Nemeth: 2022 a ‘Tale of Two Halves’ for Patrick Industries

Nemeth: 2022 a ‘Tale of Two Halves’ for Patrick Industries

ELKHART, Ind. – Calling fiscal 2022 “a tale of two halves,” Patrick Industries CEO Andy Nemeth spoke to investors and analysts about his firm’s record annual performance during an earnings conference call Thursday (Feb. 9).

On the call with Nemeth were Jeff Rodino, president, and Jake Petkovich, CFO.

“As we reflect on another year of record operating results and financial performance in 2022,” Nemeth said, “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.”

In fiscal, 2022, Nemeth said, the first half of the year showed positive demand trends across all end markets, even though economic headwinds were building.

Andy Nemeth

“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 … dealer inventories,” he said. “Our RV OEM customers further evidenced their tremendous scalability, reducing output by 48% versus the prior six-month period to address slowing retail demand.”

Even so, he noted that third- and fourth-quarter and full-year results show “that our plan to build a stronger and more diversified company is working and driving margin and operating resilience. 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,” he said, adding, “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.

Jeff Rodino

Net sales grew 198% from 1.6 billion in fiscal year 2017 to 4.9 billion for fiscal year 2022 and the firm’s gross margin widened 460 basis points going from 17.1% to 21.7%. Operating cash flow quadrupled from 99 million to 412 million in 2022, he said.

Looking forward, he said, “In 2023, we will continue leveraging our investment and diversification strategy and expect these investments to add durable value to our portfolio of businesses.”

He highlighted other financial results:

  • Fourth quarter revenues of 952 million decreased 17% or 196 million.
  • Net income for the quarter declined 34% to 40 million, and we earned $1.68 per diluted share.
  • 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.

Rodino noted, “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.

Jake Petkovich

“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.

Petkovich added, “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. … 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.”

The trio of Patrick executives also fielded questions from analysts on the call.

In December, some of the OEMs started to shutter production for some of their brands on the RV side, of course – reports that are continuing to today. What are you hearing from the OEMs for a production environment for the first quarter?

Rodino: I don’t know that they’ve shuttered brands because that’s a little bit different than actually slowing production and taking days and weeks off. We continue to see that through the holiday shutdown, some may be a little bit longer extended than we’ve seen in the past. However, the manufacturers are starting to come back online and have over the last several weeks. I will tell you that we still see the three-day weeks and the occasional week off, but ultimately, we’re seeing a similar activity that we saw pre-holiday production levels.

In talking about your expectations for wholesale and retail – retail 360,000-plus and wholesale at 325,000 to 350,000 – that’s the first time that a lot of us are hearing that there’ll be a divergence between wholesale and retail this year. Can you talk about what’s going on as far as inventory, if you still feel that there’s far too much inventory, particularly lower-priced units for 2022 in the channel?

Petkovich: Inventory still feels pretty healthy as measured by total units, weeks on hand, some of those additional measures that we’ve used and talked about in days past, but it still feels like there’s – at least from an anecdotal perspective and our connectivity with the dealer networks – there’s a desire to continue to rebalance the types of units they have from maybe the lower-end travel trailers to the higher-end fifth wheels and motorized where there’s a little more velocity these days. But also, as they think about clearing out some of the 2022 models – which we also heard a little bit at the Tampa show – that they may be a little heavier on the 2022 models than they’d like to be at this time of the year. But also, generally speaking, thinking about continuing to work on that retail-driven philosophy and how we use the analytics to build our model out, which is what leads us to that 325 to 350.

How should we think about overall revenue and gross margin for Q1 relative to Q4?

Nemeth: I think as we head into the spring selling season, we would expect Q2 and Q3 to rebound above and beyond those levels from Q1.

So, just from an overall seasonality perspective, Q1 is going to be a little bit lighter, but picking up certainly and making up that difference to get us to the 7.5% to 8.5% that Jake talked about on the op margin side by the end of the year.

On the M&A environment, if it’s a good time to buy or whether you maybe expectations have to come down on – as these markets slow.

Nemeth: I think as we look at M&A and we look at the strength of our balance sheet, we’re pretty optimistic about the opportunities that we think are going to come our way here, especially as it relates to the inventory buildup that a lot of suppliers have seen over the course of the last 18 months. And as things have slowed down, certainly, in certain markets, we think that we’re in a great position to be able to execute on M&A. We’re going to stay disciplined. We’re going to stay thoughtful. We’re going to watch trends, I’d say as it relates to multiples. Multiples definitely have come down from where they were at the beginning of last year, let’s call it. And certainly, with the expectation on centering around where 2023 is going to land from a run rate perspective. So, we’re in a great position to be able to execute on M&A. We’re currently evaluating deals. And – but we’re going to stay disciplined and thoughtful about it, and we’re going to, kind of watch what happens. But overall, I really like where we’re at.

Source: https://rvbusiness.com/nemeth-2022-a-tale-of-two-halves-for-patrick-industries/