Despite wholesale shipments on the decline and retail demand, while still solid, dipping slightly, LCI Industries Chief Executive Officer Jason Lippert said the RV industry is still staring down the fifth best year on record.

Following the Elkhart, Ind.-based company’s first-quarter financial report Tuesday (May 7) morning, Lippert told investment analysts that he expects the RV industry to reach a new normal of wholesale shipments balancing out with dealer orders sometime in the third quarter of this year.

“One of the biggest things to note is that the industry is phenomenal at adjusting and reacting,” he said. “Sometimes we don’t get the forecast right, and can’t see the future as good as everybody would like us to see it. But at the end of the day, when the dealers start making adjustments, the OEMs and suppliers make adjustments, and we get where we need to be in a relatively quick fashion.

“So what we see out there right now is dealers pulling back on inventory, probably a little bit more than normal, because of interest rates and some other factors — and just a little bit of trepidation about what’s coming,” he added. “But that’s ultimately healthy for the business. Manufacturing rates are adjusting to meet the new demand, and it’s still going to be the fifth best year on record, likely. We’ve got to keep that in mind.”

In its Q1 report, LCI announced its consolidated net sales decreased 9% to $592 million compared to the prior year in large part due to a market in which there was a 27% decrease in RV wholesale shipments. This resulted in LCI’s Q1 2019 sales to RV OEMs declining 21%. However, this was offset by LCI’s gains in its adjacent markets (19%), aftermarket (20%), and international markets (49%), which now make up about 40% of LCI’s last 12-month sales.

Brian Hall, LCI’s chief financial officer, noted that the company’s sales to RV OEMs continue to outperform the industry due to increases in content per unit. Content per travel trailer and fifth-wheel increased $187 year-over-year, or 6%, to $3,504 for the 12 months, he noted, while content per motorhome increased $172 year-over-year, or 7%, to $2,500 for the 12 months.

“Growth in furniture, awnings, and Furrion products continued to be the key contributors to the increase, partially offset by the continued shift toward more entry-level product which tend to carry less content per unit for LCI,” Hall said.

In addition, LCI noted that another factor impacting its Q1 report included a scheduled pricing increase relating to tariff and commodity impact on Jan. 1. As far as potential acquisitions, Lippert said the company has “an excess of $1 billion in realistic pipeline of strategic targets that span all LCI diversified markets.”

What follows are the edited highlights from the investors’ call.

On whether the first part of the year supported the company’s earlier forecast of 2019 being a flat year with regard to retail activity:

Lippert: I think that we might today modify that to ‘flat to down 5%.’ We’re definitely leaning more toward the down 3% to 5% range. By all accounts on our end and all the different canvassing we’ve done with dealers and OEMs, retail for March was decent and for April was decent — and, again, this is in comparison to historic retail figures. But there are no signs that it’s going to be down further than that right now. We’re going to keep our eye on it, but we’re comfortable where it’s at right now.

On when the dealer inventories will complete the process of being right-sized:

Lippert: By the beginning of Q4, sometime in Q3, is what we’re thinking. But it depends, obviously, on the activity for retail and wholesale over the next quarter and a half. So, as long as retail stays where it’s at, things have normalized for the most part on the wholesale and OEM side.

• On what factors allowed LCI to gain 80 basis points in its gross margin performance for the quarter:

Hall: The biggest portion of the improvement is coming from lean investments and automation investments in a lot of our processes for this production level. A lot of it’s tied to labor, along with the pricing adjustment that we put through effective Jan. 1 for tariffs. And then throw on a little bit of material improvement. Ever so slightly, we’ve been continuing to kind of chip away at our inventory. I think we’re down $35 million in just the last two months in inventory. But a lot of it’s just been from rightsizing our business for this production level.

Lippert: I would add that I think we right-sized a little bit quicker than the rest of the industry. We started back in the late September early October last year. We threw out a wholesale total number for the business that was probably lower than what the RV Industry Association and some other people were forecasting.

And I’d also add that January was atrocious. There were eight total production days for us in that month, and that’s much lower than what we’ve seen in the past. There was extra time off by the manufacturers and we had several shutdown days due to winter weather.

On the growth potential in Europe, and whether slideouts may be a factor in that growth:

Lippert: In the European caravan market, in general, it feels like the wholesale activity has kind of slowed down to a flat growth right now, which is still decent. The opportunity for us is that it’s a new market for us, much like RVs may have been 20 years ago for LCI. Even in the slower times we grew because there were lots of acquisition opportunities and lots of organic growth opportunities, and the same holds true for Europe right now for us.

With respect to slideouts, it’s still one of those things that we’re continuing to work with the industry and industry players over there on technology, and we’re making gradual progress. I think the fact that Thor owns Hymer over there now is a big opportunity for us, because we now have somebody that owns a substantial player in Europe that is very familiar with slideout technologies. Those conversations have commenced and we’ll see where that goes. But it’s a lot better opportunity for us with Thor owning Hymer than just trying to penetrate the European market without a North American owner in there.

We also made the announcement earlier this year that we hired a German leader that was actually an ex-Hymer executive. We are looking at a German-based manufacturers in the RV, rail and marine businesses in Germany, as well. Having a German leader in that space will help us start to navigate and make good on some acquisitions and business development there, as well.

On the growth potential in its aftermarket business:

Hall: We’ve talked about it as being close to $1 billion opportunity. Certainly, given the age of a lot of those units and the replacement cycle, we benefit from that. So, when you carve out acquisitions and things that have impacted the growth for us over the years, we still continue on an organic basis to click off anywhere from a 15% to 20% year-over-year growth rate within that space. The more products that we introduce with aftermarket in the design plans — we didn’t used to do that — it just creates more opportunity.

Lippert: You just have to keep going back and looking at $1 billion and a close to $1.5 billion of RV OEM components going into new vehicles every year. A substantial amount of those components will wear out and need replacement parts, and we’re the only replacement choice in a lot of those cases.

Like I mentioned earlier, we are constantly working with all customers in the OEM space to take on more of that volume, even products that we’re not traditionally manufacturers of, because they just would prefer to simplify the supply base — as complex as that is for millions of SKUs over decades of production for all sorts of component parts, and that’s just RVs.