Patrick Industries, Inc. (NASDAQ:PATK) Q4 2022 Earnings Call Transcript February 9, 2023
Operator: Good morning, ladies and gentlemen, and welcome to Patrick Industries’ Fourth Quarter 2022 Earnings Conference Call. My name is Latanya, and I’ll be your operator for today’s call. At this time, all participants are in a listen-only mode. 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; and Jake Petkovich, 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 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 2021 and then 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, ladies and gentlemen, and thank you for joining us on the call today. As we reflect on another year of record operating results and financial performance in 2022, we want to, first and foremost, recognize our team’s incredible dedication and tireless commitment to manage our business and serve our customers in-light of some of the most dynamic market conditions across each of our end markets in recent memory. Fiscal 2022 was the tale of two halves, as we’ll talk about, and we see the third and fourth quarters and full-year 2022 is proof that our plan to build a stronger and more diversified company is working and driving margin and operating resilience. In the first half of 2022, demand trends across all end markets were solid, although economic headwinds were building.
In the second half, we began to see these trends shift in the RV industry with a significant decline in RV production as the OEMs pulled back in recognition of balanced dealer inventories. Our RV OEM customers further evidenced their tremendous scalability, reducing output by 48% versus the prior six-month period to address slowing retail demand. During the same period, we continue to drive and our marine and housing businesses remained resilient, bolstering our margins while we scaled our RV business in alignment with our revenues. It was the second half of the year that we believe proof tested the Patrick model and the strategies we’ve been executing over the last several years, namely the strategic diversification of our portfolio and intentional and opportunistic capital allocation strategy and investments in automation and infrastructure while maintaining a strong balance sheet.
The strength and success of the Patrick model can be demonstrated by comparing 2022 to 2017, where shipments in 2017 were 505,000 units. And this year, we finished at 493,000 units. Over the past five years, our RV sales as a percent of total Patrick revenue went from 69% in 2017, down to 53% last year, and our marine revenues went from 7% of our sales to 21% during the same period. Our net sales grew 198% from 1.6 billion in fiscal year 2017 to 4.9 billion for fiscal year 2022. Our gross margin widened 460 basis points going from 17.1% to 21.7%, and our operating cash flow quadrupled from 99 million to 412 million in 2022. Our adjusted EBITDA went from 165 million to 643 million and our adjusted EBITDA margin went from 10.1% to 13.2%. Despite the challenges we faced in 2022, it was a great year for Patrick, and we are proud of the results that our team produced.
In 2023, we will continue leveraging our investment and diversification strategy and expect these investments to add durable value to our portfolio of businesses. Our liquidity profile remains strong as we close 2022. We strategically increased our access to capital through the expansion of our revolver in the third quarter, and we are monetizing working capital and generating solid free cash flow, which gives us ample resources to continue to execute on our capital allocation strategy and allows us to better navigate the headwinds we may face in the coming year. Our confidence in the future is reflected in our decision to increase our quarterly dividend and share repurchase authorization in the fourth quarter. We are prepared for 2023 to be just as or even more dynamic than 2022 and stand ready from a position of strength to take advantage of the opportunities that present themselves and to face whatever challenges the year brings and navigate the myriad of scenarios we may see in the new year.
Macroeconomic factors, as Jeff will discuss, will likely continue to impact consumers in 2023. However, we are committed to maintaining and leveraging the of our structure, effectively balancing the ability to efficiently meet our customers’ needs, while maintaining a healthy balance sheet with strong liquidity. And finally, highlighting our financials. Our fourth quarter revenues of 952 million decreased 17% or 196 million. Our net income for the quarter declined 34% to 40 million, and we earned $1.68 per diluted share. Our full-year revenue was 4.9 billion, notching an increase of 20% or $804 million. Net income for the full-year increased 46% to 328 million, and we earned $13.49 per diluted share. This represents a 40% improvement year-over-year despite the noncash reduction of $1.15 per share for the accounting treatment of our convertible notes.
I’ll now turn the call over to Jeff Rodino, who will highlight the quarter and provide more detail into our end markets.
Jeff Rodino: Thanks, Andy, and good morning, everyone. In general, there are a few overarching themes to our leisure lifestyle and housing end markets. Rising interest rates continue to prevail as economically sensitive consumers are being impacted. Alternatively, general unemployment remains low and higher-end products across markets are proving resilient. Inventories across our end markets are either in balance with estimated new normal levels or not sufficient to meet demand and therefore, providing runway for the long-term. We believe that the end consumer of our products will ultimately recalibrate to new norms and continue to invest in leisure lifestyle and housing markets. As expected, conditions in the RV industry continued to soften from third quarter into the fourth quarter as OEMs scale their businesses.
Our fourth quarter RV revenues decreased 39% to 411 million, representing 43% of consolidated sales. RV wholesale unit shipments of approximately 78,000 decreased 47% as OEMs continue to adjust output in an effort to better manage dealer inventories in alignment with the estimated reduced new normal levels. The drop in shipments was driven by an estimated 23% decline in RV retail demand in the quarter, which not only faced challenging macroeconomic headwinds, but also a tough comparison to a record-breaking RV market in the fourth quarter of 2021. From a dealer inventory perspective, the metrics we have outlined imply a net increase of approximately 7,900 units in the quarter, our estimates indicate that TTM dealer inventory weeks on hand at the end of the fourth quarter were approximately 19 weeks to 21 weeks, up slightly from 18 weeks to 20 weeks from our estimates at the end of the third quarter and below historical pre-COVID levels of approximately 26 weeks to 30 weeks.
The long-term prognosis for the RV industry is favorable supported by consumer interest in the leisure lifestyle and by the favorable shift in RV buyer demographics towards younger buyers. Our investments in infrastructure and automation over the past 30 months have improved and stabilized our operating model in an effort to provide manufacturing flexibility for our customers, while maintaining a strong financial profile. On the Marine side of our business, OEMs continue to work towards replenishing depleted inventory levels. Our marine revenues increased 35% to 255 million and represented 27% of our fourth quarter consolidated sales. Market share gains, acquisitions, and pricing all contributed to the strong performance. We estimate industry wholesale unit shipments increased 11%, while retail unit shipments declined an estimated driven by a combination of economic headwinds and inadequate inventories of certain units on dealer lots.
Restocking efforts are ongoing in marine and dealers continue to make progress on improving their inventory health. We estimate overall marine dealer inventories are 14 weeks to 16 weeks on-hand increased from the third quarter but levels well below historical pre-pandemic averages of 35 weeks to 40 weeks. Macroeconomic headwinds similar to those in the RV market appear to be impacting marine demand, particularly on lower-end units, but below historical normal dealer inventory should help bolster OEM production throughout most of 2023. We believe high-end fiberglass, ski and wake, and saltwater boats which our mix is more oriented towards and we have higher content in have slightly more favorable dealer inventory replenishment profile than some other segments of the industry.
Revenues in our housing market sector, primarily tied to MH and single and multifamily residential housing were essentially flat at 285 million, represented 30% of our consolidated sales in the fourth quarter. MH estimated wholesale unit shipments decreased 12%. While MH consumers tend to be more economically sensitive, we believe the affordable housing value proposition remains a viable and cost-effective long-term alternative to site-built housing. Total residential housing starts for the fourth quarter decreased 16% with single-family starts down approximately 26% and multifamily starts up 8%. Interest rates are impacting housing markets currently across all sectors. However, consistent with our marine business, there remains a shortage of housing inventory in the country.
And further, we see MH and multifamily development as an important piece to help solve our country’s affordable housing shortage. We want to highlight some of the examples of our continuous improvement initiatives and investments that allow us to become even more nimble, while creating high-value products. For example, we’ve been identifying plans to improve potentially and processes and easy wins within our existing operations. This includes the adoption of advanced and take manufacturing equipment in some of our facilities to increase capacity potential while providing higher-quality products and improving manufacturing efficiencies. Another example is the installation of the automated in-feed and out-feed on some of our older lamination and wrapping equipment to increase operational flexibility in order to quickly address OEM production fluctuations and schedule changes.
In addition, we continue to drive synergies and increased collaboration across our business units, helping to harmonize opportunities and provide new and innovative products and a better customer experience. Collaborative strategic sourcing between our business units has and will continue to pay dividends without inhibiting the integrity of our independent brand model and the value it provides to our customers, driving unique engineering, innovation, and customer service. In 2022, we continue to focus on automation and adjacent technologies that will help drive our business towards the future. We are cultivating relationships with robotic solutions providers that are pioneering the robot as a service space. This partnership has been deployed in two local manufacturing divisions utilizing autonomous scan and sand technology for surface finishing and treatment.
We’re using this solution to solve high-mix manufacturing challenges and an intentional step to proactively adapt to increased skilled labor shortages and grow our advanced manufacturing capabilities for the future. In the fourth quarter, we added Transhield to our portfolio, which manufactures protective coverage and shrinkable protective packaging. Transhield is a strategic fit that offers expansion into new markets, while growing our marine and aftermarket presence. We continue to be active in the deal exploration and see M&A as an important component of our capital allocation and growth strategy even in periods of transition. In December, we released our inaugural responsibility and sustainability report, showcasing our new and growing framework in sustainability reporting and many initiatives we have implemented throughout the year that betters our company and community.
I’ll now turn the call over to Jake, who will provide additional comments on our financial performance.
Jake Petkovich: Thanks, Jeff, and good morning everyone. Our consolidated net sales for the fourth quarter decreased 17% to $952 million, driven by a 39% decrease in RV revenue and partially offset by a 35% increase in Marine revenue. For the full-year, net sales increased 20% to $4.9 billion, driven by growth in all end markets. Our combined RV and Marine revenue increased 18% to $3.6 billion for the fiscal year. Full-year Marine revenue increased 56% to $1 billion, while RV revenue increased 8% to $2.6 billion. RV content per unit increased 31% to $5,257, and we increased Marine content per unit by 45% to $5,281 for the full-year 2022. We’ve gained market share as a result of our team’s incredible dedication and flexibility by helping our customers manage supply chain difficulties and bring innovative products to the market.
In our housing business, which is comprised of our MH and industrial end markets, our revenue remained flat at $285 million for the fourth quarter and increased 24% to $1.3 billion for the year. MH revenue for the fourth quarter grew 3% to $155 million and 29% to $705 million for the year. MH content per unit grew 21% to $6,243 for the fiscal year. Our industrial revenue increased 18% for the full-year and fell 2% for the fourth quarter as housing starts decreased 3% for the full-year and 16% for the fourth quarter. Gross margin in the fourth quarter increased 130 basis points from the fourth quarter of 2021 to 21.1% resulting from the realization of our production efficiency initiatives and synergies, the contribution from our acquisitions and the flexibility of our highly variable cost base in response to the planned production reduction in our RV-focused businesses.
Gross margin for the year increased by 210 basis points to 21.7%. Warehouse and delivery expenses increased 60 basis points as a percentage of sales for the quarter, but decreased 10 basis points as a percentage of sales for the year as the scale of our operations benefited from an increase in the volume of activity and the associated leveraging of fixed costs. Operating expenses for the quarter were 14% of sales, compared to 11.5% in the fourth quarter of 2021, primarily attributable to an increase in SG&A expenses and amortization of intangible assets and the diversification of our business model and portfolio. These increased costs reflect the incremental impact of higher costs related to our acquisitions, as well as increased incentive compensation to reward our team as a result of our performance in addition to investments in process and continuous improvement in our human capital management initiatives.
The full-year operating expenses were 11.5% of sales, compared to 11% in 2021. Fourth quarter operating income decreased 29% to $68 million. For the year, operating income increased 41% and operating margin increased 160 basis points to 10.2%. For the full-year, growth in our leisure lifestyle markets and a move to higher engineered value-added products helped offset the investments in infrastructure and human capital we have made. Net income in the fourth quarter was $40 million or $1.68 per diluted share, compared with $2.62 per diluted share last year. 2022 diluted EPS was $13.49, an increase of 40% over 2021. Adjusting for the impact of the accounting treatment for our convertible notes effective in 2022, our adjusted diluted net income per share was $1.82 for the fourth quarter, representing a 31% decrease from 2021 and $14.64 for the full-year 2022, representing an increase of 52% over 2021.
Our overall effective tax rate was 22.5% for the fourth quarter and 24.6% for the full-year. We expect our overall effective tax rate for 2023 to be approximately 25% to 26%. Moving to cash flows. Our fourth quarter operating cash flow grew 74% to $182 million. Similar to the dynamics of the environment in 2021, our teams work diligently to partner with customers and prudently manage our investments in inventory and working capital, which helped drive this improvement in cash flow. For the full-year, our operating cash flow increased 63% to $412 million. Working capital was a source of cash in the second half of 2022 as we continue to manage inventory while ensuring we had adequate levels to support customer requirements. This remains a priority for our team, and we expect to continue to monetize our working capital into 2023.
Capital expenditures were $16 million for the fourth quarter and $80 million for the year. We have and will continue to prioritize investments to drive scalability and operational efficiencies through automation and technological improvements. For 2023, we remain dedicated to the notion of driving continued operational excellence initiatives and anticipate investing $65 million to $75 million in capital expenditures. M&A has been a key initiative of our ongoing strategy to diversify our end-market exposure and increase our aftermarket presence. For the full-year, we spent $249 million on strategic acquisitions that have further embedded our value proposition with our customers, improve the durability of our revenue enhanced our margin and earnings.
In early 2023, we made another move to strengthen our balance sheet and reduced potentially diluted shares as we redeemed our $172.5 million 2023 convertible notes that were due in February of this year. This also improves liquidity by removing a $202.5 million reserve against our revolving credit facility that was in place while these notes were a near-term maturity. This removes approximately 2 million shares from our diluted share count beginning February 1, with the net benefit to EPS, partially offset by an increase in interest expense. The incremental noncash accounting treatment impact of these shares in 2022 was $1.15 per share. We repurchased approximately 516,922 shares for a total cost of approximately $30 million in the quarter and returned $10 million to shareholders in the form of our quarterly dividend.
For the full-year of 2022, we have repurchased $77 million in shares and paid $33 million in dividends, resulting in $110 million in total cash returned to our shareholders. In December, our Board increased the authorized amount of our share repurchase program to $100 million. During the same month, our Board of Directors voted to increase our quarterly dividend by 36% to $0.45 per share. These actions remain part of our balanced capital allocation strategy and reflects the confidence we have in our ability to generate sufficient free cash flow, our optimism in our long-term growth outlook and our commitment to drive shareholder value. We expect to continue targeting strategic share repurchases in 2023 as market conditions evolve while driving returns for our shareholders and on our investments.
We ended the year with approximately $508 million of total net liquidity comprised of $23 million cash on hand and unused capacity on our revolving credit facility of $485 million. This unused capacity on our revolving credit facility includes the impact of a $202.5 million reserve for the settlement of our convertible notes due February 2023, which we repaid in full on February 1, 2023. Our total net leverage ratio was 1.9x at year-end. We have built a strong balance sheet with ample liquidity to help us navigate the current RV downturn and macroeconomic headwinds we are experiencing. The solid financial foundation we have built will help carry us through the challenging demand environments, while also providing flexibility to make strategic investments to improve overall robustness of our operations, enhancing our agility, which are critical components to best serve our markets.
Before providing our current end-market estimates for 2023, I want to emphasize that the outlook for the coming year remains uncertain, dynamic, and subject to change. As we embark on our 2023 journey, retail trends suggest that we currently estimate full-year RV retail shipments to be down approximately 15% to 20%, implying approximately 360,000 to 380,000 units. The current dealer weeks on hand levels remain consistent, as Jeff discussed, this would imply based on our estimates, full-year 2023 RV wholesale unit shipments to be down approximately 30% to 35% to a range of 325,000 to 350,000 units. We believe that dealers currently maintain comfortable levels of inventory and that their purchasing decisions will be guided by retail shipment velocity and expectations for broader macroeconomic activity.
The OEMs are nimble and highly scalable and have the ability to quickly adjust production levels up or down. We estimate that wholesale shipments will likely be second half weighted when compared to historical seasonality trends. In our Marine market, we currently estimate 2023 wholesale shipments to be down low double digits and marine retail to be down high single digits to low double digits. Given this outlook, combined with several years of persistent supply-demand imbalance, we expect to experience continued lean, but slightly improving dealer inventories in 2023, reducing the risk of dramatic production cuts and therefore, not replicating what we experience in our RV-related businesses. We further believe that we are well indexed towards water craft categories that include higher-end units such as fiberglass, ski and wake, and saltwater boats where inventory weeks on hand remain lower than historical levels and typical consumers who have historically tended to be less sensitive to interest rate volatility and economic softness.
On the housing side of the business, we currently expect MH wholesale shipments to be down low double digits for 2023 with retail sales absorbing available wholesale production on a real-time basis. In our residential housing and market, we expect 2023 new housing starts to be down low double digits. Although we do not provide annual guidance, we think it is prudent to discuss our margin outlook given the significant decline we currently expect to see in our RV end market this year. With RV end market wholesale shipments anticipated to be down 30% to 35%, our diversification strategy is expected to bolster our margins from historically experienced declines of this scale. Our non-RV businesses are expected to partially offset declines due to the RV shipment rebalancing, we point to the $1 billion Marine business we have built over the last several years, which has had a durable resilience to our margins.
Therefore, based on the assumptions we have modeled out, we currently expect our full-year 2023 operating margin to be within a range of 7.5% and 8.5% at current estimates and subject to change as noted based on the factors discussed. Post-2023, we currently expect to resume our historical operating margin growth cadence of 30 basis points to 50 basis points annually. That completes my remarks. We are now ready for questions.
To continue reading the Q&A session, please click here.