Patrick Industries - Earnings Call - Q1 2019
April 25, 2019
Transcript
Speaker 0
Good morning, ladies and gentlemen, and welcome to the Patrick Industries Incorporated First Quarter twenty nineteen Earnings Conference Call. My name is Paulette, and I will be your operator for today's call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Please note that this conference is being recorded.
I will now turn the call over to Ms. Julie Ann Kotowski from Investor Relations. Ms. Kotowski, you may begin.
Speaker 1
Good morning, everyone, and welcome to Patrick Industries' first quarter twenty nineteen conference call. I am joined on the call today by Todd Cleveland, Chairman and 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 ks for the year ended 2018, 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.
Speaker 2
Thank you, Julie Ann. Good morning, everyone, and thank you for joining us on the call today. Calculated end market diversification and the execution of organic and strategic growth initiatives were the theme that continued to play in our favor in the first quarter as the gap between wholesale and retail shipments grew in the RV market, which represents 56 of our revenues. RV OEMs continue to aggressively rebalance inventories and limit production in efforts to drive towards inventory and retail equilibrium in the industry. Dealer sentiment at virtually all the recent shows has been positive, and retail traffic and sales are off to a solid start for the year.
We have been able to continue to increase our content per unit in all markets despite incremental headwinds related to inclement weather in many parts of the country, interest rate speculation, uncertainty around tariffs and commodity cost volatility. Industry fundamentals and demographics remained strong, and we carried a higher cost structure compared to our revenues for the first quarter primarily related to operating expenses in anticipation of expected strong retail demand in all four of our primary markets. We have strategically focused on maintaining the integrity of our business model during the RV inventory rebalancing as we expect retail demand to take hold and drive through once the new norm for inventory levels is established amongst dealers. Our revenues grew 10% for the first quarter to $6.00 $8,000,000 and our first quarter twenty nineteen net income was $21,000,000 or $0.90 per diluted share despite an estimated 27% decline in wholesale shipments in the RV industry and an estimated 10% decline in wholesale shipments in the MH industry. Now I'll turn the call over to Andy, who will further review our primary markets and overall business outlook.
Thank you, Todd. As noted, we are very pleased with our diversification efforts to drive top line strategic and organic growth in the first quarter in light of RV and MH industry specific recalibration and other factors. Our diversified market penetration in both the marine and our residential and commercial industrial markets, which we have been strategically targeting, have helped to offset wholesale shipment declines in the quarter in our two largest market sectors, specifically RV and MH, while our organic and synergistic growth and savings opportunities as a result of our acquisitions made over the last two years continue to be realized. With our RV market representing approximately 56% of our business, 44% of our revenues are now coming from our other three primary markets. This compares to approximately 31% a year ago.
Long term demographic and demand prospects continue to be positive in both our leisure lifestyle and housing and industrial markets despite the wholesale shipment volatility over the last several quarters. I will now provide an update and some additional color on each of the core markets we serve. On the RV side of our business, our fourth quarter twenty nineteen financial performance reflects the impact of continued rebalancing of retail inventories with wholesale production as dealers continue to optimize inventory levels. Our RV revenues were down $36,000,000 or 9% against wholesale shipments that were down an estimated 27%. The gap continued to widen in the first quarter between wholesale production and retail shipments, which are only down an estimated low to mid single digits after expected revisions and compares to the strongest quarter in 2018, where we saw double digit retail growth of approximately 11%.
Harvey OEMs have aggressively managed production levels with improved capacities and efficiencies over the past four quarters to better align with improved lead times for dealers and strong demand expectations. Wholesale shipments over the last four quarters are estimated to approximately 15% on a trailing twelve month basis on retail shipments that are estimated to be up approximately 3% for the same period. Over 40,000 units have been pulled out of dealer inventories over the prior twelve months as we head into the traditionally strong spring and summer selling seasons, where retail is expected to continue to outpace wholesale shipments. Furthermore, dealer confidence remains high, and retail sales in March and April to date have been reported to be very strong based on our touch points, especially with the recent break in the weather. We continue to believe that the future retail demand trajectory remains positive based on current demographic indicators, including new and young buyers and the emergence of incremental repeat buyers in the channel, increased participation by millennials and ethnically diverse families, the continued shift to smaller travel trailers, and overall economic conditions.
In addition, used RV inventory levels remain generally low with rising prices, supporting the trade in values and demand for new RVs. The RVIA's latest published expectations for twenty nineteen project wholesale unit shipments to range from approximately 445,000 units on the low end to 476,000 units on the high end, representing low to high single digit declines from 2018. We anticipate a return to equilibrium with a possible overcorrection amongst RV dealer inventories in the near term. The ultimate return to equilibrium should position RV OEMs to return to producing units in tandem with the expected retail demand. We are currently assuming existing run rates to continue through the second quarter and anticipate the channel inventories will continue to normalize even further through Q2 twenty nineteen and support a return to more normal wholesale shipment levels aligned with retail demand in the latter half of the second quarter and into the third quarter of twenty nineteen.
We currently expect a flat to low single digit decrease in 2019 retail shipment growth with potential upside based on subsiding headwinds related to interest rates, tariffs, commodity price declines, consumer confidence and equity market volatility. Our marine business continues to represent a bright spot for us, and the market is poised to continue its recovery with the potential for a long runway of slow and steady growth as OEMs in this market continue to offer more value added content on boats, bringing increased comfort and convenience to allow for the ideal leisure lifestyle experience and managing inventory of used boats in the marketplace. Our marine portfolio companies are comprised of a high quality strategic brand platform that is generating significant organic growth synergies, evidenced by our $45,000,000 or 99% increase in marine revenues, which represented 15% of our consolidated sales in the quarter. Retail trends and demand patterns are strong in the sector as well, and our touch points and data sources indicate a strong start to the show season in the first quarter. While overall marine powerboat retail shipments were down 7% on an unrevised basis in the first quarter twenty nineteen and based on data from roughly 46% of the state's reporting, first quarter shipments generally represent approximately 20% of full year shipments.
The decline was seen in all categories of powerboat segment except for the continued strength in the ski and wake sector. Our strong stable of component product lines have the ability to flex with the value stream, both as marine OEMs continue to increase content per unit as well as in the event that consumers push towards a lower end value oriented product. All indicators currently point towards another solid year in the marine industry and continued growth trajectory for fiscal twenty nineteen of low to mid single digits based on long term fundamental demand, aging boats on the water and the related replacement cycle, and positive consumer economic metrics. Turning to the housing and industrial side of our business. Our manufactured housing sales represent 70% of our total revenues and were up 44,000,000 or 70% over the 2018 despite an estimated 10% decline in wholesale shipments.
Approximately 40,000,000 of the increase was attributable to the acquisition of LaSalle Bristol in November 2018. Similar to q four twenty eighteen, manufactured housing continues to be negatively impacted by wet weather conditions in certain regions of the country, removing inventory and setting foundations and houses has been difficult. In the first quarter of twenty nineteen, we focused on the integration of LaSalle and the further identification of synergies on the operating side of the business. As we mentioned on our fourth quarter call, while we expect LaSalle to be initially dilutive to consolidate operating margins by approximately 50 basis points on an annualized basis, we believe there are significant annual operating synergy opportunities that can be realized over the next twelve to sixteen months. We are increasingly excited about the overall long term growth prospects in housing, and in particular, manufactured housing, driven by pent up demand, multifamily housing capacity, and a lack of stick built housing contractors and subcontractors, as well as the need for quality affordable housing and current demographic trends such as first time homebuyers and those looking to downsize.
Overall, our industrial business has continued to drive value, both strategically and organically. And our revenues in these markets, represented 12% of our overall sales mix in the first quarter and are focused on the residential housing, hospitality, high rise, commercial construction, and institutional furniture markets increased $3,000,000 or 5% in the quarter. Single and multifamily residential housing starts declined 519% respectively for the 2019 based on delayed US Census Bureau reporting after the government shutdown, with combined new housing starts down 10% in the quarter. Interest rate increases and tariffs in the past year have created some headwinds in addition to the lack of affordable housing capacity and inventories. We believe these factors present opportunities for continued pent up demand along with improving consumer credit, strong jobs and wage growth, and demographic trends related to new buyers and those looking to downsize and play well into our core housing and industrial market model.
We are currently anticipating low to mid single digit growth in MH wholesale units for fiscal twenty nineteen and low single digit growth in new housing starts in fiscal twenty nineteen. Overall, are excited about the upcoming spring and summer selling season in all of our markets, and our early indicators point to some of the macroeconomic headwinds we've experienced over the last fifteen months subsiding in the short term. Our nine acquisitions completed last year and 16 total in the last two years continue to present additional organic growth opportunities and synergies to further drive market share gains, expand geographically, establish best practices across all of our brands throughout the organization, and service our customers at the highest level. On the acquisition front, our pipeline remains full and spans all four market segments, and we continue to actively cultivate, review, and assess opportunities. We have pivoted with a lean operating structure in the short term to focus on surgically and strategically driving synergies and organic growth opportunities from our tremendous stable of acquired companies over the past several years, while certain end markets work through some overhang and short term headwinds.
We remain opportunistic and disciplined in the deployment of our capital allocation strategy. Our cash flows are very strong and are reflective of our ability to leverage the business model. We generated over $7 of free cash flow per diluted share on a trailing twelve month basis. These cash flows combined with our flexible balance sheet position us to continue to execute in alignment with our strategic plan and drive increasing overall long term shareholder value. I'll now turn the call over to Josh who will provide some additional comments on our financial performance.
Thanks, Andy. Our consolidated net sales for the first quarter increased 10% to $6.00 $8,000,000 reflecting the impact of acquisitions, acquisition related growth synergies and market share gains. As previously noted, the overall revenue improvement in the quarter was hampered by double digit industry declines in the RV and housing market, which unfavorably impacted both our gross and operating margin. Revenue from our leisure lifestyle market, which is comprised of the RV and marine market, increased 2% with RV revenues down 9% and marine revenues almost doubling compared to Q1 twenty eighteen. RV content per unit for the first quarter on a trailing twelve month basis increased 30% to an estimated $3,131 per unit.
Estimated marine content per unit increased 118% to $1,490 per unit. Revenues from our housing and industrial markets increased 37% in the quarter, with MH revenues up 70% versus the prior year by the 10% decline in industry wholesale shipment. MH content per unit increased 42% to an estimated $3,389 per unit. On the industrial side, revenues increased 5% in the quarter, and housing starts were down 10% compared to q one of twenty eighteen. In alignment with the wholesale shipment declines in the RV and MH market, we have aggressively flexed our production schedules and workforce in the short term in tandem with market demand levels without jeopardizing our long term workforce needs or the ability of our plants to quickly flex up production in anticipation of improved market demand as we progress through 2019.
In addition, we continue to deploy strategic and targeted capital investments to help drive operational improvement, expand manufacturing capabilities, and position our business to be able to operate efficiently and capitalize on all of our end markets. Over the last few quarters, we have seen commodity prices stabilize, then begin to decrease in late twenty eighteen. As with increases in commodities, we partner with our customers and pass along price decreases in a declining commodity environment. And during the quarter, there were notable price decreases to our customers. With the softer than expected demand levels from our primary markets, we were sitting on higher priced inventory relative to the current commodity market and this in turn negatively impacted our gross margin.
We expect to continue to work through the higher priced inventory through the second quarter in alignment with expected run rate. Our gross margin in the first quarter was 17.5%, declining 20 basis points, which was impacted by the double digit decline in the RV MH and housing market and the corresponding lost revenues, maintaining a balanced workforce with reduced schedules and headcount, but staying in a position to quickly flex our production with anticipated normalized wholesale demand and declining commodity costs and passing along pricing to our customers at the current market pricing while managing through higher priced inventory. We were able to offset part of the margin decline by leveraging our fixed costs on the marine and industrial growth and the positive contribution and higher margin profile related to certain of our acquisitions over the past eighteen to twenty four months. Operating expenses were 11.6% of sales in the first quarter. Warehouse and delivery expenses and intangible asset amortization increased 110 basis points, primarily due to certain acquisitions completed in 2018 having a higher operating expense profile relative to Patrick's overall operating expense profile.
SG and A expenses were 6.2% of sales in the quarter. Consistent with our gross margin, our operating expense margin, as previously discussed, was negatively impacted in the quarter as we chose to carry a higher cost structure relative to the cost structure currently needed to support the short term depressed demand levels in our end market in order to be in a position to quickly respond to an improvement in market demand levels and maintain our investments made in our high quality workforce. Operating income was $36,000,000 in the first quarter, a decline of 14% from the previous year. The first quarter twenty nineteen operating margin of 5.9% decreased 170 basis points compared to the prior year. We have been actively executing on synergies across the organization and are in the early stages of our 4,000,000 to $5,000,000 cost reduction target with LaSalle, and we are on track with our internal plans to execute on the full run rate of cost reductions for LaSalle.
For the first quarter, the operating margin of LaSalle resulted in a 50 basis point dilution to our overall operating margin profile. The margin dilution from LaSalle, coupled with the other factors previously described, resulted in the operating margin decline. In the 2019 and 2018, our net income per diluted share included tax benefits associated with share based compensation. For the first quarter of twenty nineteen, net income and net income per diluted share were positively impacted by $800,000 or $04 per diluted share. For the comparable prior year period, the impact to net income and diluted net income per share was $2,100,000 or $08 per diluted share respectively.
Our overall effective tax rate as reported was 22.3% for the 2019 compared to 19.6% for the first quarter of twenty eighteen. Excluding the impact of the tax benefits previously noted, our effective tax rate for the 2019 and 2018 was twenty five point four percent and twenty five point two percent respectively. For the full year 2019, we are estimating our effective all in tax rate to be in the range of 25% to 26% excluding the impact of one time tax items. Now turning to the balance sheet. On 01/01/2019, we adopted a new lease accounting standard as required.
The adoption of this new standard resulted in the recognition on our balance sheet of approximately $80,000,000 of operating lease liability, both short and long term, with a corresponding amount related to operating lease right of use assets. There was no impact on reported net income and net income per diluted share for the 2019 related to the adoption of the standard. In the first quarter of twenty nineteen, we generated approximately $28,000,000 of operating cash flows. The first quarter traditionally requires a seasonal ramp up in working capital. However, we will continue to aggressively manage and flex our working capital consistent with demand levels as evidenced by the reduction in inventories of 8,000,000 compared to 12/31/2018.
Our current flexible business model and the businesses we acquired over the last eighteen to twenty four months provide flexibility and position us with the ability to generate strong operating cash flows to support our strategic and organic growth plans for 2019. Our leverage position relative to EBITDA at the end of the 2019 remained at the same level as year end 2018 at around 2.4x. Our credit availability at the end of the first quarter was approximately $420,000,000 Along with our ongoing operating cash flows, we have plenty of flexibility to continue to execute on our disciplined capital allocation strategy. We continue to put capital to work in the quarter, having invested approximately $10,000,000 in capital expenditures to support our strategic growth and expansion plans for certain brands and for strategic investments in capacity, geographic expansion, and increased efficiencies as well as new process and product development. For the remainder of 2019, we will continue to make disciplined strategic investments in our business to ensure we maintain sufficient capacity and can support expected volume levels.
That completes my remarks. Todd? Thanks, Josh. As we eagerly look to the second quarter and beyond, we are optimistic about the opportunities to leverage our operating model and resources to continue to strategically grow our business, capture additional market share, execute on synergies and drive efficiencies. Our tremendous talent across the organization and our business model provide an operating platform that we can leverage off of and effectively execute in a dynamic market environment while staying focused on our long term strategic initiatives and driving overall shareholder value.
We remain excited and optimistic about the long term fundamental growth potential in both the leisure family life style and housing and industrial markets as well as by the fundamental economic drivers and consumer migration trends supporting them. We believe the inventory rebalancing in the RV industry that has and continues to take place in conjunction with the improved efficiencies and reduced lead times from the OEMs to dealers will provide a better end consumer experience for those buyers who have more specific preferences related to options and sizes and ultimately enhance and promote the already strong RV experience profile. Thus far in 2019, we have devoted our efforts and resources to fully digest and integrate the nine acquisitions we completed in 2018 and take advantage of the opportunities to drive efficiencies and synergies across the organization. Our acquisition pipeline continues to be full with candidates in all our end markets, and we will remain disciplined in our strategic thought process and valuation modeling as we navigate through the ongoing dynamic market conditions. We will continue to opportunistically deploy capital in alignment with our capital allocation strategy and free cash flows, all while maintaining an appropriate and disciplined leverage position.
I'm extremely proud of our more than 8,200 talented team members whose dedication, commitment, and passion for providing a premier level of customer service and high quality products to all our customers has allowed us to continue to drive performance and operating results and capitalize on the strong leisure lifestyle market, stay well positioned to respond to improvement in the MH market and continue to expand our opportunities in the industrial space. This is the end of our prepared remarks. We're now ready to take questions.
Speaker 0
Thank you. We will now begin the question and answer session. And our first question comes from John Lovallo from Bank of America. Please go ahead.
Speaker 3
Hey guys, thank you for taking my questions. The first question is on the 10% decline in manufacturer home shipments. You know, in the context of a broader housing market where single family starts were down about 5% as you said through March and new home sales were up, you know, marginally call it 1% to 2%. And the entry level seems to be performing, you know, better than most other segments of the market is a relative bright spot. So I'm just curious what you guys see as kind of the delta between the broader market and what's happening in manufactured housing.
Speaker 2
Yes, John, this is Todd. I think we touched on the fact that weather's been a real factor here. I don't like to use that as an excuse. However, if you kind of take a look across the regions of the country, whether it's snowfall, rainfall, particularly in the Southeast where the manufactured housing industry is extremely strong. Our contact points have just shared with us that, you know, as they've tried to get out and set homes and just kind of the overall tone of the buyer, they're just not in a position to set the homes.
And the buyers are just not coming out knowing the fact that, you know, the homes can't be set. Based on feedback we're getting early on, as things have dried up, the sun's come out a little bit more, we're getting indications that retail traffic is picking up and things are starting to move along in those industries. So really we think that's the real delta between the two, particularly just based on the type of style and environment that the manufactured home has to be put through in order to get placed on the lots where they put them.
Speaker 3
Okay. That's helpful. And then in terms of your industrial business, the exposure there to residential construction, any thoughts on what percentage is exposed to kind of what you would consider to be first time or entry level housing?
Speaker 2
John, this is Andy. We've got, I would say, a better than midpoint percentage that's focused on first time buyers. We also participate in the remodel sector of the market, so we participate both in new construction and remodel. We've got a heavy presence on the West Coast in both single family and multifamily. So, again, we've got kind of a nice presence from our perspective, and and the headwind, you know, that we've seen related to interest rates have been have definitely been a factor as well as the the average selling price of new homes, new single family homes have have been an issue.
We see that subsiding, and so we are optimistic about where the first time buyers are gonna be able to get back into the market, especially with some of those headwinds subsiding as we move through kind of the spring and summer selling season.
Speaker 3
Great. Thanks for that. And finally, the higher priced inventory, just to be clear, is this primarily in the RV and MH segments? Or is across the portfolio?
Speaker 2
This is Josh, John. It is primarily in the RV sector, relatively speaking. Got it. Thanks guys.
Speaker 4
Thank you.
Speaker 0
Our next question comes from Scott Dember from CL King. Please go ahead.
Speaker 4
Good morning guys. Good morning. Andy, can you maybe just circle back to your comments about inventory in equilibrium? I know it's hard to tell exactly when we're going to hit a bottom, particularly since, the days on hand situation with dealers and their expectations has changed a bit. But it sounds like you're talking about probably towards the end of this quarter where you would see some things starting to lighten up and to come back from a shipment standpoint.
Is that correct?
Speaker 2
Yes, Scott. We believe with the retail selling season coming upon us and the positive feedback that we're currently getting as it relates to March and April retail movement against the backdrop of some high double digit declines in wholesale, we think that equilibrium point is definitely pushing, you know, pushing sooner rather than later. Right now, we're kind of estimating, you know, continued run rates through the second quarter on the wholesale side, but retail demand, as we as we talked about a little bit, has been strong. So, you know, if you look back, and you go back the past four quarters, you know, we've seen progressively, you know, progressive decreasing wholesale unit shipments over the last four quarters again. Pretty strong retail.
And so we believe that equilibrium point is approaching us. There could be a little bit of overcorrection, but again, against the backdrop of that strong retail, we think that we're getting closer to it.
Speaker 4
Alright. And just certainly back to the industrial side, can you just remind us how much is non housing related and the part that's non housing related, whether it's high rise or hospitality, how are those segments doing compared to the housing markets, the housing related businesses?
Speaker 2
Sure. So we're about 60 to 65% housing related. Our commercial hospitality sectors are are strong. We've got opportunities that continue to come into play, in particular on the West Coast, which we're very excited about. Multifamily has been strong on the housing side as well.
So what we're seeing, we're seeing two things happen. Really, we're seeing first time buyers, and we're also seeing the older generation downsize back into multifamily, into more urban areas. So again, we're optimistic about where that's headed. But on the commercial high rise sector, the hospitality has been strong, and we've got opportunities that continue to bubble up in those sectors.
Speaker 4
All right. And just going back to the margin, and this will be my last question, then I'll get back in the queue. You guys already talked about the drag from LaSalle, Bristol and your expectations there, but it seems like the new thing we have to consider is the price givebacks versus what's in inventory. And maybe just remind us or just update us on what your overall expectation would be from an op market standpoint for this year, including Bristol and excluding Bristol? Thank you.
Speaker 2
Yeah, Scott. This is Josh. So if we think about our overall operating margin target for 2019, we previously discussed operating margins being flat net of LaSalle Bristol and RV market down low to mid single digit. Including LaSalle Bristol, we had talked about operating margins being down 50 basis points, so them being dilutive to our overall margin profile by 50 basis points. In the first quarter, from what we're seeing here with the overhang from the higher cost inventory a little bit into the second quarter and that with the decline in the RVs and all of our end markets, now we're looking at operating margin fee net of LaSalle minus 50 basis points and down 100 basis points all in.
Speaker 4
Got it. Thanks so much.
Speaker 0
Our next question comes from Brett Andress from KeyBanc Capital Markets. Please go ahead.
Speaker 5
Hey, good morning. Thanks for taking my questions. First, just I guess some housekeeping. What exactly was the organic growth number in the quarter? And if you look at that spread between the organic sales and the end market declines, can you just help us piece out the drivers of that during the quarter?
What impact did price have? How much of that was new customers, new product lines? Just, any color there would be helpful.
Speaker 2
Yes, Josh. Organic revenues, net of industry growth were plus 8%. So still another strong quarter of strong organic growth, net of industry growth, even in light of a declining commodity market and price decreases going on in the quarter. Our consolidated industry growth for Backdrop, we're working off of minus 20% from an industry growth perspective. And so revenues were down 12% for the quarter excluding I'm sorry.
Revenues were down 12% for the quarter all in versus the backdrop of 20% on our industry. As far as breaking out, as far as the organic growth for end market, we really don't break it out from a product versus new customers. We are seeing a lot of strength and growth on the industrial and the marine side with all the marine acquisitions we completed in 2018. But really, we're seeing market share growth and organic growth in all four of our market sectors.
Speaker 5
Got it. Okay. You touched on this in an earlier question, but can you just elaborate a little more you know, what you're seeing on the RV retail end throughout March and so far in April? Just any sense of maybe growth rates that you're seeing from your touch points? And, you know, I I guess, ultimately ultimately, where do you think weeks on hand corrects to when when all is said and done?
Speaker 2
Sure, Brett. This is Andy. Based on our touch points through our our transport operations, our our financing contacts, the customers, and certainly all the other touch points as it relates to surveys and discussion points out there. You know, we've what we've heard is a very strong March on the retail side, and we've heard a very strong April to this point as it relates to retail. So we've we've really tried to calibrate that with all those sources, and everybody's pretty much corroborated that.
So we feel feel pretty good about the the retail side of it. From a weeks on end perspective, from our tracking and our estimates, you know, we continue to estimate that we are currently operating at the lowest or the lowest level of weeks on hand that we've had in the last five years. So we continue to see inventory turns improving. We are kind of tracking and and looking for this new norm as it relates to dealer inventories given the opportunity with the reduced lead times. So, again, dealers can get units in a faster time frame than than they used to be able to based on the increased capacities that have been brought online at the RV OEMs and the efficiencies that have been provided.
So again, we're really looking for this new norm, but we will tell you that we believe we're at the lowest level that we've seen in the last five years, and that number continues to decline as it relates to weeks on hand. So turns continue to improve on an overall basis. And then, again, weeks on hand continues to decline from what we're seeing as we're tracking on a quarterly basis as well. And Brett, I'd just add, this is Todd. When you think about us heading into, you know, kind of the peak selling season, you know, against the backdrop of, you know, kind of that 475,000 to 500,000 unit shipment level on the retail side, and you think about the number of units on a monthly basis that are gonna come out of the inventory levels over the course of March, April, May, June, July, and August, we really feel like that delta between those two is going to at some point really cause, you know, kind of a pain threshold that is going to result in kind of a second half need for replenishment.
Speaker 5
Understood. And if I could squeeze one more in, it sounds like the OEMs continue to adjust production into April after it used to be like a mid-twenty percent March decline in shipments. Just any help on where you think production levels are trending so far into April? And how do you see that year over year shipment trajectory playing out the next few months as we get to that equilibrium that you talked about, just the cadence there?
Speaker 2
Sure. As we move in here into the second quarter, run rates are very similar. We're anticipating run rates to be very similar to that of what we saw in March. There will be some seasonality that will pick up. There's a few more days of natural production that occurs compared to kind of the first quarter.
But overall, you know, again, I think when you take a look at kind of some year over year comps, we still have some big numbers to hurdle over in April and May, and then the comps become a little bit more comparable when we move into June.
Speaker 6
Understood. Thank you.
Speaker 0
Our next question comes from Dan Moore from CJS Securities. Please go ahead.
Speaker 6
Good morning.
Speaker 4
Thanks for taking questions.
Speaker 7
Good morning.
Speaker 6
Maybe switch gears a little bit in terms of M and A given the retrenchment in the RV space. Are you seeing even more opportunity for consolidation among suppliers, you know, given the pullback here? And if so, how do you weigh those opportunities relative to the goal of, you know, continuing to create a more balanced and diversified portfolio?
Speaker 2
Sure, Dan. This is Andy. As we've talked about, we continue to have acquisition opportunities really across all four of our platforms today. We have not seen significant deterioration in valuation expectations. Really most of the industry, if not all, kind of use this rebalancing situation as temporary, and you know, there's a solid belief across the spectrum that, you know, again, we are working through inventory rebalancing and not a broader issue at this point.
So as we've kind of watched the volatility, certainly we've been, you know, working with our valuation models, but we've not seen kind of a rush to the table of suppliers looking to consolidate if anything. People have held pretty firm to their valuation expectations, and we've looked at that. We continue to model that and be very disciplined and opportunistic in the way that we think about things. And that being said, you know, we've also looked back at, you know, the 16 acquisitions that we did in the last two years, and it's given us an opportunity to to really look at the organic opportunities that exist there, whether it be expansion, new products, cross selling opportunities, and those are significant. And we've really gotten very excited about those opportunities.
We feel like we can execute either on the M and A side or organically through the acquisitions that we've been able to bundle up and really continue to drive value. So from an overall perspective, we still feel good about the pipeline. We continue to actively cultivate and continue to talk to candidates. So we've got a nice stable, but we wanna make sure we've got a good handle on on the markets and and, you know, that rebalancing point as we kinda look for the new norm for dealer dealer inventories on the RV side in particular. And so we're gonna continue to be very disciplined there.
But overall, we would tell you that we still we still feel really good about about the pipeline and our ability to execute in that, you know, at the right time and based on prioritization of of markets and and products customer opportunities. Nothing's really changed on the acquisition front.
Speaker 6
Helpful. And one more on the margin front. And appreciate all the color, Josh. But just in terms of Q2, how should we be thinking about given working through those higher priced inventories, gross margins for Q2 and operating margins either relative to Q1 or on a year over year basis? Thanks.
Speaker 2
Yeah. We're going to continue to work through some higher priced inventory in Q2. It's going to moderate, but we'll continue to work through it in the quarter. Traditionally, Q2 has been our strongest operating margin quarter in prior years, and I would say that'd be relatively consistent with this year, but I would expect margins to progressively improve as we progress throughout the year, as we work through a little bit of the higher priced inventory and as our cost structure kind of balances out with improving end markets and higher revenues as we progress throughout the year. And Dan, just as it relates to that higher priced inventory, we do pass along both price increases and price decreases.
And so this is really just a situation of inventory versus lower than expected wholesale production. So nothing's really changed other than some timing as it relates to, you know, that movement. It's just we we had some inventory buildup because of of expectations on wholesale that'll work its way through. But we're pretty aggressive, and we wanna make sure that we pass along price decrease to our customers as we see those commodities move. So we view that certainly as short term, related to the margin, you know, and as it relates to the inventories that we're carrying.
Speaker 6
Understood. Got it. Appreciate it.
Speaker 0
Our next question comes from Craig Kennison from Robert W. Baird. Please go ahead.
Speaker 7
Good morning. Thanks for taking my questions. You've addressed many of them already. But Todd, I think early in your prepared remarks you mentioned carrying some higher expenses early in the period. I'm just wondering if you could add a little more color to what some of those expenses might be and how long they would continue.
Speaker 2
Sure. You know, what I was mostly talking about is, you know, I would say the talent that we've brought on over the course of the last couple years that has allowed us to grow our business and take market share in a very dynamic environment. And I would say as we've looked at things and kind of evaluated where we're going from a long term perspective, we haven't taken action, you know, kind of to cut and align with current production levels. If we would see, you know, production run rates stay, you know, kind of at current levels, you know, there was further levers that we can pull, both, you know, whether it be operationally or on the SG and A side of things. All things that we're prepared to do, again, we just look at things from an overall market standpoint, whether it whether it is RV, MH, or, you know, any of the markets we serve, we really feel like the talent and the people that we have within our organization are critical to taking us to the next level as the market recovers.
Speaker 7
Thanks. And I apologize if I missed it. We're all trying to get after the same kind of wholesale shipment dynamic. But again, it looks like March shipments were off over 25%. Was your comment on April that we should see a pace like that down kind of 25% based on the kind of production days you've seen from manufacturers?
Or because the days are different, maybe it won't be so bad?
Speaker 2
Yeah. I'm glad you asked that, Greg. I mean, I think that's important. No. We don't anticipate that.
I mean, like I said, we've got we've got some comps that were extremely high in the first quarter. So as you start lining things up, the numbers are going to be less probably, I'm gonna say, in the mid teens in the second quarter as it relates to declines. And obviously, it'll probably be a little stronger in April, we'd see. And then obviously, number coming down as far as year over year percentage as you move towards the end of the second quarter on a monthly basis.
Speaker 7
I'm sorry to be so dense here. But by coming down, you mean the declines would shrink?
Speaker 2
Yes, correct.
Speaker 7
As the quarter unfolds, so trends get better as the quarter unfolds. Got it. And then last question really on the Marine side. But you've built more critical mass in that segment. I'm curious if as you gain scale in marine, if you're able to identify synergies more easily, either revenue synergies or cost synergies.
So I'm sure it's, you know, in the RV space, you probably have a well oiled machine, but it it may have to be harder to develop that in marine. But now that you've been there, maybe maybe they're coming more quickly.
Speaker 2
Craig, this is Andy on the marine side. Without question, I wouldn't say it's necessarily scale related synergies. It's as much of the quality of the product platform that we've got is very, very strong. The talent that we've been able to partner with is incredibly strong, very dynamic, and very deep in the industry with a lot of knowledge both at the customer level and at the operating level. And so we've been aggressively pursuing acquisitions in that space really over the last two years.
And like I said, as we've pivoted a little bit to focus on the organic side, yeah, without question, these opportunities are there and are bubbling up at a pretty rapid pace. So we're very excited about that look. Like I said, we can continue the M and A, which we expect to do. We can also pivot and make sure that we're focusing on driving synergy growth, we have seen that produce at a pretty rapid pace. Again, not necessarily scale related, but just the value product of the platform that we've got today is extremely strong.
Speaker 7
Great. Thanks for taking my question.
Speaker 8
Thank you.
Speaker 0
And our next question comes from Tim Conder from Wells Fargo. Please go ahead.
Speaker 8
Thank you. And gentlemen, yeah, you've answered a lot of questions. So thank you for the color so far. Mostly mine are more clarification in nature. Josh, on the lease accounting change, it didn't impact net income, but was there any shift between operating expense and interest expense due to the new rule?
Speaker 2
No. There was not.
Speaker 8
Okay. Okay. And then on the commodity cost, if I've heard you right, the majority or all of those will be kind of flushed through the inventory, the higher cost commodities by the end of q two?
Speaker 2
Yes. That's our expectation.
Speaker 8
Okay. Okay. And then, Todd, I think you'd mentioned that there's the potential maybe for a little overcorrection on the RV inventory side. Just maybe if you could give a little more color or elaborate on your thoughts there that why that potentially could materialize that you may be seeing some evidence of that or not.
Speaker 2
Sure. So I think, you know, given the environment that we came from where the dealers, you know, demands were high, weren't retail demand was high, they weren't able to get units when they wanted them, You know, I think their view was to get as many units as they could get with retail, as strong as it was and continues to be. As things have settled out related to retail demand, you know, it's more steady, so to speak, coupled with the fact that, you know, pricing on units has moved, interest rates have gone up, there's been some uncertainties in the obviously equity market environment, some of the geopolitical things that were kind of taking place back in late 'eighteen, all I think kind of played into the minds of, you know, the feedback that we're getting in the dealers. And so as we're watching inventories come down, I think naturally, the sting of where things kind of would have been or have been have pushed dealers to you know, take pause and kind of step back and make sure that as they're looking at the data points, they're looking at all the data points. And in doing so, I think that is going to push them to bring things down to a more critical level.
And then ultimately, think the other piece that I'm not sure anyone really kind of understands or taking into consideration is, you know, we're running, I think we've been averaging over the last couple months somewhere between, let's call it, you know, 36 to 40,000 units from a production standpoint per month. We're moving into a period of time where we're gonna be retailing, assuming, you know, that we're down low single digits. We're gonna be retailing, you know, an average of probably 55,000 to 58,000 units a month. That's taken out nearly 15 to maybe even 20%, or 15 to 20,000 units per month that are going to be coming out. So you couple that with the potential of an improved environment, retail environment, strong seasonality, our perspective would be that there is that risk.
Now again, we can't speak for dealers, but the risk is what we're looking at, and potentially being prepared to be in a position to take care of the customers, and ultimately the end consumer if indeed, you know, that does happen.
Speaker 8
Okay, okay, very helpful, sir. Thank you. And then lastly, Andy or Josh, whoever wants to take this, just wanted to reaffirm, did you or did you not have any kind of one time benefits that pushed the Q1 tax rate to where it was at a little over 22%? I know your guidance has been in that 25 to 26% range for the year.
Speaker 2
Tim, this is Josh. We did have a small benefit in the quarter of 800,000. That compares to 2,100,000.0 in the quarter of the prior year. So 4¢ in q one of this year and 8¢ in q one of last year.
Speaker 8
Okay. Okay. Thank you, gentlemen.
Speaker 0
We have no further questions at this time. I'll now turn the call over to Ms. Julianne Katowski for further remarks.
Speaker 1
Thanks, Paulette. We appreciate everyone for being on the call today and look forward to talking to you again at our second quarter twenty nineteen conference call. A replay of today's call will be archived on Patrick's website, www.patrickind.com, under Investor Relations. And I'll turn the call back over to our operator.
Speaker 0
Thank you, ladies and gentlemen. This concludes today's teleconference. Thank you for joining. You may now disconnect.