Patrick Industries Q4 2024 Earnings Report

Patrick Industries EPS Results

• Actual EPS: $0.52
• Consensus EPS: $0.50
• Beat/Miss: Beat by +$0.02
• One Year Ago EPS: N/A

Patrick Industries Revenue Results

• Actual Revenue: N/A
• Expected Revenue: $815.59 million
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

Patrick Industries Announcement Details

• Quarter: Q4 2024
• Date: 2/6/2025
• Time: Before Market Opens
• Conference Call Date: Thursday, February 6, 2025
• Conference Call Time: 10:00AM ET

Patrick Industries (NASDAQ:PATK) is a leading manufacturer and distributor of building products and materials for the recreational, marine, and manufactured housing industries. Founded in 1959 and headquartered in Elkhart, Indiana, the company operates 60 facilities across the United States and Canada. Patrick Industries has established a reputation for providing high-quality, innovative products that meet the evolving needs of its customers.

The company's leadership team is led by CEO Andy Nemeth, who has been with Patrick Industries since 2002. Nemeth has over 31 years of experience in the manufacturing and distribution industries and has played a crucial role in the company's growth and success. Other key management team members include Chief Financial Officer Jacob Petkovich, who joined the team in Q4 of 2020. Mr. Petkovich previously served as the Managing Director of Leveraged Finance for Wells Fargo's security division. 

Patrick Industries has seen steady growth in recent years, with revenue increasing from 2016 - 2022. The company has also shown consistent profitability, with operating income growth during that period. The company has managed its debt levels effectively, with total debt decreasing or staying about the same during 2016 - 2022. The company's stock has performed better than most sectors, increasing from around $25 in 2016 to approximately $90 in Q4 2022. In 2020, Patrick Industries acquired Goshen, Indiana-based Inland Plywood Company for $54 million, expanding the company's product offerings in the RV and marine industries.

The recreational vehicle, marine, and manufactured housing industries have experienced substantial growth in recent years, driven by a robust economy and a growing interest in outdoor activities. However, the industry also faces rising material costs and supply chain disruptions. Patrick Industries operates in a highly competitive market, with significant competitors including Thor Industries, Inc., LCI Industries, and Winnebago Industries, Inc. The industry is also subject to regulatory and political issues, such as emissions standards and trade policies.

Patrick Industries has several growth opportunities, including expanding its product offerings, pursuing strategic acquisitions, and entering new markets. The purchase of Inland Plywood Company will provide the company with additional product offerings in the RV and marine industries. The company has also announced the expansion of its operations in Canada, providing other growth opportunities.

Patrick Industries faces several risks and challenges, including changes in consumer preferences and economic conditions, supply chain disruptions, and regulatory changes. The company's dependence on the RV, marine, and manufactured housing industries also makes it vulnerable to market downturns. Additionally, the company may face increased competition from existing competitors or new entrants to the market. However, the company has a proven track record of adapting to changing market conditions and has established itself as a leader in the industry.

Environmental, social, and governance (ESG) issues are becoming increasingly important for companies in all sectors, including Patrick Industries. As a company that manufactures and distributes building products, Patrick Industries is responsible for managing its environmental impact and ensuring its products are sustainable and safe. The company has implemented various sustainability initiatives, such as reducing waste and promoting energy efficiency in its facilities.

Regarding social responsibility, Patrick Industries is committed to providing employees with a safe and healthy work environment. The company has implemented various programs and initiatives to promote employee health and wellness, such as offering wellness programs and resources for mental health support.

Governance is also essential for investors, as it can impact a company's long-term success. Patrick Industries has a robust corporate governance framework, with an independent board of directors and a commitment to transparency and accountability.

Patrick Industries Q4 2024 Earnings Call Transcript

Key Takeaways

• Diversified model and flexible cost structure helped the company deliver solid profitability in 2024 despite a downturn in the marine market.
• The RV segment showed signs of stabilization with Q4 revenues up 1%, wholesale unit shipments up 3%, and the first retail registration increase in 13 quarters, while dealer inventories fell to well below historical weeks on hand.
• Manufactured housing remained a standout, with Q4 housing revenues rising 12%, MH wholesale shipments up 15%, and full‐year MH content per unit increasing 4%.
• Strategic acquisitions such as RecPro and Elkhart Composites have bolstered the aftermarket and composites portfolio, unlocking greater cross‐sell opportunities within existing product lines.
• The balance sheet ended 2024 with approximately $804 million in net liquidity, 2.7x leverage, $251 million in free cash flow, and the company returned $55 million to shareholders alongside a 9% dividend increase.

Presentation

[Andy Nemeth, CEO at Patrick Industries]

strategic acquisitions, stabilization in our RV market and strong performance in our housing businesses, in particular our manufactured housing businesses. The combination of these items helped offset declines in our marine market where dealers and OEMs are focused on reducing field inventory levels.

[Andy Nemeth, CEO at Patrick Industries]

All told, our diversified model and flexible cost structure helped us maintain solid profitability in 2024, while also enabling us to stay strategic and thoughtfully position our business for the next upcycle. Looking ahead, we're going to stay focused on meeting and exceeding the needs of our valued customers, while preserving the ability to flex our cost structure as needed. We remain optimistic that consumer purchasing confidence will improve as we move through the year, enabling some of the pent up demand to be realized in 2025. This potential catalyst combined with lean dealer inventories could support improving demand as we progress through the year. At the end of 2024, our total net liquidity was approximately $8.00 $4,000,000 and combined with our strong balance sheet provides us significant flexibility to execute on strategic opportunities while continuing to return cash to shareholders.

[Andy Nemeth, CEO at Patrick Industries]

Our team remains dedicated to advancing our organizational objectives and driving additional shareholder value as we move through 2025. I will now turn the call over to Jeff, who will highlight the quarter and provide detail on our end markets.

[Jeffrey Rodino, President of RV at Patrick Industries]

Thanks, Andy, and good morning, everyone. Our OEM partners continued to demonstrate tremendous disciplined and sometimes aggressive inventory management throughout 2024 in response to ongoing interest rate and consumer demand headwinds. This discipline drove meaningful reductions in field inventory across our outdoor enthusiast market. In RV and Marine, we estimate dealer inventories declined approximately 1322% respectively during the year. And in the second half of twenty twenty four, certain powersports OEMs had previously announced targeted dealer inventory reductions and recent reports suggest solid progress on those efforts.

[Jeffrey Rodino, President of RV at Patrick Industries]

On the housing side of our business, demand for affordable housing remained solid through the year, exceeding our expectations. Our fourth quarter RV revenues increased 1% to $358,000,000 representing 42% of consolidated sales. RV content per unit on a full year basis was $4,870 which increased 1% from the same period in 2023. On a sequential basis, content per unit was flat, reflecting a further mix shift toward smaller, more affordable units. RV wholesale unit shipments increased 3% in the quarter, while we estimate RV retail registrations increased approximately 1% during the same period.

[Jeffrey Rodino, President of RV at Patrick Industries]

Our current estimates suggest the fourth quarter of twenty twenty four will represent the first quarter in 13 consecutive quarters where retail has improved over the prior year quarter, with October being the first month in forty consecutive months to show retail improvement. Our estimates further suggest a seasonal dealer restock of approximately 14,000 units during the quarter, resulting in an estimated seventeen weeks to nineteen weeks on hand versus the pre pandemic historical averages of twenty six to thirty weeks. The team recently attended the twenty twenty five Florida RV Super Show in Tampa, One of the largest RV retail shows in The U. S, where we saw encouraging customer engagement. Thus far, news out of early season retail shows has been promising.

[Jeffrey Rodino, President of RV at Patrick Industries]

On the acquisition front, we are pleased to report that RecPro, our third quarter acquisition, has been an excellent fit within the Patrick family and the organic opportunities that are available within our existing product portfolio are greater than we originally anticipated. Our teams have demonstrated passion and efficiency while working together and we've begun to adding legacy RV product lines onto the RecPro platform with strategic plans to integrate marine and powersports in the future. Additionally, earlier this week, we announced the acquisition of Elkar Composites, a composite solution provider to the RV market. This acquisition bolsters our growing portfolio of industry leading composites offering including PCPRO, PC Lite, Azdale and NTXT, which we have highlighted on previous calls. Marine fourth quarter revenues was $122,000,000 representing 14% of our fourth quarter consolidated sales.

[Jeffrey Rodino, President of RV at Patrick Industries]

This compares to $147,000,000 in the fourth quarter of twenty twenty three. Results reflect continued softness, particularly in the higher engineered ski, wake and pontoon categories, where we remained a significant market presence. Marine content for wholesale powerboat unit decreased 3% to 3,967 on a full year basis as a result of this mix shift. However, content per unit increased 1% on a sequential basis. We estimate the marine retail and wholesale powerboat unit shipments decreased approximately 720% respectively in Q4.

[Jeffrey Rodino, President of RV at Patrick Industries]

These figures imply a seasonal dealer field inventory restock of about 13,000 units, which is lower than the historical average for this time of the year, but reflective of the OEMs partnerships with the dealer base and helping cover floor plan costs during the off season. Our current estimated dealer inventory weeks on hand of twenty three to twenty five weeks is well below the historical average, which is thirty six to forty weeks and down approximately three to five weeks from the same period a year ago, contributing to our belief that an uptick in demand could lead to dealers restocking more meaningfully. Our Power Sports revenues were $78,000,000 in the quarter, representing 9% of our fourth quarter consolidated sales. Our Power Sports business is primarily focused on the utility segment of the side by side market, which continues to demonstrate resilience compared to the recreational segment. We also participate in the motorcycle and golf cart segments of the market.

[Jeffrey Rodino, President of RV at Patrick Industries]

Powersports OEMs are actively managing field inventory levels and we're encouraged by the continued strength in the attachment rates and steady demand for premium features. Based on recent reports from certain powersports OEMs, we believe ridership and usage have been more resilient than new unit retail sales, meaning customers continue to use their powersports products, which we believe is a positive sign. Heading into 2025, we are confident in our brands that compete in this space today and the runway of opportunity ahead of us. While the broader industry continues to calibrate, our powersports business are focused on supporting OEMs through engineering new products and solutions that consumers value. Our housing revenues increased 12% to $288,000,000 in Q4, representing 35% of our consolidated sales.

[Jeffrey Rodino, President of RV at Patrick Industries]

This growth was driven by continued momentum in manufactured housing, which we believe remains an attractive option for those seeking affordable housing solutions. Our MH content per unit increased 4% to $6,604 for the full year. In the fourth quarter, MH wholesale unit shipments increased 15% offsetting softness within residential housing starts, which decreased 6% with single family starts down approximately 5% and multifamily starts down approximately 9%. I will now turn the call over to Andy Raider, who will provide additional comments on our financial performance.

[Andrew Roeder, CFO, Executive VP of Finance & Treasurer at Patrick Industries]

Thanks, Jeff, and good morning, everyone. Our consolidated net sales for the fourth quarter increased 8% to $846,000,000 For the full year, net sales increased 7% to $3,700,000,000 Full year RV revenue increased 8% to $1,600,000,000 while marine revenue was off by 27 to $571,000,000 Our powersports revenue increased 189% to $352,000,000 and our housing revenue increased 10% to $1,200,000,000 MH wholesale shipments improved nicely last year, increasing 16% and RV wholesale shipments also recovered increasing 7% year over year. Marine wholesale shipments declined an estimated 25% for the full year. Retail registrations outpaced wholesale in RV and marine suggesting solid reductions in dealer field inventory as OEMs across our end markets remain disciplined with their production schedules. On a GAAP reported basis, gross margin was 22.1% in the fourth quarter compared to 22.9% from the prior year, partially due to the mix of revenue given end market dynamics with OEMs focused on producing more affordable units in the quarter combined with typical seasonality.

[Andrew Roeder, CFO, Executive VP of Finance & Treasurer at Patrick Industries]

For the full year, gross margin was 22.5% compared to 22.6% in 2023. The fourth quarter and full year gross margins include thirty and ten basis points respectively of purchase accounting adjustments of inventory step ups related to twenty twenty four acquisitions. Total operating expenses were $148,000,000 for the fourth quarter and $578,000,000 for the full year. For the quarter, warehouse and delivery expenses increased 21%, primarily due to the third quarter acquisition of RecPro. For the fourth quarter, SG and A expenses increased 20% to $81,000,000 and amortization expenses increased approximately $5,000,000 or 26%.

[Andrew Roeder, CFO, Executive VP of Finance & Treasurer at Patrick Industries]

The increases in these expenses were directly related to acquisitions during 2024 and our decision to maintain our cost structure in the fourth quarter without further adjustment to ensure the efficacy of our business model and ability to support our customers upon signs of potential inflection in our markets. For the full year, SG and A expenses increased approximately 9% to $326,000,000 Amortization expense increased $17,000,000 or 22% to $96,000,000 as a result of acquisitions. Operating income for the fourth quarter was $40,000,000 and $258,000,000 for the full year. On a GAAP reported basis, operating margin was 4.7% in the fourth quarter and 6.9% for the full year. On an adjusted basis and as noted in our press release this morning, after excluding certain one time non recurring expenses including transaction costs, inventory step up and costs related to our debt refinancing in the fourth quarter, operating margin was 5.2% in the fourth quarter and 7.2% for the full year.

[Andrew Roeder, CFO, Executive VP of Finance & Treasurer at Patrick Industries]

On a GAAP reported basis, net income in the fourth quarter was $15,000,000 or $0.42 per diluted share compared to $0.94 per diluted share in 2023. Adjusted net income in the fourth quarter was $18,000,000 or $0.52 per diluted share. For the full year, GAAP reported net income was $138,000,000 or $4.11 per diluted share and on an adjusted basis for the full year, net income was $146,000,000 or $4.34 per diluted share. As reconciled in our earnings press release, our adjusted net income and net income per share exclude certain one time non recurring items, including a fair value inventory step up related to acquisitions, transaction costs and expenses related to the extinguishment of debt. Please also recall that our per share data including EPS and dividends reflect our three for two stock split, which was paid on December 13.

[Andrew Roeder, CFO, Executive VP of Finance & Treasurer at Patrick Industries]

Additionally, our fourth quarter and full year EPS include approximately $0.02 and $0.1 per share respectively in additional accounting related dilution from our 2028 convertible notes and related warrants as a result of the increase in our stock price above the convertible option strike price. As we've noted in the past, we have hedges in place, which are expected to reduce or eliminate any potential dilution to the company's common stock upon any conversion of the convertible notes and or offset any cash payments the company is required to make in excess of the principal amount of the converted notes. For GAAP reporting purposes, these hedges are always anti dilutive and therefore cannot be included when reporting earnings per share. Adjusted EBITDA decreased 11% to $89,000,000 while adjusted EBITDA margin decreased to 10.6% for the fourth quarter. On a full year basis, adjusted EBITDA increased 6% to $452,000,000 while adjusted EBITDA margin decreased 10 basis points to 12.2%.

[Andrew Roeder, CFO, Executive VP of Finance & Treasurer at Patrick Industries]

Our overall effective tax rate was approximately 29% for the fourth quarter and 22% for the full year 2024. Cash provided by operations was approximately $327,000,000 for 2024 and purchases of property, plant and equipment were $76,000,000 for the year resulting in free cash flow of $251,000,000 This fell short of our outlook as we made the decision to strategically utilize our cash flows to maintain and procure certain raw material inventory to ensure we are in position to support any uptick in demand from our customers in the first quarter twenty twenty five. For the quarter, operating cash flow was $103,000,000 implying free cash flow of $77,000,000 At the end of the quarter, our total net leverage was 2.7 times. We remain committed to our goal of de levering while strategically evaluating acquisitions that align with our growth objectives. This approach has allowed us to pursue opportunistic acquisitions such as Sportech and RecPro during the year and smaller bolt on transactions like Elkhart Composites, which was announced this week.

[Andrew Roeder, CFO, Executive VP of Finance & Treasurer at Patrick Industries]

We remain comfortable increasing leverage when appropriate to capitalize on strategic opportunities. Available liquidity at the end of the quarter was approximately $8.00 $4,000,000 comprised of $34,000,000 of cash on hand and unused capacity on our revolving credit facility of $770,000,000 We are dedicated to maintaining a disciplined capital allocation strategy, prioritizing strategic acquisitions that align with our growth objectives, while also investing in projects that support our organic growth initiatives. These efforts are complemented by our commitment to reinvesting in Patrick and delivering value to shareholders through cash returns. In 2024, we invested $412,000,000 in acquisitions, including our acquisition of Sportech and RecPro. During the quarter, we repurchased approximately $5,000,000 or 60,000 shares and returned approximately $13,000,000 to shareholders in the form of dividends.

[Andrew Roeder, CFO, Executive VP of Finance & Treasurer at Patrick Industries]

For the full year, we returned $55,000,000 to our shareholders, including a total of $5,000,000 in stock repurchases and $50,000,000 in dividends. At the end of twenty twenty four, we had $200,000,000 remaining under our current share repurchase authorization. In November, management and our Board of Directors demonstrate their confidence in our financial strength and growth potential by electing to increase Patrick's quarterly dividend by 9% to $0.4 per share. Before we give our end market outlook, we want to discuss our estimated tariff exposure relative to our current expectations that align with the President's announcement on Saturday. Although we have seen changes this week to the original proposal and we will adapt as necessary, we believe that it's worth providing color on our exposure to these three countries.

[Andrew Roeder, CFO, Executive VP of Finance & Treasurer at Patrick Industries]

In total, China, Mexico and Canada account for approximately 10% of our cost of goods sold with approximately one half focused on China and the other half on Mexico and Canada. We have been diligently de risking our offshore exposure over the past two years to China and are confident in our ability to further reduce our exposure to China by more than half if necessary. We will continue exploring alternative sourcing options across all three countries where possible. We will continue to monitor the tariff situation as it is extremely dynamic. We have many optional tools at our disposal including working with both our suppliers and customers in partnership through our good, better, best product offering, VAVE initiatives and our strategic sourcing decisions to materially mitigate the impact to our margins at this time.

[Andrew Roeder, CFO, Executive VP of Finance & Treasurer at Patrick Industries]

Moving to our end market outlook for 2025. As we have discussed, we are poised and ready to serve our customers and pursue additional market share gains. Our teams remain focused on monitoring key indicators such as customer, dealer and consumer sentiment, dealer show activity, consumer confidence and interest rates, which we believe will continue to shape demand trends. In the RV market, we are currently seeing early indicators of potential improving demand from our OEM customers. Meanwhile, marine and powersport OEMs are maintaining their disciplined approach to dealer inventory, though we anticipate some minor year over year restocking in the first quarter and fourth quarters as they thoughtfully manage inventories for the selling seasons.

[Andrew Roeder, CFO, Executive VP of Finance & Treasurer at Patrick Industries]

These trends reflect cautious optimism as we move forward. In our RV market, we are maintaining our estimates that twenty twenty five wholesale unit shipments will increase at a mid single digit rate to approximately 350,000 units. We currently estimate that retail registrations will be flat in 2025 implying a one for one dealer replenishment environment. In our marine market, we estimate 2025 retail will be flat, bifurcated between the first and second halves of the year and wholesale units for our overall product mix to be up 5% to 10% as a result of the incredible production pullback and discipline shown in 2024 in our marine mix categories. This still implies a modest dealer inventory reduction for 2025 until solid signs of inflection occur.

[Andrew Roeder, CFO, Executive VP of Finance & Treasurer at Patrick Industries]

In our power sports end market, we expect unit shipments to be down approximately 10% with our organic content to be up mid single digits for the full year implying an overall mid single digit decline for our businesses. On the housing side of the business, we estimate MH wholesale shipments will be up 10% to 15% with retail sales absorbing available wholesale production on a real time basis. In our residential housing end market, we estimate 2025 new housing starts to be flat to up 5%. Given the current end market outlook we've outlined, we continue to estimate our 2025 operating margin will improve by 70 to 90 basis points versus 2024 adjusted operating margin. We estimate our operating cash flow will be between $390,000,000 to $410,000,000 and CapEx to total between $75,000,000 to $85,000,000 implying free cash flow of approximately $3.00 $5,000,000 or more and a free cash flow yield of approximately 10%.

[Andrew Roeder, CFO, Executive VP of Finance & Treasurer at Patrick Industries]

For 2025, we expect our full year tax rate will be between 2425%. As noted earlier, our EPS in 2025 could include additional dilution related to our convertible notes and warrants depending on our share price. That completes my remarks. We are now ready for questions.

[Operator]

Thank you. We will now be conducting a question and answer session. Our first question today is coming from Mike Swartz from Truist Securities. Your line is now live.

[Michael Swartz, Director - Equity Research at Truist Securities]

Hey, guys. Good morning. Maybe just to start out with, it appears that your 2025 outlook, maybe aside from the manufactured housing business, is fairly in line with what you had get a discussed over the two, three months ago. I guess within the ranges that you've provided and maybe just some more qualitative commentary, I guess how are you thinking about the year as we sit here today versus maybe where we were three months ago? Are there any major changes?

[Andy Nemeth, CEO at Patrick Industries]

Good morning, Mike. This is Andy. There's no significant changes to that. I think there's some building optimism right now and some tailwinds building. If you just kind of looked at where we were at a quarter ago versus where we're at today, we're optimistic with what we see today looking out.

[Andy Nemeth, CEO at Patrick Industries]

We're keeping our estimates in check right now just as it's a little bit early to get a feel on the retail selling season just at this point, but But certainly in the next couple of months, we'll have a much greater feel on what that looks like. But right now, I would just tell you that there's building tailwinds that we see. And so we're optimistic, but holding tight to our estimates.

[Michael Swartz, Director - Equity Research at Truist Securities]

Okay, great. And then maybe for Andy Rader, just more housekeeping. Can you give us the breakout that 8% growth? How much of that was inorganic versus organic and end market?

[Andrew Roeder, CFO, Executive VP of Finance & Treasurer at Patrick Industries]

Yes, sure, Mike. That 8% growth was driven by acquisition revenue, which was up 11% for the quarter year over year. And then industry was down 4%. That's largely mix driven. Organic was up 2% and that's pricing down 2% and content share up 3.5%.

[Michael Swartz, Director - Equity Research at Truist Securities]

Okay, perfect. Thanks guys.

[Operator]

Thank you. Next question is coming from Daniel Moore from CJS Securities. Your line is now live.

[Daniel Moore, Partner - Director of Research at CJS Securities]

Yes, good morning. Thanks for taking the questions. Maybe just talk about the biggest opportunities buckets either end markets or products you see to continue to increase penetration and drive that 2% to 3% organic growth as we look at 2025 and beyond?

[Andy Nemeth, CEO at Patrick Industries]

Dan, I think that what we're really excited about is all the new product opportunities that we've been working on both from a prototyping perspective for the current model year and in addition to our advanced product group, which has been very active in working with our customers. And so the content share gains that we see with new products and new product potential for 2025 is something that we're very excited about to be able to hit those targets or exceed those targets. So, we've just we've done more prototyping in the last year and a half than we've done in the prior three years. And so, it's an exciting time as we look out here and the innovations that our teams have come up with are very exciting to look at. So that in addition to the fact that I think we're positioned, we've made the appropriate investments to be able to scale with our customers when we do see an inflection point should allow us the opportunity to be very aggressive in the marketplace to be able to execute and really scale with those customers.

[Andy Nemeth, CEO at Patrick Industries]

So we feel good about a number of the opportunities that are out there.

[Daniel Moore, Partner - Director of Research at CJS Securities]

Very helpful. And juggling for three calls this morning. So if you said it and I missed it, I apologize. Appreciate the updated color on the full year outlook. Just looking at Q1, what are your expectations for revenue maybe relative to Q4 as well as operating margins relative to what we just saw in Q4 on an adjusted basis or just holistically how do we kind of think about starting out the year?

[Andy Nemeth, CEO at Patrick Industries]

I think really as we're looking at the model, Q4 and Q1 are pretty similar as it relates to kind of the revenue expectations, Really with some pickup, Q2 and Q3 are traditionally our largest quarters and where we expect to see a lot of the margin impact for the products that we're working on today. So Q1 relatively flat with Q4 is our kind of current estimates and expectations, again, as we move through the selling season here and the retail season in February, March, April.

[Daniel Moore, Partner - Director of Research at CJS Securities]

Perfect. And then just kind of a capital allocation question, but raised dividend by 9%, not insignificant.

[Andy Nemeth, CEO at Patrick Industries]

Hey, Dan, I'm sorry. Let me step back one second. I'm sorry, I was looking at the wrong number there. We're actually going to be up in Q1 from Q4. I apologize for that.

[Andy Nemeth, CEO at Patrick Industries]

I had my comparisons off. We're going to be up in Q1 from Q4 as it relates to kind of where we sit both from a margin perspective and a top line perspective. So I apologize. I was giving you a bad comparison there.

[Daniel Moore, Partner - Director of Research at CJS Securities]

No, that's fine. Obviously, as is typical, the bigger jump in margins will come Q2, Q3 as you described?

[Andy Nemeth, CEO at Patrick Industries]

That's correct.

[Daniel Moore, Partner - Director of Research at CJS Securities]

Yes. Okay. And then just capital allocation, you've got significant liquidity, held a little bit of working capital, but we're looking at a year coming up of tremendous free cash flow generation. Just what's the pipeline for M and A and talk about the balancing act between wanting to drive leverage a little lower M and A opportunities versus maybe being more aggressive with the buyback as we're just kind of ending one of the cyclical recovery here? And that's it for me.

[Daniel Moore, Partner - Director of Research at CJS Securities]

Thanks.

[Andy Nemeth, CEO at Patrick Industries]

Yes. So capital allocation wise, we're carrying a little bit more inventory into Q4 as we had kind of previously indicated in anticipation of some uptick in production here as it relates to some little bit of restocks, some seasonality, but in anticipation again to be able to scale with our customers. I think as we look out into 2025, first of all, the M and A pipeline continues to be full and we continue to be very, very active in cultivating opportunities out there. So nothing's changed as it relates to our expectations to be able to continue to deliver M and A. We're very excited about that.

[Andy Nemeth, CEO at Patrick Industries]

We are excited about the cash flow generation and capital allocation. We're going to continue to be disciplined and thoughtful about it. But again, I think we can be opportunistic and on offense here for the next two or three quarters for sure as it relates to all our priorities related to capital allocation.

[Operator]

Thank you. Next question today is coming from Joe Altobello from Raymond James. Your line is now live.

[Joseph Altobello, MD & Senior Analyst at Raymond James Financial]

Thanks. Hey guys, good morning. I guess first question, I want to talk about the cash flow in the fourth quarter, maybe a little bit more color there. Which raw materials did you procure? Was this tariff related to try to maybe get ahead of that?

[Joseph Altobello, MD & Senior Analyst at Raymond James Financial]

And why wouldn't that be sort of a pull forward, if you will, and bolster cash flow in 'twenty five?

[Andy Nemeth, CEO at Patrick Industries]

Yes, Joe. There is some pull forward there. We were disciplined in Q4 to make sure that we carried enough inventory. Most of it's in the RV sector as it relates to the raw materials that we brought in. So very liquid material as it relates to kind of how we're thinking about it.

[Andy Nemeth, CEO at Patrick Industries]

A little bit of marine as well with some business that we picked up. So we look at that, we maintained constant and picked up a little bit of inventory in Q4 in anticipation of kind of a little bit more activity in Q1 this year. So yes, there is a little bit of pull forward. We're going to continue to manage our inventories very aggressively, but we're in a great position. And like I said, it's very movable inventory from a raw material perspective.

[Joseph Altobello, MD & Senior Analyst at Raymond James Financial]

Okay. And just to shift gears over to mix, you talked about it several times this morning. What are you guys assuming in terms of RV mix this year? Does it get better or does it stay kind of where we were exiting 2024?

[Jeffrey Rodino, President of RV at Patrick Industries]

Hey, Joe, this is Jeff. I think as we get into the first quarter, we've seen a little bit of uptick in production levels, but the mix has has remained the same from the fourth quarter to the first quarter. We believe that there will be some opportunity for that mix to switch back a little bit over to the mid to high end product. But again, we just want to see where retail starts to land. But as it sits today from fourth quarter to first quarter, we're seeing it's pretty similar with the expectations that it could change later in the year.

[Joseph Altobello, MD & Senior Analyst at Raymond James Financial]

Okay, great. Thank you.

[Operator]

Thank you. Our next question is coming from Noah Zascon from KeyBanc Capital Markets. Your line is now live.

[Noah Zatzkin, Vice President & Equity Research Analyst at KeyBanc Capital Markets]

Hi, thanks for taking my questions. I guess first, just on the kind of 70 to 90 basis point operating margin improvement in the outlook. Is most of that volume driven? Is there kind of any cost savings in there or automation efforts? Just trying to put together kind of like the puts and takes there.

[Noah Zatzkin, Vice President & Equity Research Analyst at KeyBanc Capital Markets]

Thanks.

[Andy Nemeth, CEO at Patrick Industries]

Noah, this is Andy. It's primarily volume driven as we've set the organizational structure really to match up in alignment with kind of the revenue run rates that we've been experiencing over the last couple of quarters. And so, it's really going to be volume related and we just don't have to add a lot of significant amount of overhead to support significant amount of revenue increase coming through. So we're going to be able to leverage the model the way we thought we could to be able to generate that.

[Noah Zatzkin, Vice President & Equity Research Analyst at KeyBanc Capital Markets]

Great. Maybe just one on RecPro. I know you touched on this a bit, but any kind of early learnings there, incremental opportunities versus what you've had kind of previously laid out or just kind of anything to note in terms of kind of the timeline there? Thanks.

[Jeffrey Rodino, President of RV at Patrick Industries]

Yes, Noah, this is Jeff. We've been really excited about the RecPro acquisition and what we've been able to accomplish really in just the first three months of onboarding them. We've been able to add over 60 product categories to 60 products to the Repro site of Patrick products that had not had that aftermarket exposure. And we've got several more lined up and we're starting to really incorporate some of the marine divisions right now. So it's been really good for us.

[Jeffrey Rodino, President of RV at Patrick Industries]

And we've been really enthusiastic about the teams working together and being able to get that product out there. So it's been good.

[Noah Zatzkin, Vice President & Equity Research Analyst at KeyBanc Capital Markets]

Thank you.

[Operator]

Thank you. Next question is coming from Scott Snibber from Roth Capital. Your line is now live.

[Jack Weisenberger, Equity Research Associate at Roth Capital Partners, LLC]

Hey, good morning guys. It's Jack on for Scott. I just got one question. What are kind of what are you seeing from your touch points at retail in RVs? And kind of seems like the retail has bottomed or at least near that bottom and that dealers are ordering again.

[Jack Weisenberger, Equity Research Associate at Roth Capital Partners, LLC]

What should we look for regarding Q1 RV OEM production rates?

[Jeffrey Rodino, President of RV at Patrick Industries]

Yes. So from a production rate standpoint, we have seen a little bit of uptick. We believe that there's certainly a need to get additional inventory out in the system for the selling season. You know our tux points are a little bit mixed, but there's some optimism out there. We've seen some good activity on the retail side, went down to the Tampa show and certainly saw a lot of consumer engagement there.

[Jeffrey Rodino, President of RV at Patrick Industries]

So we believe that there's opportunity for good retail growth or some retail out there, but we're still watching and waiting.

[Jack Weisenberger, Equity Research Associate at Roth Capital Partners, LLC]

Great. Thank you.

[Operator]

Thank you. Next question today is coming from Tristan Thomas Martin from BMO Capital Markets. Your line is now live.

[Tristan Thomas-Martin, Leisure Analyst at BMO Capital Markets]

Hi, good morning. I'm asking kind of two questions that have kind of I think been hinted out a couple of times. The first one, what are you seeing in your RV transport business so far in the first quarter?

[Jeffrey Rodino, President of RV at Patrick Industries]

Yes. So we're starting to see that additional products we're also seeing a lot of we're still seeing a lot of the multi haul, which means that we're seeing the smaller units. That seems to be what's kind of retailing right now and is getting a lot of activity on our transportation side. So there's some a lot of moving parts in the first quarter as people start to get product off the production lines and then we get it out to dealers. But we have not slowed down on hiring drivers to be able to make sure that we can meet the needs of the dealers as we get into the selling season here.

[Tristan Thomas-Martin, Leisure Analyst at BMO Capital Markets]

Okay. Thank you. And then just kind of content, if we take a longer term view, right, in 'twenty five, it's been we've seen pressure from the cheaper units. And how are you and kind of the OEMs thinking about model year 'twenty six, model year 'twenty seven? When do you think we really see that content inflection?

[Jeffrey Rodino, President of RV at Patrick Industries]

Yes. I mean, so a couple of things. Number one, from fourth quarter to first quarter, we've seen the mix relatively the same, even though we've seen some production uptick. But I think there's also the lifetime RV buyer out there that sat out of the market for the last couple of years because of availability and pricing. And as pricing has come back in line, come down a little bit, interest rates have come down a little bit, I think some of that, I'm going to say lifetime RVer is going to come back into the market, which gives us that opportunity for that mid to higher level product.

[Jeffrey Rodino, President of RV at Patrick Industries]

I wouldn't I'd like to be hopeful that we'll start seeing that in the second and third quarter of this year. So we're really trying to keep an eye on that. But there's definitely some opportunity for that mix to shift back as we get into a more traditional selling season. And as we're coming out of any downturn, what we've seen over the last cycles is this entry level product is what the dealers are bringing to the market to try to get activity and retail activity back on the lots. So we think as that activity gets back on the lots, we'll start to see some of that change.

[Tristan Thomas-Martin, Leisure Analyst at BMO Capital Markets]

Okay. And maybe mine, if I could sneak one more in there. Just can you kind of remind everybody, when are model your content decisions made typically? And then how easy are they to change later on like the product's life cycle?

[Jeffrey Rodino, President of RV at Patrick Industries]

Yes. So on the RV side, RVIA has a suggested model change of June 1. And we start working with customers almost immediately after the open house in October. When those decisions are made varies really by the lead time of the product. If it's an import product and has a twelve to sixteen week lead time, we're going to be pushed to make those decisions.

[Jeffrey Rodino, President of RV at Patrick Industries]

Really, they should be made already right now based on a June 1 model change. But there's other products that we make here domestically that we don't carry a lot of inventory because we're build to order. We can make those quick decisions a little bit closer to the June 1 deadline.

[Tristan Thomas-Martin, Leisure Analyst at BMO Capital Markets]

Thank you.

[Operator]

Thank you. Next question today is coming from Alex Perry from Bank of America. Your line is now live.

[Alexander Perry, Director, Equity Research at Bank of America]

Hi. Yes.

[Alexander Perry, Director, Equity Research at Bank of America]

I just wanted

[Alexander Perry, Director, Equity Research at Bank of America]

to ask again sort of about the increased enthusiasm you're seeing in the RV segment coming out of show season. Can you just provide a little more color on what you think is driving that? Are you in the conversations with the OEMs as of late, what do you think is driving the increased enthusiasm? Are you seeing a little bit of increased consumer confidence as we get past the election? Or the conversations on the interest rate environment consumers are getting used to maybe a more stable but higher interest rate environment.

[Alexander Perry, Director, Equity Research at Bank of America]

Just more color on what's sort of driving your enthusiasm there? Thanks.

[Andy Nemeth, CEO at Patrick Industries]

I think there's a combination of things that are driving that. I think that the lien dealer inventories that are out in the space today across our markets, the tremendous discipline that our OEM partners have demonstrated to make sure that everybody stays nimble and scalable. I think certainly consumer confidence and consumer sentiment with some of the uncertainty gone post election, I think is driving some of that. And I also think the consumer certainly enjoys the outdoor enthusiast experience. And so as we look at our markets and what we've seen in the past, we do see these resurgences as it relates to excitement for the products in the space that we work in.

[Andy Nemeth, CEO at Patrick Industries]

And so, we're just kind of feeling that right now. We're feeling that there's a lot of optimism in the space because of the discipline that's been put in. And then I think from what we've heard as it relates to the retail show season, there's been solid traction and the consumer has been consumers are buying units. And so whether it's RV or marine, we're feeling a little bit of that enthusiasm. So I think there's a lot of factors going into it.

[Andy Nemeth, CEO at Patrick Industries]

And certainly little optimism is something I think we feel cautious optimism is a good term, but optimism is something that we're feeling across the space.

[Alexander Perry, Director, Equity Research at Bank of America]

Thank you. Really helpful. And then just on the guide, I think in the slides it says contemplating some moderate rate relief. How much is that sort of baked into what you're expecting in terms of the guide? And then I guess just to revisit tariffs, you gave some very good quantitative color on potential on your tariff exposure.

[Alexander Perry, Director, Equity Research at Bank of America]

Are the actual tariffs being contemplated in the guide and what could be the potential impact? Thanks.

[Andrew Roeder, CFO, Executive VP of Finance & Treasurer at Patrick Industries]

Alex, this is Andy Raider. We have 50 basis points baked into our plan for next year. So that's we've stuck with 50 basis points as the environment's changed a bit. But, yes, right now, we're not looking for a whole lot of relief. We think the 100 basis points we saw this past fall really hasn't moved the needle.

[Andrew Roeder, CFO, Executive VP of Finance & Treasurer at Patrick Industries]

So that we don't think that's going to change a whole lot.

[Andy Nemeth, CEO at Patrick Industries]

On the tariff front, Alex, right now, we don't have anything baked into our model or our plan as it relates to tariff impact. Like I said and like we talked about in our comments, I think that we feel good about a lot of the risk mitigation that we've done, especially as it relates to our offshoring from China. Mexico and Canada are kind of a TBD right now, but the opportunity to work with our customers, our product offering, different things that we can do because of our multiple product lines and things that we can bring, we hope to be able to work with our customers to mitigate as much of that as possible. So we're going to be very active in that partnership. And again, so right now, we don't have anything built in as it relates to that.

[Andy Nemeth, CEO at Patrick Industries]

It's still an unknown. But I'm really proud of what our team has done in particular as it relates to derisking kind of our China exposure over the last couple of years. They worked really hard behind the scenes to really drive alternative sourcing options and we're not going to stop doing that. So again, we've not built any into the model at this point.

[Alexander Perry, Director, Equity Research at Bank of America]

Perfect. That's very helpful. Best of luck going forward.

[Andy Nemeth, CEO at Patrick Industries]

Thanks.

[Operator]

Thank you. Next question today is coming from Mike Albanese from The Benchmark Company. Your line is now live.

[Michael Albanese, Equity Research Analyst - Recreation & Leisure Industry at The Benchmark Company LLC]

Just a quick one on housing and my apologies if I missed this here, but has the growth been more so driven by I guess inventory stock on the builder side or the uptick in I guess retail demand for affordable housing? I guess, just help me unpack the bifurcation a little bit. Thanks.

[Andy Nemeth, CEO at Patrick Industries]

We think that it's retail demand for affordable housing out there. We've been for a long time, we've thought that there's not enough inventory and not enough capacity to support affordable housing demand. And so the MH industry in particular has been very robust for us and we're really proud of the team's work and what they've been able to do, not only to be able to, again, bring value to our customers, but bring additional product lines on. And so we think it's very much related to the retail demand that's there and the enthusiasm that exists for affordable housing.

[Michael Albanese, Equity Research Analyst - Recreation & Leisure Industry at The Benchmark Company LLC]

Got it. Thanks guys. Nice job.

[Andy Nemeth, CEO at Patrick Industries]

Thank you.

[Operator]

Thank you. Next question is coming from Brandon Rollei from D. A. Davidson. Your line is now live.

[Brandon Rollé, MD & Senior Research Analyst at D.A. Davidson Companies]

Good morning. Thank you for taking my questions. First, just on the overall competitive environment, can you talk about any increases or potentially decreases in competition you've seen in some of your end markets, particularly within the marine and RV industries, just given people moving towards more affordable pricing on certain models and just overall customer preference?

[Jeffrey Rodino, President of RV at Patrick Industries]

Yes, Brandon, this is Jeff. We haven't really seen a lot of changes in the competitive environment. From our standpoint, we've always had two or three competitors in just about every space with every one of the product categories that we deal with and have not seen any change, really marked change in that in the last couple of quarters or really even the last year. So we continue to push our team to try to stay ahead of our product categories to make sure that we're first out to the market with as many new products and innovations as possible to stay ahead of any type of competitions out there. And we've seen that happen and we're proud of what we've been able to accomplish on that end.

[Brandon Rollé, MD & Senior Research Analyst at D.A. Davidson Companies]

Okay, great. And just finally, just circling back to some of the optimism around the RV market, would you be able to comment on just the ordering activity post RV show season. It seems like there's been some mixed color around just actual retail sales and how eager dealers are to order. It seems like the larger more successful dealers may be in a position to order inventory more aggressively, but your average dealer which makes up the bulk of the industry may not be as excited to order inventory right now. Can you just kind of talk about what you're seeing maybe bifurcating between the two different types of dealers out there right now?

[Brandon Rollé, MD & Senior Research Analyst at D.A. Davidson Companies]

Thank you.

[Jeffrey Rodino, President of RV at Patrick Industries]

Yes. I don't think we can specifically talk about what the dealers are buying or not buying. I mean, what we look at on a daily basis are the production levels. So I can tell you the OEMs and who's running what. We don't see specifically where the OEMs are shipping all of these.

[Jeffrey Rodino, President of RV at Patrick Industries]

We see some of that through our transportation businesses. However, that doesn't give us the entire market. I mean, certainly the big dealers out there are moving a lot of the smaller inventory, the major dealers, the smaller units, I should say. But we have seen some production uptick across the categories, across the across the entry level all the way up into the bigger product. But we still think that mix is a little bit heavier on the smaller product side.

[Operator]

Thank you. Our next question today is coming from Craig Kennison from Baird. Your line is now live.

[Craig Kennison, Director of Research Operations & Senior Research Analyst at Baird]

Great. Hey, thanks for taking my question as well. I guess wanted to follow-up on the tariff issue. Andy, I think you said really nothing baked into guidance and that makes sense given a lot of the unknowns around Canada and Mexico. But based on the latest tweet that I read, I think there is an incremental tariff on China.

[Craig Kennison, Director of Research Operations & Senior Research Analyst at Baird]

Can you just address whether that incremental 10% tariff is something you've contemplated?

[Andy Nemeth, CEO at Patrick Industries]

Sure, Craig. We've definitely contemplated it as we've been active, like I said, in alternative sourcing. But also, we work with our suppliers over in China as well. So we've been able to partner with them. And as we've looked out at business opportunities and production levels, we work with our supply partners there to make sure that we're mitigating as much as possible when it comes to that exposure.

[Andy Nemeth, CEO at Patrick Industries]

So it's a combination of alternative sourcing as well as working with our partners to mitigate as much of the impact as we can. So yes, we've contemplated it and we don't feel the need at this point to build that in.

[Operator]

Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over for any further or closing comments.

[Andy Nemeth, CEO at Patrick Industries]

Yes. I just want to thank everybody on the call, first of all, for joining us. I also want to send tremendous gratitude and thanks to the entire Patrick team, who has exhibited unbelievable dedication and commitment in some uncertain times, especially in 2024. But the team has done just such a fabulous job. I'm so proud of the work that they've done to position the organization to really be able to optimize the opportunities that are coming forward as we look at 2025 and beyond.

[Andy Nemeth, CEO at Patrick Industries]

And so again, thanks to the entire Patrick team, such commitment, very, very proud of that. So again, thanks everybody for joining us on the call. We look forward to talking to you in Q1.

[Operator]

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.

Participants

Executives

• Andy Nemeth, CEO
• Jeffrey Rodino, President of RV
• Andrew Roeder, CFO, Executive VP of Finance & Treasurer

Analysts

• Michael Swartz, Director - Equity Research at Truist Securities
• Daniel Moore, Partner - Director of Research at CJS Securities
• Joseph Altobello, MD & Senior Analyst at Raymond James Financial
• Noah Zatzkin, Vice President & Equity Research Analyst at KeyBanc Capital Markets
• Jack Weisenberger, Equity Research Associate at Roth Capital Partners, LLC
• Tristan Thomas-Martin, Leisure Analyst at BMO Capital Markets
• Alexander Perry, Director, Equity Research at Bank of America
• Michael Albanese, Equity Research Analyst - Recreation & Leisure Industry at The Benchmark Company LLC
• Brandon Rollé, MD & Senior Research Analyst at D.A. Davidson Companies
• Craig Kennison, Director of Research Operations & Senior Research Analyst at Baird