Officials at Patrick Industries Inc., the Elkhart, Ind.-based component supplier, said they expect the RV industry to achieve “inventory equilibrium” sooner rather than later, and even warned of an overcorrection as manufacturer production levels seek a balance with dealer inventory and retail demand.
In a conference call with investment analysts following its first quarter financial report Thursday (April 25), company officials said the 10% increase in net sales to $608.2 million was achieved despite revenues from its RV business having decreased 9%, or $36 million, from the first quarter of 2018.
It should be noted despite the revenue decrease in its RV business, the company’s RV content per unit (on a trailing 12-month basis) increased approximately 30% to an estimated $3,131 from $2,414 for the first quarter of 2018.
“RV OEMs continue to aggressively rebalance inventories and limit production in efforts to drive towards inventory and retail equilibrium in the industry,” said Patrick Chairman and CEO Todd Cleveland. “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.”
Company President Andy Nemeth noted that Patrick’s diversified market penetration in both the marine and residential/commercial industrial markets helped offset its RV business declines. The RV market represents about 56% of the company’s business, so 44% of its revenues are now coming from its other three primary markets. “This compares to approximately 31% a year ago,” he pointed out.
“We anticipate a return to equilibrium with a possible overcorrection amongst RV dealer inventories in the near-term,” Nemeth added. “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, 2019, 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 2019. We currently expect a flat to low single-digit decrease in 2019 retail shipment growth.”
Edited highlights from the conference call with investors includes the following:
Q: When do you expect the inventory equilibrium to be realized?
Nemeth: 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 sooner rather than later.
Right now, we’re estimating continued run rates through the second quarter on the wholesale side, but retail demand has been strong. If you look back at the past four quarters, we’ve seen progressively decreasing wholesale unit shipments against pretty strong retail. So we believe that equilibrium point is approaching us. There could be a little bit of an over-correction. But, again, against the backdrop of that strong retail, we think that we’re getting closer to it.
Q: You mentioned the potential for an over-correction on the RV inventory side. Could you elaborate on that?
Cleveland: Given the environment we came from, where retail demand was high but dealers weren’t able to get units when they wanted them, their view was to get as many units as they could get with retail as strong as it was — and continues to be.
But while retail demand is steady, so to speak, it’s coupled with the fact that pricing on units has moved, interest rates have gone up, there have been some uncertainties in the equity market environment, and some of the geopolitical issues that were taking place back in late ’18 have all played into dealers optimizing their inventories.
So, as we’re watching inventories come down, what we’re seeing is dealers take pause, step back and make sure that they’re looking at all the data points. In doing so, I think that is going to push them to bring things down to a more critical level.
Ultimately, the other piece that I’m not sure anyone really understands or is taking into consideration is over the last couple months we’ve been averaging somewhere between, 36,000 to 40,000 units from a production standpoint per month. We’re moving into a period of time where we’re going to be retailing — assuming that we’re down low single-digits — an average of probably 55,000 to 58,000 units a month. That’s nearly 15,000 to 20,000 units per month that are going to be coming out of inventory.
So, you couple that with potential for an improved retail environment with strong seasonality, our perspective would be that there is that risk for an over-correction. Now, again, we can’t speak for dealers, but the over-correction risk is what we’re looking at, and given that potential we need to be prepared to be in a position to take care of the customers, and ultimately the end consumer, if indeed that does happen.
Q: Can you elaborate a little more on what you’re seeing in the RV retail market throughout March and thus far in April?
Nemeth: Based on our touch points through our transport operations, financing contacts, the customers and certainly all the other touch points as it relates to surveys and discussion points out there, what we’ve heard is a very strong March on the retail side.
And we’ve had a very strong April to this point. We’ve really tried to calibrate that with all those sources, and everybody’s pretty much corroborated on that so we feel pretty good about the retail side of it.
We continue to see inventory turns improving. We are tracking and looking for this new norm as it relates to dealer inventories, given the opportunity with the reduced lead times. Again, dealers can get units in a faster timeframe than they used to be able to based on the increased capacities that have been brought online by the RV OEMs.
Q: Have seen even more opportunities for consolidation among suppliers, and if so how do you weigh those opportunities relative to the goal of continuing to create a more balanced and diverse company?
Nemeth: We continue to have acquisition opportunities really across all four of our platforms today. We have not seen significant deterioration in valuation expectations. Most of the industry, if not all, realizes this rebalancing situation is temporary and so there’s a solid belief across the spectrum that, again, we are working through inventory rebalancing and not a broader issue at this point.
We’ve watched the volatility and we’ve been working with our valuation models, but we’ve not seen a rush to the table of suppliers looking to consolidate. If anything, people have held pretty firm to their valuation expectations. We’ve looked at that and we continue to model that and be very disciplined and opportunistic in the way that we think about things.
With that being said, we also look back at the 16 acquisitions that we did in the last two years. That’s given us an opportunity 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.
So from an overall perspective, we still feel good about the pipeline. We continue to actively cultivate and continue to talk to candidates. We’ve got a nice stable, but we want to make sure we’ve got a good handle on the markets.
That rebalancing point is where we look for the new norm for dealer inventories on the RV side in particular. So we’re going to continue to be very disciplined there. But overall, we would tell you that we still feel really good about the pipeline and our ability to execute at the right time and based on prioritization of markets, products and customer opportunities. So nothing’s really changed on the acquisition front.