
shifts coming up here looking to '18 even out into '19 or so?
Todd M. Cleveland - Patrick Industries, Inc. - CEO
Yes, so I think -- first of all, when you take a look at our labor situation, I think we're going to have ongoing, as long as there's expansion, we're going
to have ongoing labor challenges that we're going to have to face as a management team. I think the initiatives that we took starting back almost
2 years ago from a talent engagement and from a talent retention standpoint has started to take hold. Obviously, we've made significant investments
in leadership within the organization that has been important for us to guide and get our principles and values, spread across the organization.
So on a softer side, I think that's going to be the key for us to maintain and kind of stay ahead of the labor game. But I do think, again, there's a
finite number of individuals that are in these areas, and we've got to create the company of choice, so to speak, so that we're getting the best talent
and the talent that we need in order to be the best supplier that we can be for our customers. From an overall expansion standpoint, obviously,
we've made some geographic expansions starting a little over a year and a half ago in some areas. And I do think that the OE's will continue to
spread their expansions into those regions. Honestly, I would be surprised if anybody opens up a new hub in the years to come, but it could happen.
But I think when you look across the country and the opportunities that we have as an organization, we can continue to deploy additional product
lines into the regional hubs that serve not only the RV but the Marine space and the manufactured housing space to alleviate some of the pressures
that we're seeing here in the Midwest, and obviously those are things that we have underway and plan to continue to undertake.
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JULY 27, 2017 / 2:00PM, PATK - Q2 2017 Patrick Industries Inc Earnings Call
Timothy Conder - Wells Fargo Securities, LLC, Research Division - MD and Senior Leisure Analyst
Okay. And then lastly, gentlemen, as it relates to -- you talked about CapEx. Along with those plans should we anticipate CapEx as a percentage of
revenue materially changing? And I guess, looking more over the next 2 to 3 years what I guess would be the time frame of that question?
Joshua A. Boone - Patrick Industries, Inc. - CFO, VP of Finance and Secretary-Treasurer
So, this is Josh. No, we would not expect CapEx as percentage of sales to materially change. We set out the year with a $16 million target. And in
our prepared remarks, we talked about that's our current estimate, but we're prepared to flex that by an additional $4 million, with what the strong
demand we're seeing in all our primary markets. So right now, I would say that we're looking at $16 million to $20 million this year with an incremental
$4 million specifically identified on our capacity expansions to make sure that we're best positioned to handle the strength in the markets and to
continue to combat the labor component of that too. As far as ongoing 2018, 2019 beyond, again, I wouldn't expect it to materially change as a
percentage of sales, and I wouldn't expect it to grow proportionally either. So we'd expect it potentially to decrease slightly as we grow revenues
for those years and beyond.
Timothy Conder - Wells Fargo Securities, LLC, Research Division - MD and Senior Leisure Analyst
Thank you very much.
Operator
(Operator Instructions) And our next question comes from Steve O'Hara with Sidoti.
Stephen O'Hara - Sidoti & Company, LLC - Research Analyst
Hi. Good morning. Just wanted to just go back to the Marine market, again. Just wondering -- I mean, it seems like the market has come off its
bottom but the market itself doesn't appear to have grown the way RVs have, and I'm just wondering -- I mean do you -- is the thought that at
some point you could see higher growth here? Or is it about being able to cross-sell into other markets? I'm just wondering what the long-term
strategy is in Marine when it appears to be a lower growth market.
Andy L. Nemeth - Patrick Industries, Inc. - President
Steve, this is Andy. As it relates to kind of our vision into the Marine market, it's been growing at single to mid-single digit rates over the last several
years. We see, again, continued upside potential as it relates to that. I think slow and steady growth has been our model really in all of the markets
we serve, and we're well positioned to support that because we believe that we bring a nice value proposition. And so as we look into the Marine
market today, it's highly fragmented. We think that our branding model and value proposition allows us great opportunity to continue to put
together some great partnerships, with the marine OEMs to be able to support them. And so we see strategic growth upside potential. We see
expansion opportunity potential to grow organically, and then on top of that, that slow and steady growth in that particular space as it relates to
just general industry growth. So we think the overall value proposition provides a nice long-term view and platform for us to continue to execute
on. So again, that's how we're thinking about it, similar to the way we look at our other markets.
Stephen O'Hara - Sidoti & Company, LLC - Research Analyst
Okay. and just can you -- did you say what your growth was relative to -- I guess organic growth relative to the industry's growth? I mean, I know
you guys do a pretty good job of growing above industry rates in some of the other categories. Is that true for Marine or maybe you don't have
the scale yet?
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JULY 27, 2017 / 2:00PM, PATK - Q2 2017 Patrick Industries Inc Earnings Call
Joshua A. Boone - Patrick Industries, Inc. - CFO, VP of Finance and Secretary-Treasurer
So we don't -- this is Josh. We don't break out organic growth by industry per se. Our Marine revenues quadrupled, but it was off a low base from
last year. A lot of that was acquisition driven as we're really just feeling the effects of leveraging the marine acquisitions that we've acquired over
the last, call it, 12 months -- 12 to 18 months. And so -- but on a consolidated basis, our organic revenues were up 15%. So exceeding the market
weighted average for us, and we would expect that trend to spill over on the Marine side now that we've acquired Leisure Products and BHE and
we've leveraged that platform to continue to execute on it like we've done the RV side.
Stephen O'Hara - Sidoti & Company, LLC - Research Analyst
Okay. Thank you very much.
Operator
And our next question comes from Scott Stember with CL King.
Scott Stember - CL King & Associates, Inc., Research Division - Senior VP & Senior Research Analyst
Just a follow-up question on the tax rate going forward. I know it's probably difficult to forecast what it'll be just depending on option grants and
when they actually are executed. But is there a number that we could use from a modeling standpoint. 37% seems to have been the rate going in
past years, but obviously, so far this year we're well below that. Maybe just give us a little sneak peak into what you're thinking?
Joshua A. Boone - Patrick Industries, Inc. - CFO, VP of Finance and Secretary-Treasurer
Yes, Scott, this is Josh. Obviously, for the quarter, we had a lower effective tax rate with the stock comp tax benefit associated with the options, it's
at 33%. Absent that, we would've been able to slightly under 36% for the quarter, and 36.25% year-to-date. So absent any other exercise of options
to get the stock comp benefit, we would be -- I would anticipate 36.25% for the remainder of the year.
Scott Stember - CL King & Associates, Inc., Research Division - Senior VP & Senior Research Analyst
Got it. That's all I have. Thanks.
Operator
And we have no further questions at this time. I would like to return the presentation back over to Julie Ann Kotowski.
Julie Ann Kotowski - Patrick Industries, Inc. - Director of Financial Reporting & IR
Thanks, Cynthia. We appreciate everyone for being on the call today, and look forward to talking to you again at our third quarter 2017 conference
call. A replay of today's call will be archived on Patrick's website, www.patrickind.com, under Investor Relations. I'll now turn the call back over to
our operator.
Operator
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.
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JULY 27, 2017 / 2:00PM, PATK - Q2 2017 Patrick Industries Inc Earnings Call
Editor
Company Disclaimer
This audio event contains certain statements related to future results, our intentions, beliefs and expectations or predictions for the future, which
are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements
involve a number of risks and uncertainties that could cause actual results to differ materially from either historical or anticipated results depending
on a variety of factors. Potential factors that could impact results include: the impact of any economic downturns especially in the residential
housing market, a decline in consumer confidence levels, pricing pressures due to competition, costs and availability of raw materials, the imposition
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availability of commercial credit, the availability of retail and wholesale financing for residential and manufactured homes, the availability and costs
of labor, inventory levels of retailers and manufacturers, the financial condition of our customers, retention and concentration of significant
customers, the ability to generate cash flow or obtain financing to fund growth, future growth rates in the Company's core businesses, the seasonality
and cyclicality in the industries to which our products are sold, realization and impact of efficiency improvements and cost reductions, the successful
integration of acquisitions and other growth initiatives, increases in interest rates, oil and gasoline prices, adverse weather conditions impacting
retail sales, our ability to remain in compliance with our credit agreement covenants, and general economic, market and political conditions. In
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The Company does not undertake to update forward-looking statements, except as required by law. Further information regarding these and other
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JULY 27, 2017 / 2:00PM, PATK - Q2 2017 Patrick Industries Inc Earnings Call