Title

Presentation

LCI Industries misses on earnings expectations. Reported EPS is $1.31 EPS, expectations were $1.37.

Operator: Good morning or good afternoon, all, and welcome to the LCI Industries Q2 2023 Earnings Call. My name is Adam, and I’ll be your operator for today. [Operator Instructions]. I will now hand the floor over to Lillian Etzkorn to begin. So Lillian, please go ahead when you are ready.

Lillian Etzkorn: Good morning, everyone, and welcome to the LCI Industries’ Second Quarter 2023 Conference Call. I am joined on the call today by Jason Lippert, President and CEO; and Kip Emenhiser, VP of Finance and Treasurer. We will discuss the results for the quarter in just a minute. 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 could 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 that the forward-looking statements are made, except as required by law. With that, I would like to turn the call over to Jason.

Jason Lippert: Thank you, Lillian. Good morning, everyone, and welcome to LCI’s Second Quarter 2023 Earnings Call. We delivered solid results in the second quarter, highlighted by continued content growth and sequential margin expansion as we navigate a challenging RV operating environment. Revenues were $1 billion, down 34% compared to the prior year, but up $41 million sequentially. Net sales from acquisitions completed in ’23 and ’22 contributed approximately $17 million for the quarter. While revenues are down compared to the record highs we reached in 2022, our results are still $386 million above the second quarter of 2019. We continue to benefit from strength in our aftermarket, international, marine transportation and housing businesses, which made up a combined 64% of overall revenue this quarter, partially offsetting the impact from the significant year-over-year drop in RV wholesale unit shipments.

The North American RV being only 36% of our revenues this quarter, our diversified revenues are greatly helping make a difference in our results during the challenging RV environment. Coupled with our steadfast commitment to driving long-term operational improvements throughout our business while continuing to move forward with our diversification strategy, we believe we will continue our trajectory of sustained profitable growth. Pursuing and capitalizing on operational efficiencies remains a top priority. With the flexibility we’ve added to our manufacturing footprint, we’re able to quickly adjust capacity to match changes in demand while supporting areas in our business that are running strong. Our executive and plant leadership teams have been hard at work driving new cost savings initiatives, driving new sourcing initiatives and implementing hundreds of continuous improvement projects around the business to diversify and improve our overall cost structure.

We’ve been successful in rightsizing our overall cost structure, reducing general and administrative expenses while also significantly bringing down inventories to drive enhanced cash generation. We continue to rationalize margins across the business and also invested a few smaller business units, focusing on better-margin product lines to improve our mix. These combined actions, along with the tailwinds of lower freight commodity costs, have strengthened our financial profile, putting us in a solid position with sufficient cash amidst uncertain operating conditions. Needless to say, our company will be in a better position with this reduced cost structure as the industry starts to normalize in the coming quarters. Moving on to RV OEM. Sales decreased 55% during the second quarter of 2023 compared to 2022, largely due to decreased wholesale shipments.

We’re beginning to see improvements, and dealer inventory levels will be then most challenged as destocking rates amongst dealers decelerate as inventories reach appropriate levels. In addition, 2022 and 2023 year vehicles are being moved out of the pipeline as ’24 miles begin to enter the market just over a month ago. This changeover also creates a major buying opportunity as dealers cut prices on older miles, helping bring in new RVers looking for great deals. August and September OEM order forecasts have improved slightly over prior months, a sign that they are likely hitting an inflection point in demand. Camping trends this summer are also up, with millions more taking trips this Memorial Day and Fourth of July versus ’22 against the backdrop of frustrated air travelers.

Comparing air travel and other traditional modes of vacation, RVing is 35% to 50% more affordable, on average, according to the recent RVIA study, which makes an attractive choice in any economic environment. During the quarter, content per towable RV increased 2% from the prior year to $5,487 while content per motorhome RV for the quarter increased 6% from the prior year to $3,760. The model changeover has also supported content growth in recent months. As we continue to launch new and innovative products for RVs, we are typically able to capture share and demand from the latest models, which normally feature additional leading-edge content with each successive year. With the annual RV open house only a month away in September, we are looking forward to showcasing some of our latest product introductions that have been driving content growth like our new 4000 Series windows with built-in shade systems, independent suspensions and ABS suspensions and air conditioners and much more.

Moving to the Aftermarket. Revenues reached a record trailing 12 months of $854 million, decreasing only 2% year-over-year for the quarter, driven by inflationary pressures that have impacted consumer demand, partially offset by improvement in automotive end markets, which weighed positively on Aftermarket results. Operating profits of the Aftermarket segment expanded significantly year-over-year in the second quarter, driven by market share gains, declining commodity costs and targeted price increases. We believe the RV, automotive and marine aftermarkets will continue to be a major driver for our business as we meet demand for RVers looking to make improvements and repairs to their vehicles. In addition, we feel with the hundreds of thousands of rental nights added annually through rental platforms like RVshare and Outdoorsy, repairs and upgrades will be turbocharged as many RVs go from being used just a few weeks a year to as many as 20 to 30 weeks a year for some renters.

We continue to expand our wide aftermarket product catalog by launching many new products and product programs in the RV aftermarket, helping us capitalize on nearly 0.5 million RVs entering the repair, replacement and upgrade cycle annually. As we become a premier source for our targeted aftermarket, we’re continuing to expand our share in a nearly $5 billion addressable market while strengthening the Lippert brand through our best-in-class customer service. With the support teams in place to directly engage RVers everywhere, we’re able to quickly solve problems and help people spend some more time on the road rather than in a repair shop. In the month of June alone, our customer care center took a record 180,000 calls, which was up 80% over last year, which we believe is a sign that we will continue to grow as we add content and continue to make the customer experience and service a central focus of our aftermarket business.

We also just announced our third annual Lippert Getaway event, which will be held in Island Park, Idaho this September. Our teams are always excited for the opportunity to shape the future of RVing by engaging the community and collecting valuable feedback about the products that keep them in the lifestyle. In July, our customer experience team attended the EAA AirVenture Air Show event in Oshkosh, Wisconsin that attracted over 50,000 RVers. Events like this, along with other major initiatives like the Campground Project, Lippert Ambassadors, product giveaways and Lippert Scouts, have been critical to helping us build trust and lasting relationships with customers, all while helping us create a strong community that is involved with and heavily invested in the Lippert brand.

Turning to North America and adjacent markets. Second quarter revenues were down 8% compared to prior year, primarily due to softness in marine and manufactured housing end markets. On a positive note, we continue to see stabilization and some growth in other meaningful adjacent markets, like transit bus, school bus and utility trailer markets. We’re very focused on continued innovation in the marine markets on products like our anchor systems, thrusters, windshields and seating, and moving the market to our and electric Bimini product lineup that is quickly becoming an industry standard since we launched it a few years ago. In June, we launched a partnership between our Captains Group and Oasis Marinas, the largest marina management company in the U.S., to support and donate Lippert marine products to several events in celebration of National Marina Day.

Because our brand is one of the largest product supplier brands in boats, we have our customers’ attention, and we’ll continue to develop more featured products for the space. Our international markets had another quarter of solid results due to easing supply chain constraints that have hindered our OEM partners, along with continued operating improvements as we integrate our acquisitions there, helping to drive a sales increase of 6%. As expected, with chassis shipments increasing, European OEMs are able to deliver higher levels of production to meet up pent-up demand, which we anticipate will be a tailwind through the remainder of the year. We continue to leverage European innovations in our North American RV markets to drive long-term content growth with products like window blinds, pop-tops and acrylic windows.

These types of products have the potential to strengthen our competitive differentiation in the U.S., with easy access to our proven European product designs and production facilities. We look forward to driving further growth internationally as this business continues to contribute to our overall performance. I’ll now move on to our innovation highlights. In the past months, we’ve announced many new exciting product launches, including our Solera Off-Grid awnings, with an industry-first solar panel fabric; the OneControl Auto set-up app, BaseCamp Leveling systems, independent suspension axles, windows with integrated line systems, glass entry doors, ABS braking, Class B pop-tops and much more. [Indiscernible] launch this fall, the Solera Off-Grid series solar awnings will help us tap into a growing off-grid trend.

These awnings provide the added benefit of up to 300 watts of solar power without the added expense and weight of installing conventional rigid panels on the roofs of RVs, redefining the possibilities of sustainable energy integration for off-grid enthusiasts. We believe that our suspension system enhancements one of the greatest opportunities for us as we introduce the ABS concept for total RVs that has been around on auto suspensions for decades. We have developed an ABS product that we think meets price point and performance expectations and [indiscernible] volume that should influence many of the industry-leading brands to make a move in this direction as many already have. Other innovations, such as the industry’s first glass door and windows with integrated lines, make for a cleaner and better-looking designs inside and outside the RV while aligning all price points to consider these options.

We believe that innovation is a significant reason we have grown our business profitably through adding meaningful content to most RVs over the last 3 decades. On top of innovation, culture remains a true differentiator for our business. As I’ve long stated, the strong culture starts with experienced and caring leaders at the top who work to create trust and meaningful relationships and leadership opportunities for people that have the privilege to lead. Our leadership development programs and in-house leader development staff have made Lippert a place where team members have the opportunity to grow both personally and professionally. Beyond simply creating a better work environment, our cultural focus has had a measurable impact on our company, helping us achieve an annualized voluntary turnover rate of 25%, an incredible achievement given the environment, putting us far ahead of our peers.

With team members that are excited and energized to show up every day and here for the longer term, we believe we are able to more consistently build high-quality products at a safer, more productive workplace. Within our culture, in addition to focusing on how we can support our team members, we also focus on how we can improve the communities around us. And it’s important for our stakeholders to know that we actually measure this. In the first half of 2023, Lippert team members performed 65,000 hours of community service at hundreds of charitable organizations. Over the last year, over 75% of our 15,000 team numbers participated in at least one serving event. Overall, we cannot be more proud of these accomplishments and the efforts from our global teams that give back and serve to the areas where we operate.

We look forward to bringing our teams together to make even more of a community impact through the rest of 2023. Regarding capital allocation, our priority is keeping a strong balance sheet, driving solid cash generation to pay down debt and maintaining sufficient liquidity amidst challenging operating conditions. We remain open to strategic M&A opportunities and have an acquisition pipeline, but our primary focus is on fortifying our balance sheet and making investments in the business to support our growth. We are taking a diligent approach to CapEx, which we expect to be lower this year than last year by approximately $50 million and targeted on high-return investments. In the past 18 months, we’ve invested over $50 million in new automation projects, including significant glass automation dedicated to the towable and motorhome window and windshield markets to drive efficiencies, getting new product to markets and improve product quality.

We believe that automation projects like these have been transformational for our business, and we are already seeing the benefit of these investments in our performance today. In closing, we want to give a very heartfelt thank you to all of our team members for their very hard work this year in what has been a very challenging operating environment. We are proud to see how our teams continue to grow personally, professionally and contribute to the ongoing success of our business with the guidance of our driven and tenured leadership teams. Moving further into 2023, we believe we are very well positioned to keep Lippert moving forward and deliver long-term value for our stakeholders. I’m now going to turn the call over to Lillian Etzkorn, our CFO, to give more detail on our financial results.

Lillian?

Lillian Etzkorn: Thank you, Jason. Our consolidated net sales for the quarter decreased 34% to $1 billion compared to the prior year period, primarily impacted by the reduction in North American RV production and decreased selling prices, which are indexed to select commodities, partially offset by acquisitions. For the month of July, sales were down 20% to $295 million versus July of ’22, primarily due to the decline in wholesale RV shipments. And as Jason noted, we are continuing to see the benefit from operational improvements that we have made to our business while also capturing continued tailwinds from our long-term diversification strategy. While sales in North American RV OEMs declined 57%, sales in our adjacent markets, aftermarket and international businesses only declined 4%.

This significantly reduced the impact of the year-over-year decline in the RV industry production. The decline in Q2 2023 sales to North American RV OEM was again driven by a decrease in wholesale shipments, partially offset by content expansion in towables and motorhomes. Content per towable RV unit increased 2% to $5,487 while content per motorized units increased 6% to $3,750 compared to the prior year period. Towable content growth can be attributed to organic market share gains of 7% while acquired revenues contributed 5% of the year-over-year growth, partially offset by the sales price reductions contractually tied to commodity prices. Sales to the adjacent industries declined 6% versus the prior year. Sales were positively impacted by acquisitions and pricing adjustments to our transportation product and were offset by lower sales in North American marine OEM and manufactured housing.

Marine content per power boat decreased 17% to $1,457, primarily due to price decreases associated with year-over-year declining input costs and changes in product mix. Q2 2023 sales to the aftermarket decreased 2% compared to the prior year period, driven by inflationary pressures impacting consumer demand. International sales increased 6% year-over-year, including an estimated 2% positive impact of exchange rates in the quarter. Supply chain constraints have been easing, which has enabled European OEMs to meet pent-up demand. Gross margins were 21.5% compared to 26.6% in the prior year period, primarily due to the impact of fixed production costs on lower sales volume and the timing of sales price reductions contractually tied to commodity prices.

Operating margins decreased compared to the prior year period, in line with expectations, as we continue to absorb fixed costs on a lower sales base and also decreased prices indexed to select commodities. As a bright spot, we had a year-over-year increase in aftermarket margins, driven by decreased material commodity costs, helping to partially offset the impact from lower overall sales. GAAP net income in Q2 of ’23 was $33.4 million or $1.31 per diluted share compared to $154.5 million or $6.06 per diluted share in Q2 of ’22. EBITDA decreased 65% to $88.2 million for the second quarter compared to the prior year period. Noncash depreciation and amortization was $65.5 million for the 6 months ended June 30 of ’23 while noncash stock-based compensation expense was $9.1 million for the same period.

We anticipate depreciation and amortization in the range of $130 million to $140 million during the full year of ’23. For the 6 months ended June 30 of ’23, cash generated from operating activities was $274 million, with $34 million used for capital expenditures, $26 million used for business acquisitions and $53 million returned to the shareholders in the form of dividends. Operating cash flows were negatively impacted by lower sales and partially offset by the positive changes in working capital. The improvement in working capital were led by the initiatives we put in place to decrease inventory, which has resulted in a decrease of $200 million year-to-date. As inventories continue to normalize, we expect further improvements to working capital and positive impact to cash flow.

We have made net debt repayments on our long-term debt of $179 million year-to-date through June 30. At the end of the second quarter, we had an outstanding net debt position of $921 million, 3.1x pro forma EBITDA adjusted to include LTM EBITDA of acquired businesses and the impact of our noncash items. As we look forward, we are focused on continuing to maintain a strong balance sheet and targeting 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 in the coming quarters. For the full year of 2023, capital expenditures are anticipated in the range of $60 million to $80 million. We continue to expect that RV production levels will remain volatile in the short term.

We estimate our July consolidated sales of down roughly 20% to be indicative of third quarter ’23 results as RV OEM production remains suppressed as dealers continue destocking to get inventories to more appropriate levels. We anticipate Q3 of ’23 RV shipments will be between 65,000 and 75,000 units, with a full year estimated range of 290,000 to 310,000 units. We believe third quarter’s financial results will be very similar to the second quarter. Looking ahead, we are confident in our ability to keep up our solid performance and are very well positioned to continue managing through operational challenges to create long-term shareholder value. With that, this is the end of our prepared remarks, and we’re ready to take questions.

Operator: [Operator Instructions]. Our first question today comes from Kathryn Thompson from Thompson Research Group.

Kathryn Thompson: This is really more about the balance of going into the Elkhart open house and where inventories in the field right now. Have you seen — we’ve sort of seen this early this year, but are you seeing dealers scratch out orders to a degree before the open house and are maybe running a little bit leaner in hopes of waiting placing orders for new units? Or do you feel that inventory right now really reflects current demand? And just really kind of understanding how you think about inventories going into that show.

Jason Lippert: Thanks, Kathryn. I think that it’s more the latter of what you just said. I think that, obviously, dealers can — they get to a point where their inventories are so low where they need to order and need to stay stocked up. Dealer inventories have obviously decelerated the destocking, but still — they’re still destocked. I mean the way we’ve looked at it is from Q1 2020 when we felt inventories were fairly normalized, we’re about 85,000 used, almost 100,000 used less today in this quarter than what we were back then. So it feels — and again, I’m just giving you our feeling, yards are empty here. The shipyards at the OEMs are pretty empty. You go back just 12 months ago, they were chock-full. But the orders have picked up.

It feels like 10% or so for August or September, like they need units because the last handful of months have obviously been — we’ve been pretty starved for orders. So it feels like they need some of those units to get through open house, and then we’re anticipating continue to stock up as Camping World said in their recent release that they were going to continue to stack through the next 6 months and gain inventory. So that’s what it feels like.

Kathryn Thompson: Okay. And that ties into cash generation. You previously said that inventory — obviously, inventory and cash go hand-in-hand, especially if you have inventory buildup. But with lower inventory and the debt reduction are key bogeys that you’re focused on. From here, what is your outlook on inventory to cash conversion and uses?

Lillian Etzkorn: Kathryn, it’s Lillian. So as you noted, we’ve done some significant reductions in our inventory. Year-to-date, we’ve reduced it by about $200 million. We are going to look to continue to reduce inventory through the second half of the year, probably not at that type of pace, but we are going to still continue to rightsize our inventories as we move forward. We’ve had very strong cash generation in the first half of the year. Expect that we’re going to continue to be generating cash as we move into this next half. So the company has been positioned very solidly and very focused on cash generation, and that’s going to be something that we will continue to be working towards the balance of the year.

Jason Lippert: And it feels like with — if volume stays up as we kind of see the trend for August or September, what we have immediate visibility for, obviously, we can reduce inventory to quicker clip than what we have in the last couple of months. But July was obviously a little slow. Again, if August, September, rest of the year pick up, we can move inventory out and generate more cash. So…

Kathryn Thompson: Okay. And then final question, can you touch on any of your updated automation efforts? Just where you are…

Jason Lippert: Yes.

Kathryn Thompson: And given low production rates, seeing this as an opportunity to speed up some of those initiatives.

Jason Lippert: Yes. We’ve obviously squeezed CapEx this year for obvious reasons, but we had quite a few projects flowing into the year that were carryovers from 2022. Probably most notable is our glass automation that we’re doing for windshields, which will be a new product line for us, for towable and motorized RVs. Especially in the towables, the windshields have really ticked up over the last few years. You see probably about 30% of the towables now with windshields on the front, where they didn’t have anything in prior years. So we’ve got automation for those two lines. I’d say we’ve probably got 40-or-so million of automation and one building for glass now. Half of that is online. The other half is coming online over the next 6 to 8 months. So — and we’ve got other projects that we’ve got in the back burner warming up for ’24 as soon as cash improves.

Operator: The next question comes from Frederick Wightman from Wolfe Research.

Frederick Wightman: I just wanted to follow up on the comment about 3Q being similar to 2Q. I wasn’t sure if that was a comment in terms of total dollar performance, so sales, EBITDA earnings. Was that a comment on year-over-year performance? What exactly did you mean by that?

Lillian Etzkorn: Fred, it’s Lillian. Yes, what I was referencing with that, really, is comparability to the second quarter of this year’s performance, both from the top line perspective and the overall earnings for the business.

Frederick Wightman: Okay. Perfect. And then did you guys — I apologize if I missed it. Did you give an updated retail number for ’23?

Jason Lippert: I don’t know if we did or not, but we feel the retail for this year is going to be somewhere in the 375. And we feel 375 to 400 for ’24, that’s kind of what we’re throwing out. I think that’s in line with some of the other public companies that have stated their forecasts.

Frederick Wightman: Okay. Great. And then just lastly, I think last quarter, you said, from an inventory mix perspective, model year ’22 was like 35%. Do you have an updated number for that sort of where it stands today?

Jason Lippert: Can you repeat that again, Fred?

Frederick Wightman: The — just the mix of model year ’22, because I think, last quarter, you said it was around 35%?

Jason Lippert: Yes. Yes. So it feels, in doing all the dealer touches and talking to all the OEMs, that it’s around — it’s nearing the 10% mark. Some dealers have 15% that we’ve touched and others are in the 5% — 3% to 5% range. So it’s definitely declining pretty good. And with respect to the performance, I just want to be clear that while we’re challenged in the times recently with lower volumes, we feel very confident. As we’ve stated in past years that this is a double-digit OI business. And we will get back there, but there’s some choppiness in just volume and getting through some of our inventory challenges and things like that over the next couple of quarters. Just wanted to be clear about that.

Operator: The next question comes from Mike Swartz from Truist Securities.

Michael Swartz: Just maybe for Lillian, a question. I think previously, you said you anticipated mid- to high single-digit operating margins for the full year. I think you’re implying kind of mid-single digit again for the third quarter. So do you have an update there? It seems like it would be probably at the lower end of the range, but I don’t want to put words in your mouth.

Lillian Etzkorn: Yes. No, I think that’s probably fair. So as we’re seeing how the cadence for volumes coming through and as we’re seeing the RV business cadencing and what-have-you through the balance of the year, it probably is more at that mid-single digit for this year. And as Jason just commented just immediately previously, we do still see this business on a longer-term basis being a double-digit OI business. It’s just taking a little bit of time as we get into more normalized operating patterns for the industry to get there.

Michael Swartz: Got you. Okay. And then just a point of clarification. I think you said your kind of visibility into August and September RV production looks better than past months. I’m guessing you’re talking about maybe June and July. Was that on a year-over-year basis? Or was that absolute production levels? I just want to clarify that.

Jason Lippert: Well, I think one of the things that we want, we want a lot of the investors understand specifically is the ramp down that we’ve seen over the last — you go back to April of 2022, just over a year ago, we were on a run rate of 725,000 units as an industry. That was what — if you annualize the monthly production in April, that’s what we were kind of shooting toward. And if you look to 1 year later in April ’23, we’re running at a $260,000 run rate. So the deceleration of the business is a lot greater than what it might have looked at from the outside saying, “Hey, we finished ’22 at a 500,000-unit wholesale and ’23 looking at a 300,000-plus unit wholesale.” So the difference is a lot greater. But yes, I think that what we have visibility on today, August and September being up, we should get into better comps, obviously, significantly better comps as we get closer to first quarter.

But right now, all we have visibility on is August and September. And it feels like 10% over what we saw in May, June and July, which had several weeks of downtime in all three of those months, more than normal for those months. So I hope that answers your question. If not, we can keep trying.

Michael Swartz: Okay. No, that’s helpful.

Jason Lippert: Okay.

Operator: The next question is from Bret Jordan from Jefferies.

Bret Jordan: On the prior topic, I guess, you’d said Q3 is similar to Q2, but it sounds like most of Q3 is going to be running better than Q2. Or is that just better year-over-year? I’m trying to reconcile the August and September being up versus the second quarter.

Jason Lippert: Yes. I think we’ve got some puts and takes with our diversified businesses that might be where some of the clarity needs to be. But if you look at August in Europe, they take the entire month down, where, if you look at Q2, we had a pretty robust quarter for Europe. So you got to look at all the different industries and segments independently. But for the RV segment, I think, is what we’re speaking to, as we see orders at least for August and September, not knowing what October is going to be yet. And still, there’s — we can’t be certain that they don’t come back after open house or even in the next few weeks and say, “Hey, we need to take a week down in September.” So just telling you what we see today.

Bret Jordan: Okay. And then what’s your outlook…

Lillian Etzkorn: Yes. Maybe building on that a little…

Bret Jordan: Sorry, go ahead.

Lillian Etzkorn: Bret, just to expand a little bit on that from a sequential perspective as we look at some of the other industries, I think it is important to note that Europe, generally speaking, is lighter from a seasonality perspective for Q3 because of the shutdowns that we have in the various countries. The other area that we’re seeing softness, as expected, is in the marine side of the business, but that was down a little bit sequentially in the second quarter. And as we progress through into the third quarter, that’s also going to be down again sequentially. So again, to the point that everything kind of the puts and takes, we are seeing strength in certain areas. Clearly, some of these adjacent markets are being puts and takes with the RV.

Bret Jordan: Okay. And what’s the second half impact from commodities, I mean, what you can see in price deals that you have now?

Jason Lippert: Yes. We’ve got — I mean, again, lots of positives and negatives there. We have some commodity pricing going down. We have some that are going up. We have commodity indexes, where some of our pricing to customers is going up, some of it is going down. So again, overall, I think that it’s a pretty net neutral result. We’ll know more about Q4 next quarter, but that’s kind of where we’re at. Makes sense?

Bret Jordan: Okay. And then one last question. The outlook on sort of content as the OEs, the manufacturers are rolling out the ’24s, is there a bias to sort of try to get consumer prices lower, on average, moving content down? Or is it sort of trying to make them more appealing by moving content up? Is there any shift there?

Jason Lippert: Yes. I mean, definitely, the shift is to — as you’ve heard maybe from some of the other public calls, there’s a real push to get pricing down as pricing crept up over the last couple of years. And some of that’s coming through decontenting, some of that’s coming through just pure discounting. When I look at our products, I’ve said this in the past, but I think it’s helpful to repeat it that when a unit’s taken a slide out or axles or a chassis, there’s not really much that changes from a content standpoint on that because they need those products, windows, awnings. You can’t really build units without those. They’re decontenting largely on product — a lot of products that we don’t sell. So when I think about our products and decontenting, the only time we get a little pinched is when the market tends to go from high-end units to entry-level units or bigger travel trailers to smaller travel trailers and the market shifts that way, which we’re seeing a little bit of, especially when you look at big Class A motorhomes and diesel motorhomes.

Those are certainly taking the biggest hit, but again, it’s a small overall part of the entire market. So I hope that’s helpful.

Operator: The next question comes from Scott Stember from ROTH MKM.

Scott Stember: Can we get — go back to the content conversation. It sounds like you won’t be as impacted by decontenting. So looking out to 2024, factoring everything in, where do you see organic content growing? I know you’ve been in the 3% to 5% range as a goal, right? But do we still stay there?

Jason Lippert: Yes. I think if you peel out inflation and those pressures, certainly, we — our goal is to continue to add bells and whistles and features to existing products and then continue to come out with new product lineups. And we’ve been doing that for the better part of 20 years and been pretty successful. I’d also add that we haven’t lost market share during this time. So it’s another strength we’ve got as we tend to continue to keep our market share pretty level or grow it over time. So given all that, I think that, that’s still a fairly safe assumption, again, netting out any kind of inflationary issues and things like that.

Scott Stember: All right. And then looking at the marine side, getting a little bit softer than the previous quarters, but could you maybe just flesh that out pontoon versus more expensive types of boats?

Jason Lippert: Yes. I think that obviously — we sell a lot into the pontoons, but we sell a lot of windshields to all the bigger boats as well. So we have some decent content there. But I think because, over the last couple of years, they just — as you all know, they haven’t ramped — the marine business hasn’t ramped up as high and as fast and to the levels that RV did compared to where they were. We feel that this cycle is going to be relatively short-lived. Most of the OEM customers we talk to are talking first quarter to get some of the inventory flushed out. But I don’t feel that the dealers have the same type of problem or the size of the problem with marine inventory that the RV dealers had with the RV inventory, especially on the towable side.

Scott Stember: All right. And then last question on the aftermarket. You talked about your customer call centers having tremendous increases of inbound calls. Can you maybe talk about where is that coming from? Is that related to repair work, break/fix or — and what are you hearing from dealers as far as warranty and things like that?

Jason Lippert: Yes. Yes, sure. That’s a great question. Yes, 180,000 calls and communications in each of the last 2 months. So if you look over the last 10 or so years that we’ve really had our call center running and running full tilt, and we really rarely had a quarter that had less service impact and calls in the prior quarter. So we put more RVs out there, we’re going to get more calls. We put more content out there, we’re going to get more calls. I think the other thing that leads to more calls and opportunities is the fact that I think we’re servicing better than anybody else in the industry. So we tend to get calls when maybe other people’s lines are busy. We’re monitoring every single call, how quickly we answer, how much we’re putting toward sales on each of those calls, their sales efforts, obviously, in each of those calls, even if it comes in for repair.

But to answer to your question on repairs, it’s — my guess would be 65%, 70% of the calls come in for service repairs, warranty, things like that. The rest are, “Hey, I’m thinking about getting this or that product from my RV, where do I get it? How do I get it? How do I get it installed?” And then we’ve got service to handle all of those things. So in our best estimation, the calls into our service center are going to continue to grow over time, especially as we put more RVs and more content out there, which is good for our aftermarket and one of the reasons why it’s growing like it has.

Operator: [Operator Instructions]. The next question is from Daniel Moore from CJS Securities.

Daniel Moore: Covered a lot of ground already, but maybe just one or two quick ones. The decontenting discussion, maybe if we take that over to marine, content was down, I think I heard 17%. What was the split between price and mix? And do you anticipate mix being maybe a little bit more of a headwind, at least, near term if customers are looking for kind of lower price point, lower amenity models?

Jason Lippert: Well, they’re looking for some of those exact numbers. I’ll say a couple of things. One is we just started measuring marine content within the last year. So some of those numbers might just be fuzzy because we’re starting — just starting to measure it. Certainly, some of that’s inflationary because we have given some decreases. But I would tell you that just when we look at the pontoon market and Forest River had their dealer show just the other day, I mean, the pontoon boats feel like they’re as expensive as they’ve ever been in terms of what dealers are looking to buy. You don’t see very many of the entry-level $30,000 pontoons anymore like it used to. I mean there’s a lot of pontoons that are in the $70,000 to $100,000 range, lots of bells and whistles and features.

And if you look at electric Biminis, you look at some of the power arches, obviously, they’re putting more windshields on pontoons today, which they didn’t do in the past. And seating packages that we do a lot of are getting more expenses. So I’d say that that’s probably the best color we can give you there, and maybe the color will become more clear in future quarters as we get more time under our belt reporting the content.

Daniel Moore: Fair enough. That’s helpful. Maybe 1A and 1B on capital allocation, CapEx, as you mentioned, tightening the belt a little bit. Are there projects that you deem as less necessary? Or maybe just sort of pushing things out to fiscal ’24 when things get a little bit clearer?

Jason Lippert: Yes. I’d say that we’re just pushing them out. I mean all the projects that we’ve got on the block right now we feel are important. We wouldn’t put them on. We’d deprioritize them. Some of those projects are automation projects. So those usually take priority because we’re improving our labor and quality and safety, all while putting these CapEx in place. So when we look at last year at $130-ish million in CapEx, and this year at $65 million, we’re just trying to put the most important projects. $65-ish million in CapEx this year is what we look to be at. We’re just trying to prioritize the most important ones we can do in that range.

Daniel Moore: Makes sense. And lastly, I appreciate the color, Lillian. You mentioned your leverage target 1.5x again. Would you want to get back down 90% to 100% all the way there or all the way there before you kind of start looking at M&A again? Or if you made meaningful progress, would you start to consider smaller tuck-ins along the way?

Lillian Etzkorn: Yes. No, I think it’s — I think what I would want to see is that we’re making meaningful progress. We’re always going to be looking for opportunities from an M&A perspective, to the extent that it makes sense for the business and it’s strategically aligned with our objectives. So if the right opportunity came forward and we were making meaningful progress, then I’d be comfortable doing that. I’d say, for right now, as we’ve stated, really focused on making sure that the balance sheet is very strong in its fortress, basically, but always willing to entertain opportunities as long as we’re making that progress.

Operator: The next question comes from Craig Kennison from Baird.

Craig Kennison: It’s been a good call. I had — I think I have a decent handle on stocking trends in the RV channel and then in the marine channel. Wondering if there’s any color you can shed or any light you can shed on any stocking trends in your aftermarket channel?

Jason Lippert: Yes. It’s really difficult, Craig, to answer that question in a way that’s going to provide you any kind of better color than maybe what you already have. But I would say that the trends typically follow the retail unit trend. So when the dealers are challenged a little bit, they’re typically holding back on those inventories. But there’s also the factor that you have with — when retail slows down and people are moving more used product, they’re tending to use a little bit more of aftermarket parts to upgrade and things like that, and obviously, we sell a lot of those. So — all I can tell you is that our — if you look at our quarter, we’re 2% down, which is a lot better than obviously what the market is doing.

But I think a lot of that, as we continue to just put more content into the channels, the aftermarket channels, our automotive side is a factor to that. That’s been bumping up a little bit recently. It was a little bit challenged in past quarters. And then you’ve got the marine channel as well. So you’ve kind of got three channels in aftermarket when you look at that number versus just our RV OEM, which is strictly RV. Is that helpful?

Craig Kennison: It is. And then just an unrelated question, hopped on a little late, but did you offer any commentary on your appetite for acquisitions in this environment?

Jason Lippert: Yes. I think we’re obviously staying super diligent on the capital expenditure side. And we’re just — we’re looking at companies. We’ve got a pipeline. We’re pushing some of those out right now for obvious reasons. But I don’t anticipate — when we get back to 2024, I mean, M&A is still an important part of our growth strategy. And we’re still going to continue to look at acquisitions as actively as we have in the past. It might look a little bit different as we look more to marine and aftermarket and a little bit less in RV, but it just depends on what presents itself, but we’re going to stay active. More tuck-ins likely that are smaller, like we’ve announced this year. We announced two smaller deals. So if those types of things come along, obviously, those would be easier to consider.

Operator: The next question is from Brandon Rollé from D.A. Davidson.

Brandon Rollé: I just had a quick one on the labor situation in Elkhart. Could you comment on the availability and maybe competition for labor as the industry starts to ramp up production?

Jason Lippert: Yes, sure. And I’ll start by saying it’s a little bit of a mystery to me. We are having, obviously, one of the biggest downturns in RV the industry has ever seen. This community is pretty heavily reliant on that industry and different than ’08, ’09. I mean — and I’ve talked to a lot of people recently. I haven’t heard a lot of people screaming and complaining that they can’t find work. So there’s a lot of people, obviously, that have done really well. The RV workforce, probably, they are comfortable staying for a period at this kind of 4-day work week level. But unlike the last big dip we had, I just — we’re just not hearing about a lot of people having trouble finding jobs. I think the other industries in the area are finally getting some of the labor that they need and a lot of those businesses are doing okay.

As you know, this industry or the economy in general is still growing a little bit. There’s — the RV industry is struggling right now and has for the last 12 months, but it’s good to know that people are — seem to be sticking around. So long answer to the question, but hopefully, that’s helpful.

Operator: We have no further questions, so I’ll turn the call back to Jason for concluding remarks.

Jason Lippert: Yes. I just want to thank everybody for joining the call. Obviously, it’s been a year of dealing with some of the RV challenges, but it feels like we’re starting to see some of the light at the end of the tunnel. And we look forward to updating you on that over the next couple of quarters. So thanks for joining the call.

Operator: This concludes today’s call. Thank you very much for your attendance. You may now disconnect your lines.