Hello, everyone, and welcome to today's conference, LCI Industries Q4 and Full Year 2022 Earnings Call. My name is Bruno, and I will be operating your call today. [Operator Instructions] I will now hand over to your host, CFO, Mr. Brian Hall. Please go ahead..

Good morning, everyone, and welcome to the LCI Industries' fourth quarter and full year 2022 conference call. I am joined on the call today by Jason Lippert, President, CEO and Director. We will discuss the results for the quarter in just a moment.

But first, I would like to inform you that certain statements made in today's conference call regarding LCI Industries and its operations may be considered forward-looking statements under the securities laws and involve a number of risks and uncertainties.

As a result, the company cautions you that there are a number of factors, many of which are beyond the company's control, which would cause actual results and events to differ materially from those described in the forward-looking statements. These factors are discussed in our earnings release and in our Form 10-K and other filings with the SEC.

The company disclaims any obligation or undertaking to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made, except as required by law. With that, I would like to turn the call over to Jason Lippert.

Jason?.

Thanks, Brian, and good morning, everyone, and welcome to LCI's fourth quarter and full year 2022 earnings call. Our fiscal year 2022 marked another record year for LCI as we reached all-time high revenues while continuing to deliver strong margins.

As we got to the back half of the year, our diversification strategy proved pivotal to our performance, helping to partially offset the impact of RV OEM production shutdowns enacted during the fourth quarter to normalize inventory levels across the country.

Thanks to the agility and operational strength of our veteran leadership teams, we were able to make necessary changes quickly in order to adapt to the volatile operating environment.

These results are a testament to our cultural strength and long-tenured leadership teams, which we believe have been and will continue to be the cornerstone of our long-term success. We closed 2022 with a record $5.2 billion in revenues, up 16% year-over-year.

This growth was supported by solid performance in our RV and Adjacent Industries, driven by overall growth in the outdoor lifestyle and aggressive content expansion and innovation. We completed four acquisitions throughout the year, adding two very strong industry brands to our portfolio, including Way Interglobal and Girard Products.

Net sales from acquisitions completed in 2021 and 2022 contributed approximately $219 million in 2022. These acquisitions bolstered our innovative portfolio, which we have leveraged to continue our trajectory of record content growth.

Looking at North American RV OEM, sales increased 17% during the year compared to 2021, reaching $2.8 billion despite lower production levels in the back half of 2022. Industry wholesale RV shipments for the year totaled roughly 490,000 units, and we expect some further softening in 2023 as demand continues to normalize and come off all-time highs.

January and December were rightsizing months for the industry, as industry OEMs took a majority of these two months off to allow inventories if the dealers to rebalance. In the interim, we are working closely with the OEMs to keep our capacity aligned with the changing production levels.

Despite lower RV OEM production, we have quickly and diligently worked to adjust costs and capacity, leveraging operational improvements implemented in the past years, as well as making some cuts. Overall, we've cut $370 million of cost out of our structure since RV industry volumes started to decline during the second quarter of 2022.

Thanks to the agility of our teams and focus on our diversification into other markets, we have been able to shift some of our manufacturing costs of these other areas of our business that are running pretty strong in order to achieve maximum leverage.

I do want to emphasize that retail demand has slowed, but is stabilizing the levels that are still historically strong. Data like retail traffic and purchases from recent RV shows have proven to be a bright spot in an otherwise challenging macro environment, giving us confidence in the industry moving forward.

Importantly, secular trends such as younger buyers as well as the growth and popularity and availability of peer-to-peer RV rentals continue to bring new consumers into our lifestyle. Outdoorsy and RVshare, two of the largest peer-to-peer rental companies, have recently said that U.S.

campers have rented RVs for over 3 million collected nights on their platforms. Additionally, RVIA data revealed that 67 million North Americans are planning a trip in an RV this year, up from 58 million in 2022, with 50% of those surveyed RVers planning to buy a new RV, underscoring the long-term popularity of RVs and the outdoor lifestyle.

Throughout the quarter, we saw heightened input cost, most notably through freight and materials. While it will take us some time to work through the raw material that carry these higher costs, we believe our customers are committed to help us work through these costs.

In addition to several continuous improvement projects we have in the pipeline, we remain focused on driving cost out of our business through automation, as we have 10 new projects slated for implementation largely in the back half of 2023. Our team also achieved record content growth in both towable units and motorhomes.

Content per towable RVs for the full year 2022 increased 45% from the prior year to $6,090 while content per motorhome RV in the full year 2022 increased 43% from the prior year to $4,099, all supported by a long-term focus on innovation and continued investment in R&D capabilities as well as our acquisition strategy.

Given the current RV production environment, our diversification strategy is paying dividends and is proving to be critical to driving sustainable growth across our business. In prior down cycles such as 2008 and 2001, our performance was substantially impacted due to majority of our revenues coming from RV.

Today, our Aftermarket, Adjacent Markets, International Business make up 46% of our total net sales. In December and January, 64% of our sales came from our diversified markets. We have simply never been this diversified while in a down cycle.

We believe our ongoing focus on diversification will further cement our leading position into the broader outdoor recreation markets to support consistent, profitable growth in the long term.

Revenues in the North American Aftermarket grew year-over-year, up 7% compared to 2021, largely impacted by a drop in revenues in the automotive aftermarket business. Coming off a strong year in 2022, we are thrilled to see a record number of RVs on the road.

As more enthusiast take to their RVs, we believe we will see more repair and replacement [business] (ph), which should continue to drive our Aftermarket revenues. To [indiscernible] that point, Aftermarket parts revenues were up 65% in January.

As we've said on many prior calls, there have been 2 million RVs added to the system in the past four years, so there will be a need for parts and services that we supply as many of these RVs are now coming to the repair and replacement cycle.

As the purchasing of RVs decreased for the season, we are already seeing an increase in service at dealerships. In 2022, we had 1.2 million calls to our contact center for service and repair related activity.

This trend should be nothing short of fantastic for the aftermarket products and services businesses that assist RV consumers with repair, replacement and upgrades. With that being said, we will continue to invest in this part of our strategy as we steer our Aftermarket business towards $1 billion market.

While our Aftermarket RV continues to grow, we are maintaining our emphasis on creating a best-in-class customer experience, as engaging and listening to our customers is central to our building long-term relationships and strengthening the Lippert brand with dealers and consumers alike.

The Lippert Scouts program, which has grown substantially in membership in the past year, serves to provide valuable insights on our products and services, how customers use them, and most importantly, how we can drive improvements in product and services. Further, we held our second annual event for RVers across the U.S.

called the Lippert Getaway during the last week of October in Pine Mountain, Georgia. It was a resounding success and consisted of five full days of learning, repairing and improving their RVs, as well as listening and fellowship amongst nearly 400 people.

We will continue to stay focused on developing relationships with the end consumer to help drive our business and more successful results.

Turning to the North American Adjacent Markets, 2022 revenues rose 26%, driven by demand in Marine along with solid content growth throughout the other adjacent businesses like bus, specialty vehicles and powersports vehicles. Our adjacent offerings benefit from the same secular tailwinds driving growth across the RV in aftermarket.

Unlike RV OEMs, Marine production has been relatively stable, producing pressure as RV demand softens. In Marine, we experienced substantially fewer challenges related to macro conditions, as the overall market didn't ramp up as hard and as fast, and thus did not create as much excess inventory as the RV business did.

Like RV, we are continuing our focus on consumer groups and aftermarket related activity. We also saw the launch of our seating division for TRACKER Marine earlier this year in Missouri.

We believe our developing relationship here will provide additional opportunity now that we are located near and supplying the largest pontoon and boat builder in the country.

Our Marine revenues for 2022 have increased to $493 million and we're anticipating a flatter year-on-demand, which we believe we will improve through organic growth and market share gains.

Our Marine production facilities have never been operating at the peak levels they are today and we expect their solid performance to continue as we continue to supply the high demand and offer many new products in this space. As a part of our diversification strategy, we have also been gaining traction in manufactured housing.

With the rising housing prices impacting people across the country, manufactured housing continues to be an alternative for some that might be priced out of traditional residential homes.

Also, during the past few years, as residential window suppliers were plagued by demand and in turn created a long delay for builders, our team took advantage and started offering entry level vinyl windows at short lead times to residential builders.

We're now starting to build a nice residential window lineup in a market that's over 3 billion annually in addressable market. And one other positive note around diversification is that we announced a key partnership last week with ATW, which is now owned by Bain Capital and is the largest utility trailer builder in the country.

We launched a collaborative partnership to start supplying them axles to all of their trailer starting this month. We are extremely excited and our team will strive to bring new products as well as incredible dealer and OEM services that they never [seen before] (ph).

We believe our adjacent market and expansion is key to our diversification efforts and our team continues to gain more and more momentum finding new products for the customers in these markets.

Looking globally, our International Businesses also experienced growth in 2022 with revenues increasing 6% year-over-year, proving to be a stabilizing force in our diversification strategy.

Growth in our International Businesses was driven by the ongoing introduction of innovative products into EU markets and we are encouraged by the backlog in these businesses as we head further into 2023. Issues stemming from global chip shortages are easing slightly, which we feel will lead to more growth in the European RV business in 2023.

We expect some of this demand to start breaking loose in the second quarter as many OEMs are starting to see chassis shipments increase, so they can build more motor caravans.

In addition, we continue to see great progress toward Lippert European components such as pop-top and acrylic windows that are already popular in Europe being adopted by the U.S. RV OEMs.

These opportunities could provide big competitive barriers for our competition, because of the ability to utilize European designs, proven products and production facilities.

While the last couple of years have been challenging for the European division, we are optimistic about 2023 being a year in which they are contributing to the overall company in the much more meaningful way. Turning our focus to innovation.

Throughout 2022, we had one of our largest product launch years in company history, and this should help bolster a challenging 2023 [year] (ph).

With about 150 people dedicated to innovation and product development in our business, we are committed to making innovation a huge competitive advantage as few peers and competitors who invest this kind of money into innovation.

Our ABS brakes for our suspension systems, Tire Linc tire pressure management systems, continued development of Onecontrol and new window, awning, appliance and door designs have all getting tremendous traction with OEMs, helping to solidify our reputation as a company that continues to refine and innovate our core products.

As mentioned earlier, we are thrilled about the acquisition of Girard and Way Interglobal, both add substantial products to our offering that connects our appetite for cutting edge products with our desire to bring increased utility and aesthetics to each RV.

These two acquisitions also make us the largest and most diverse appliance and awning maker in the entire RV industry. One of the other things we are proud of our own innovation is that we made several of our new products the new standard.

The stand out in that category was our instant hot water heater design taking the place of the older, larger, tank water heaters that have been around and standard for decades. With respect to capital allocation, we continue to do our part maintaining a balanced deployment strategy.

We remain receptive to strategic M&A opportunities when they appear, but are also focused on maintaining ample liquidity and a strong balance sheet with modest leverage. We have also continued to make strategic internal investments, specifically in automation, to add further flexibility to our cost structure.

In 2022, we allocated over $70 million to growth and automation CapEx and we anticipate allocating even more dollars to these important projects in 2023. I'll now move on to our cultural highlights for the year.

Here at Lippert, a well-rounded culture is our core focus, fostering an environment that values all team members and enables each team member to grow. We believe the strong culture starts with experienced leaders at the top, but also creates opportunities for all team members to become leaders in their own [role] (ph).

To this end, we have a group of leadership coaches that is tasked with creating and executing programs focused on developing and training leaders throughout the front lines of our manufacturing business.

This group of 30 individuals are focused on coaching team members across the business in personal and professional leadership development, getting all team members the power to make LCI a better place and impact team members around them more positively.

In the end, we believe our great culture and focus, a real resource on leadership development, is the key to retaining people. We also believe that when people are retained over the long term, there is no question that quality, safety, efficiency and innovation, the key fundamentals of the business, all improve.

Our culture focus is not only on how we can support our team members, but also how we impact the communities around us. Over 2022, Lippert team members performed over 150,000 hours of community service through serving in various charitable organizations and mission work around the country.

Over the last six years, our team members have collectively served over 700,000 hours of community service. We could not be prouder of this accomplishment in our team's effort to give back to those in need and look forward to our culture initiatives having even more of an impact of 2023.

In closing, as always, I'd like to thank all of our team members for their hard work and commitment in driving our business forward, while upholding our company values and leading strong. We could not have achieved such amazing results without this incredible dedication coupled with the strength and guidance of our leadership team.

We look forward to continuing our progress in 2023. While we may not be setting volume records, we are dedicated to setting many other records such as safety, efficiency, continuous improvement and community impact records.

We believe that we are in a great position even in the face of RV volume challenges to come out strong and [resolve] (ph), and excited to continue our efforts in delivering long-term value for our customers and shareholders. I will now turn to Brian Hall, our CFO, to discuss in more detail our fourth quarter and full year financial results..

Thanks, Jason. Our consolidated net sales for the fourth quarter decreased 26% to $894 million compared to the prior year period, impacted by a reduction in RV production, partially offset by growth in our other end markets.

January sales were down 48% to $273 million versus January 2022 due to the continued decline in wholesale RV shipments, as we estimate the industry shipped less than 14,000 units in the month, many of which were produced in prior months.

This was partially offset by continued diversification success with growth in Adjacent Industries, including Marine. Q4 2022 sales to North American RV OEMs decreased 42% compared to the prior year period, driven by a decrease in wholesale shipments, partially offset by record content expansion in towables and motor homes.

Content per towable RV unit increased 45% to a record $6,090, while content per motorized unit increased 43% to $4,099 compared to the prior year period. Towable content growth can be attributed to organic market share gains of 15%, while acquired revenues contributed 7% of the year-over-year growth.

We saw a positive performance from our other end markets, which helped to partially mitigate the impact of softened RV demand. In the quarter, North American Marine sales increased 4% with our estimated content per powerboat increasing 19% to $1,712, driven by market share gains.

Overall, sales to Adjacent Industries grew 3% versus the prior year period, supported by the aforementioned growth in Marine sales. Q4 2022 sales to the Aftermarket decreased 17% compared to the prior year period, driven by a decline in automotive aftermarket sales, partially offset by strength in RV [Technical Difficulty] aftermarket sales.

International sales decreased 1% year-over-year, representing 10% of our total company revenue, as exchange rates negatively impacted results by approximately 9% due to the strength of the dollar compared to the euro and British pound. Excluding the exchange impact, organic growth would have been 8%, led by the strength seen in our rail markets.

Gross margins were 16.4% compared to 24.1% in the prior year period, driven down by one-time charges, production inefficiencies and elevated input costs in aluminum, steel and freight. Our one-time charges were a key contributing factor to margin compression and our EPS variance for this quarter.

These one-time costs consisted of severance and inventory expenses, leading to a negative impact of $0.62 per share. Severance expense was incurred as we worked to improve our cost structure and remove redundancies within our operation.

Our one-time inventory charges primarily related to the difference in price at which we purchase these commodities such as aluminum versus the selling price as well as adjustments for excess and obsolescence reserves. Typically, the pricing variance is accounted for by our quarterly lag pricing adjustments.

However, given high volatility seen in the recent prices for some commodities, we incurred a one-time charge to earnings. Although this write-off hindered near-term margins, we expect reduced margin pressure in the second half of 2023, as production ramps supporting profitability during the year.

Looking ahead, we are prime to deliver profitability despite the macroeconomic conditions moving into 2023. SG&A costs as a percentage of sales increased year-over-year due to the one-time costs noted previously.

Operating margins decreased compared to the prior year period, in line with expectations as we absorb fixed costs on a lower sales base and consuming the aforementioned [Technical Difficulty] cost inventory layers.

GAAP net loss in Q4 2022 was $17.1 million or $0.68 per diluted share compared to net income of $82.3 million or $3.22 per share in Q4 2021. This decrease was a reflection of lower RV demand. EBITDA decreased 93% to $10.2 million in the fourth quarter compared to the prior year period. Moving on to full year 2022 results.

Sales to North American RV OEMs increased 17%, driven by increased interest in the outdoor lifestyle and content expansion. Sales to North American Adjacent Markets increased 26% to $1.2 billion in 2022. And North American Aftermarket increased its total sales by 7% to $825 million.

While International sales increased 6% to $398 million compared to the prior year period. Acquired revenues were approximately $219 million for full year 2022. Non-cash depreciation and amortization was $129.2 million for the 12 months ended December 31, 2022, while non-cash stock-based compensation expense was $23.7 million for the same period.

We anticipate depreciation and amortization in the range of $130 million to $140 million during full year 2023, primarily due to amortization from recent acquisitions.

For the 12 months ended December 31, 2022, cash generated from operating activities was $603 million, with $131 million used for capital expenditures, $108 million used for business acquisitions and $127 million returned to shareholders through a $103 million of dividends and $24 million in share repurchases.

Operating cash flows were positively impacted by increased earnings, and as inventories continue to normalize, we anticipate [Technical Difficulty] a reduction in the impact of working capital on cash generation.

Driven by our strong operating cash flows, we further pursued our capital allocation strategy of deleveraging our balance sheet, making net payments of $178 million on outstanding borrowings during 2022.

At the end of the fourth quarter, we had an outstanding net debt position of $1.1 billion or 1.5 times pro forma EBITDA adjusted to include LTM EBITDA of acquired businesses. As the greater macro environment remains uncertain, we are focused on maintaining a strong balance sheet and continue to target a long-term leverage of 1.5x net debt to EBITDA.

In the near term, we are working to integrate recently completed acquisitions, which we expect to positively impact our operating cash flows. Full year 2023 capital expenditures are anticipated in the range of $80 million to $100 million. Given the uncertainty in the marketplace, we anticipate RV production levels to remain volatile in the short term.

As a result, we estimate the January consolidated sales results of down 48% to be indicative of full Q1 2023 results, as RV OEM production remain suppressed while the dealer base seeks the right inventory levels for expected demand.

The sales decline is primarily driven by the reduction in RV production as we anticipate Q1 2023 RV shipments between 45,000 and 50,000 units.

Looking forward to Q2 and beyond, we are anticipating RV shipments to improve more in line with those experienced in the back half of 2019, which results in an estimated RV shipment range of 330,000 to 350,000 units for full year 2023.

While we have responded quickly to reduce our cost structure, material cost headwinds, as discussed in prior quarters, will continue to limit profitability through the first quarter, and we anticipate operating profit margins to return to mid- to high-single digits [Technical Difficulty] 2023. That is the end of our prepared remarks.

Operator, we're ready to take questions. Thank you..

[Operator Instructions] Our first question is from Kathryn Thompson from Thompson Research Group. Kathryn, your line is now open. Please go ahead..

Hi. Thank you for taking my questions today. First, I'm going to focus on the OEM ramp up, and if you could give some cadence to that? And then, also just clarify that you're -- as you said in your prepared commentary, you're seeing some good strong demand for maintenance at RV dealers just for units that are already sold.

Could you talk about what trends you've seen historically with maintenance versus sales? And is there a divergence in that trend that you're seeing in today's market that could be positive for the outlook?.

Yes, I'll start, Kathryn. Regarding the ramp up or just where the industry is going from where we're at, obviously, we've been in ramp-down mode and just trying to get to a pace where the industry is -- where wholesale is being outpaced by retail.

So, we've had a couple of hiccups here in November and December, but for the most part, it feels like the next couple of months will be retail outpacing wholesale hopefully longer than that by a pretty fair margin.

Still getting -- still trying to find the bottom, I think, where we've got some customers that are taking weeks at a time down between now and into March, it feels like. We're kind of hoping after that in March-April timeframe things start to tick up.

And certainly, all the retail outpacing wholesale that's going on today is just taking chunks out of dealer inventory, which is where we need to get to see some wholesale orders again. And on the aftermarket piece, I'd just say that we track all that activity by the minute.

And January, just on parts orders from dealers, was up 65%, I think, as we said in prepared remarks. But that's dealers calling in, needing replacement parts and parts for service, and we just see that activity up significantly right now.

And we know that trend will continue especially as they have more time to service units and more service base have come online over the last 12 months. So, Brian, I don't know if you want to add to the aftermarket piece..

I think maybe not so much on the aftermarket piece, but to give you some additional clarity around our expectations, I mean, obviously, Kathryn, there's a lot of uncertainty in the marketplace today. But as we said in our prepared remarks, we're expecting somewhere between 45,000 to 50,000 units for the first quarter.

I mean, that's far off from when you think about Q1 of last year at 170,000-plus units. But as the OEMs hold production levels pretty -- well, hold them down or suppress here temporarily, as Jason said, to let the inventories deplete some, we would then expect that to start to come back up.

And like we said, if you look more in line with 2019, from Q2 through Q4, you're certainly looking at 85,000 to 100,000 units a quarter is kind of what our current expectation is. I mean, we continue to hear a lot of positivity from a lot of the dealer base. There are retail sales occurring.

So, at some point, as they continue to deplete inventory, there's going to have to be orders and production to follow suit and replenish inventories in the system..

Okay. That's helpful. As a follow-up to that, there's several larger retail shows that have occurred at the beginning of this year.

Any color on trends from those? And what this could portends for the future?.

Yes. We've talked to a lot of OEMs and a lot of dealers over the last a handful of weeks that they've had big shows since Tampa in January. All the traffic commentary around retail traffic and purchases have been really healthy. And I think we're seeing that take out of inventories to rebalance dealer inventories, like Brian said.

There's been a lot of positive remarks, dealers seeing inventories come down to healthy level where we can see -- they're going to have to buy for the summer selling season. They know it. And I think everybody's just positioned to get dealers in the best position they can before they -- before that starts to happen.

But I think we're on the shows, all signs and commentary have been positive. Retails seems to have stabilized. I just look at how bad Q4 fell, it's 77,000 or 70,000 units, retail/wholesale roughly. If you annualize that, that's 300,000 units. That's a layup. So that's where we feel 330,000 to 350,000 is a good number.

And for a down year, that's a -- it's a pretty damn good number. I think it's -- I think that's healthy, and we can adjust our cost to get into a good position with those -- with that type of volume. So -- but retail staying healthy is the most important thing we have looking for our industry right now and it's preparing to stay that way..

Okay. And then final question for the day. On inflation, you said in prepared remarks, freight and raws were up in Q4. But what we're seeing in other industries, wide variety of industries, definitely you're having certain costs, natural gas, but other labor including pulling back.

How do you think about the balance of inflation or even deflation as you look out in 2023? Thank you..

Yes. I mean, I'd start first with from a pricing perspective. To our customers, we've been saying throughout a lot of 2022, we've had some pretty meaningful price decreases, which I think is consistent with your commentary about what we're seeing in the marketplace for steel, aluminum, freight.

We are seeing those costs come down from the all-time highs that we experienced these last couple of years. So, we've been given price decreases. But from a consumption perspective for us and our income statement results, we've talked that we were -- we've been heavy on inventories.

Some of those costing layers or some of the all-time high costs that we're consuming today, that certainly was a headwind for the fourth quarter. And as we, I think, communicated at the end of the third quarter, we expected that -- I expect that to continue into the first quarter. We certainly are starting to see improvement in our inventory layers.

But with the little volume that we're seeing here in the first quarter, it's taken some time to do that. So -- but I do expect that to be -- I expect us to be through most of that through the first quarter, and as we get into the second quarter, we should start to get back on par with where I think we would expect us to.

So, from a margin perspective, because that's the biggest needle mover, I would say, as Jason said, obviously, we've had to respond quickly and take a lot of costs out of the business and we'll continue to do whatever is necessary from a fixed and variable cost perspective, but materials is the biggest needle mover.

And I expect that as we move through that and get back to some more normalized volumes in the second quarter and beyond in 2023, we should be back into more of a high-single digit type -- or mid- to high-single digit type margin view for operating income..

Great. Thank you very much..

Our next question is from Scott Stember from ROTH MKM. Scott, your line is now open. Please go ahead..

Good morning, guys. Thanks for taking my questions..

Good morning..

Brian, from what you're saying about, I guess, the lag of getting that higher priced inventory through the channel and matching things up, it sounds like the first quarter could be challenged from a profit standpoint, or do you think it will be profitable in the first quarter?.

I think that as we look at Q4 -- I'd contrast Q4 with Q1. Q4, you had the one-timers in there like we talked about $0.62 EPS impact. I'd say from a margin perspective, if you take those out, you're pretty darn close to breakeven for fourth quarter.

I expect that given January's performance and we think that that's going to be a bit indicative of what the first quarter looks like, we'll see a little bit of ramp up here in February and a little bit more in March, but pretty consistent with the declines we saw throughout the fourth quarter.

So, I think they're pretty similar from a quarter view perspective, once you take those one-time hits out of there. So, I think it'll be close to breakeven and possibly at least we would target a little bit better than that.

But then once volumes come back in the second quarter and we really chew through these inventory layers, which as I've been saying previously, those -- that's anywhere from 4 percentage points to 5 percentage points of margin headwind that we've been experiencing these last couple of quarters as we consume those layers of inventory..

Okay. And then, back to the aftermarket. You talked about how the automotive side really drove the decline in the quarter.

Can you maybe give a little bit more content on that? And the other side of the business, the RV, how did that perform in the quarter?.

Yes. So, the RV business is exceeding expectations in terms of just volume. So, no problems there. And again, it's all service and repair parts related. I mean, there's some upgrade and just normal aftermarket business through all channels, consumer, e-tail, Amazon dealers and all the distributors that we do business with there.

And we expect that to continue through this year. On the automotive side, it's largely driven by new car sales. So, as everybody knows, there's just a glut of availability for new cars. There just isn't being -- trucks aren't being produced like they were three years ago.

So, when new cars are down, new automobile sales are down and production is down and our hedge business is impacted by that. But we expect that to start slowly coming back. And we've adjusted our business. We chased materials down all last year on steel, because steel is mostly the kind of content we have the current automotive side of our business.

So, as all of the indexes adjust positively, we work through inventories, we'll see that positively impact margins through the whole course of this year..

And I'd add to that, Scott. If you look full year, we really started, I think, seeing the disconnect in the back half of 2022 between the automotive side and the RV Marine side of the business. But if you look full year, automotive was only -- it was off 3%, but the rest of the business was up 19%.

So, you can certainly see there were -- there was a sharp contrast in the performance. When you look to the fourth quarter, as the automotive side began to slip more and more, it was off about 24%, almost 25% from the fourth quarter.

So, you can see that, that's the side of the business which -- it was running about half and what we experienced in the back half of the year, it's now to less than half of our overall aftermarket business..

Okay. And then, in the first quarter or at least in January, you talked about that 65% increase.

That's just from, I guess, orders from dealers for parts, service parts, what is the overall aftermarket doing in -- the whole aftermarket doing in January?.

Yes, I mean, for January, everything is still suppressed. I would tell you the automotive side did get slightly better. We started to see some orders come in there. So, instead of 24%, 25% off like it was in the fourth quarter, it was only off 17%. The RV Marine side of the business was better than that, but still down slightly in January.

I think that it's -- our expectation is on that side of the business, a lot of it, is our sales to wholesale distributors. Their orders are going to be a little bit spotty.

So, we've seen from month to month some pretty meaningful variances when we're looking at how their orders are coming in, but at least it's not down as meaningful as what the automotive side is, and we expect that as we move through the winter months, and people get their units out for the season, that we'll start to see that continue to improve.

So, when we get to the back half of the year, we're definitely anticipating all the aftermarket to be up -- start probably in the summer months at some single digit growth rates, but then be double digit -- back to double digits when we get towards the end of the year..

And the two other things I'd add Scott is automotive is about half of the aftermarket business. So, it weights heavy when it weights one way or the other.

And then, we've got the -- on the RV side, it's just -- there's all sorts of opportunities with service parts, but that's through largely retail and dealers and the big chunk of our aftermarket business on the RV side is wholesale distributors and they've got inventories to work through as well. So....

Okay. Just last question on the aftermarket. There was a slight operating loss within aftermarket in the quarter.

That was strictly related to the auto side? And it sounds like probably having to do with input costs as well?.

Yes, you're correct. On both fronts, definitely as the -- at the volumes that we were experiencing on the automotive side and the seasonality, when you get into the fourth quarter and first quarter for automotive, it typically is extremely low margin. So, I would call that normally in the off season, low single digit type margin.

So, to see that flip to a loss is not much of a surprise.

And then, couple that with, like you just mentioned, consuming some of the high-cost steel layers in a lot of those hitch products, we've certainly seen -- very consistent with what we've seen across the entire business where it's quite a bit of a headwind through the back half of 2022 and into this first quarter or so of 2023..

Okay. Thanks, guys, for taking my questions again..

Thanks, Scott..

Our next question is from Fred Wightman from Wolfe Research. Fred, your line is now open. Please go ahead..

Hey, guys. Good morning.

I was hoping you could just give a comment on the timing of the model year changeover as we see this depressed production level extend farther and farther versus where people might have planned? Do you think that your customers are just going to move to model year '24 products when they resume production or is it going to be continued production at '23?.

I think there's a lot of talk around that. There's a lot of -- the biggest problem right now probably is just the 2022 model year. It was the largest produced model year in the history of RVs. And, obviously, volumes have been -- retail spend depleting since more or less July of last year.

So, there's a lot of that product in the pipeline, but we've heard all sorts of stories over the last couple of months where the OEMs are doing what they need to do to blow that product out to the dealers and get it in the hands of the retail, so that it's just flushing through the system.

On the other hand, the '23 is just -- there's not a lot of that product being built. So, I don't anticipate that's going to be a big issue.

Certainly, you'll have some of what you're talking about, but I think that the OEMs and dealers doing a really good job working together to -- they both have the same common issue here and both have to collaborate to figure it out.

So, I think in the past, they've done a really good job of that when there's been that kind of a headwind, but they'll get through it..

Okay. And then, Brian, you gave us the total number for the one-time costs in the quarter. I think, you cited it as a $0.62 headwind.

Can you just break that down between severance and then the inventory hit?.

I can, Fred. I got it right here. It's about the -- from an inventory perspective, there's a bulk of it, it's about $0.44. So, the remainder is the $0.19, which is severance..

Perfect. Thank you so much..

Our next question is from Craig Kennison from Baird. Craig, your line is now open. Please go ahead..

Yes. Hey, thanks for taking my question as well. I wanted to follow-up on Fred's last question.

Regarding your cost structure going forward, how should we think about SG&A in Q1 and on a go-forward basis following the actions you took in Q4?.

Hey, Fred -- or Craig, the -- so, I would say that we've continued to make adjustments to our cost structure. We really started having to make some bigger swings at it in November and December as we saw what production schedules look like.

So, there's been additional adjustments that we'll continue to make as we rightsize and get better visibility into the coming months.

I do think that, obviously, from a percentage of sales perspective here in the fourth quarter and first quarter to see our SG&A costs slightly elevated, it's certainly the expectation, and then resume or head back to the more normalized levels when we get the volume in the second quarter.

So, I don't think it's going to vary too meaningfully, but we have taken some additional costs out of it. And, obviously, from a compensation perspective, as you would weigh things more with where -- when the profits are actually incurred given the expectations we have for the first quarter, that will be a much lighter quarter from that perspective.

So, I think it will come down some from the fourth quarter, but probably not in a major meaningful way..

Thanks. And then, Brian, I think I heard you make a few comments around your margin expectations for the full year, and then you commented on maybe a breakeven scenario for the first quarter.

Could you just give us a sense of the cadence of margin, and where you expect the full year margin to be, at least what range might you expect that to be in?.

Yes. I mean, I think that -- really 2021 is a good year for comparison. When I look at -- and I'd say little bit by chance, when you look at top-line expectations and then look at kind of the what type of margin we were running throughout 2021, our expectations will be that that's pretty similar when we have the volume.

So, once you take first quarter out, which as I mentioned, we're expecting breakeven to a small slight profit there. Once you move past that and we get volumes resuming to more normalized levels, we would expect mid- to high-single digit type margins.

And I think that at least the way we're seeing unit production play out today, which there's a lot of uncertainty in that, Q2 would be, I would call it, 8% to 10% type margin, and then that improving throughout the remainder of the year with as volume increases.

Fourth quarter normally would be a little seasonally different, but at least through the second and third quarter, which would be the meaningful quarters for the year, I would expect them to be in that range..

And our diversified businesses are really adding a huge lift to our profit improvement through the year. So, most of our businesses there are having really solid years, off to a good start and all those. So, the diversification is a big part of the story as well, Craig..

Great. Thank you. And then on content per unit metric, you mentioned giving some price back as your cost changes.

Just curious, is that figure is something that would go down sequentially? Or is there enough innovation and other drivers to that metrics such that you could see continued growth?.

Yes, Craig, if you look at it -- if you were to go back and contrast the past few quarters on a year-over-year basis, you certainly saw that grow to all-time highs in the 50%-plus range. We're at 45% today. When you start to dig into the details of that, our organic growth rate is some of the highest I remember seeing in my tenure here.

So, at 15%, acquisitions adding another 7%.

As you fast forward into the next quarter or two, I would expect those acquired revenues to probably not vary too much, and I think that we're going to -- we've won enough business and expect to continue gaining share during 2023 that I would expect that double-digit type organic growth rate for us to continue at least here in the near term, which is far greater than our historical 3% to 5% average.

Now, if you look at the remainder of that, that's price. And as we've talked over the last couple of years to see the 35%-plus type inflationary numbers pushing through the system has certainly been the case. But that's retracted.

If you look at the balance of it for the fourth quarter numbers that we saw, that's way down from where it was in the third quarter. And as you fast forward into the first and second quarter, I would expect that price number to continue to come down as we give those price -- the price adjustments back to our customers.

To where that would be on a more normalized basis and you should be back by the first, second quarter to where you really just price is not a part of the picture and it's more about organic and acquired revenue growth..

Great. Thank you..

Thanks, Craig..

Our next question is from Mike Swartz from Truist. Mike, your line is now open. Please go ahead..

Hey guys, good morning. Maybe to start.

Just on the -- I think, Jason you called out the $370 million cost reduction program that was put in place in 2022, maybe give us a feel for how much of that was actually realized in 2022 and how much, I guess, the remainder we'll see in 2023?.

Yes, I mean, I'll jump in there, Mike. I'd say we realized most of it. We've had to make as you've watched the RV industry production rates decline really ever since the first quarter of 2022, we've been taken cost out of the business ever since that point, whether it's labor or adjusting our fixed cost structure to the best of our abilities.

So, I would say that's what's been realized at this point. We probably have a little bit more to go, but probably not meaningful enough until we really see what sales levels are going to be I think here in the short term.

Like I mentioned earlier, we've taken some additional cost out in January based on changing forecast, but we're really looking forward to the second and third, fourth quarter as to what levels, the cost structure we need to target..

Yes, I think just to add to that, it's -- when you get into cost-cutting mode, you just keep going. So, there's things that we're looking at every single day, we're on cost cutting mode right now all over the business.

And we're just trying to make sure that we're not cutting too deep, because we do feel that we're going to be to a 400,000 unit-ish run-rate towards the middle of the year. That's what we feel we're going to get back to. So, we don't want to cut so deep that we can't sustain higher levels of production once we see it.

And then -- that's what I'd add there..

Okay. That's very helpful. And then just on the Marine business, I think you made some comments that you think will be flattish in 2023.

Is that including market share gains, or is that what you see just from industry production?.

Yes. I think that starting now early in the year, at least what visibility we have from the manufacturers is that run rates aren't changing a great deal, some up, some down, so overall for us we're expecting pretty flat through the first quarter and into the second quarter.

I think it's yet to be determined as to how much that varies throughout the year. Certainly, there is going to be some pricing adjustments that will see some declines there as aluminum costs have come down, et cetera, et cetera.

But I think from -- our organic growth should help to mitigate some of those declines on the pricing side of things, but it's yet to be determined, I would say, on what the volumes will be on -- for the manufacturers as you get further into the year..

It feels steady right now. They've been running at a good click for a while. And we anticipate at some point in time, it will cool off, but we're not seeing at this point in time..

Okay, great. Thank you..

Our next question is from Bret Jordan from Jefferies. Bret, your line is now open. Please go ahead..

Hey, good morning, guys..

Good morning..

Quick question on -- you maybe you said this, but did you talk about your expectation on '23 retail and RV just sort of -- so we can line up what shipments might be versus clearing inventor?.

Yes. We said on retail 370,000 to 390,000 is our expectation. Wholesale 325,000 to 350,000..

And then, on Marine, the same question, I guess.

Are you seeing that retail demand is clearing the inventory or is inventory building on the Marine side? Obviously, there is a backlog there because of supply problems, but is retail still as strong as it had been?.

Yes, I think they have been building some inventory and retail has fallen off just a little bit. But again, like I just mentioned a minute ago, we're not seeing the production rates change much on the OEM side. We anticipate that that'll happen at some point in time this year.

But with the introduction of electric Biminis, lot of seating content, we got plenty of new business there to override any way the business might soften or the market might soften..

Okay. And then a really big picture question. I guess you commented in the beginning about the RVIA forecast of 63 million RV trips this year and I think you talked about peer-to-peer RVshare, because I'm just trying to do the math.

If there's 11 million RVs in the population, we're going to have 63 million people using them, is this peer-to-peer sharing to get this utilization? And I guess at some point is peer-to-peer a risk to the industry and that one RV can service 10 people as opposed to 10 people buying an RV, does it impact demand at some level?.

Yes. It's certainly both. When you look at the 3 million rental nights that RVshare and Outdoorsy have both have gone public with over the last -- talking about over the last few years, I mean that's a significant amount of rentals compared to what we would see in years pass before the marketplace existed.

So, yes, but I don't -- I really feel that -- in talking to a lot of consumers and we talk to a ton of consumers, I feel that there -- they use rentals as a way to gauge whether or not they want to buy an RV.

Certainly you'll have families that want to rent anytime they use it, but you're going to have families that jump into the lifestyle and want to have their own and not use somebody else's every time they take a trip, especially if you're going to use it often.

So that's kind of the some of the feedback we hear from consumers -- from our customer experience team. I think it's really healthy for the industry.

And then the rental individuals, the individuals that are running these RVs to the consumers, I mean some of these guys and gals are buying five, 10, 50 units and having a fleet and running them out and servicing them that way..

Right, okay. And then, one last question, I guess, on the cadence of pricing. Obviously, I think you talked about how we are going to be giving some of the price back that had been 30%-plus.

Is it -- is most of the price decline already been seen or does it sort of staggered out through Q1 and Q2 on the RV OE price side?.

It really depends on what commodities end up doing over the next couple of quarters, but we feel like most of it is there. We actually -- I was going to mention this on a comment a minute ago, but there is actually some price increases going on too. So, other areas where we didn't have indexes, we're holding price as long as we can.

So, I mean we're going to manage margin the very best we can to hit the target numbers we talked about a little bit ago, which we feel for a really down year are pretty solid..

Yes, Brad, I would add, on the contractual one, July one, as we discussed previously, it was a very meaningful decrease for our customers. January one is another one. October was actually a slight increase, very nominal.

But it's -- so given the volatility in that -- in this space, we've seen it move up and down, but some of the more meaningful decreases on a contractual basis have already been given at this point..

Okay, great. Thank you..

[Operator Instructions] Our next question is from Daniel Moore from CJS Securities. Daniel, please go ahead. Your line is now open..

Thank you. Thank you for all the color. Greatly appreciate it. Just maybe to crystallize for aftermarket, what are you thinking about for growth for the full year? You gave a lot of color and commentary about some of the buying patterns for January.

But what are your expectations for growth? And second, in addition to the CapEx, just talk about how much working capital do you think you can take out this year? And what a free cash flow number might look like for '23? Thanks..

Yes, I mean from a full year aftermarket perspective, Dan, I would say after we work through these first -- the first quarter, we would -- like I mentioned, towards the back half of the year, we'd get into the double-digit percentage growth rates. I think overall, it probably averages out to high single digit type growth for full year.

So, a little under what we've seen historically. But certainly, given the current headwinds we've been seeing, that we should see a lot of improvement there. From a cash perspective, I think that we'll have a better operating cash flow year in 2023 than we had in 2022 assuming we continue to bring inventories down.

So, based on the guidance that were given on the overall expectations for the business, plus an additional $300-plus million type reduction in inventories for the year, you should be in excess of $700 million of operating cash flow, so -- which is actually slightly north of what we experienced in 2022.

So, from a cash perspective, we're expecting really, really strong 2023..

Appreciate the color, again. Thank you..

Thanks, Dan..

Thanks..

Our next question is from Brandon Rolle from D.A. Davidson. Brandon, your line is now open. Please go ahead..

Thank you. I just had a quick question on your shipment outlook.

Did that change at all since your pre-announcement a couple of weeks ago?.

No, I don't think so..

Okay. And then on just the content per unit and de-contenting, given pricing seems to be the biggest impediment to retail right now, how much de-contenting are you expecting in this upcoming model year 2024? I think, a lot of people are expecting '24 to be cheaper than '23 and '22.

I don't know if you're able to gauge that or if it's on a brand-by-brand basis, but on average I guess how much de-contenting do you expect to take place in this upcoming model year?.

I mean, not a ton honestly. I mean, we expect some de-contenting to happen, but now it's time to show the value you got in your units. And I mean, we've got -- I mean, I'll just give you an example. ABS brakes, we launched this year. We've got a ton of interest in that. And that's actually doubling the cost of axle products in the units.

So, as I've said on a lot of our prior calls, the innovative products that we supply to the industry due to the fact that they not really commoditized, they're really special. We tend to have more of these types of options and sell the stuff into the units, whether the industry is good or bad, they tend to take out the commoditized type products.

The commodities of the units and replace them with better features and values and take cost out that way and we just don't supply a lot of commodity type products to the industry.

So, while they may do that, it tends not to affect us much, because if you need an axillary slide out on the unit, you're going to use an axillary slide or leveling systems and things like that. You're not going to take that stuff that the consumer needs off the unit. So, that's a short answer..

Okay. All right, thank you..

Our next question is from Tristan Thomas-Martin from BMO Capital Markets, Tristan, your line is now open. Please go ahead..

Good morning. I just had a question on your industry production outlook for the first quarter, I believe is at 45,000 to 50,000 units.

If in -- January was at 14,000 and it seems like production started to come back in February, it's probably going to ramp up little more in March, what are the odds the industry ends up coming in ahead of your expectation?.

Well, there is always a chance. So, as we've said before, we usually don't have great visibility out beyond three, four weeks from an order perspective. So, it's a hard question to answer, but it's all going to depend.

And at this point where we're at on February 14, dealers that have to be putting through a lot of orders, and that's going to take time for them to produce, that hasn't really been happening yet. So, I wouldn't expect it to vary greatly. But there's always a chance to....

Better -- our 325,000 to 350,000, we bet on. We feel that's what a good number is. But at the end of the day, there's a lot of positives out there. I mean, unlike '08, you go back to the last big dip we've had in production, we -- the economy was really unhealthy. I mean, this time around the economy is pretty healthy.

The retail consumer is pretty healthy. The OEMs are consolidated and pretty healthy. The dealers are much more consolidated and pretty healthy. Unemployment is low. There's just a lot of good things. There might be some pieces of the economy that get hit over the next six to 12 months.

But the fact that it's not getting hit all at once, I think is a good sign. And the fact that retail staying relatively healthy right now, consumers healthy, it's -- I think we're in a good spot. We're in a good spot to get at or above what we're talking. I don't -- I wouldn't bet on below..

Awesome. That all makes sense. Thank you..

We currently have no further questions. I will now hand back to our speaker for final comments. Mr. Jason Lippert, please go ahead..

Thanks everybody again. And again, on the second what I just get on talking about.

We are in a difficult period in the RV cycle right now, but we've been through before, we've got solid leadership, and the business is also much more diversified today than it was 10, 12 years ago when we went through it the last time, and that's going to give us a nice lift on the business.

This time around, it doesn't feel nearly as bad as the last time we went through a recession. So -- and as I said, the OEMs and the dealers and the consumers are relatively healthy. So, I think we're in a good spot. We look forward to updating you. We'll know much more about the market and where the RV business is headed the next time we have a call.

So, thanks for joining us. See you next time..

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines..