Patrick Industries, Inc. (PATK) Earnings Call Transcript & Summary

Greetings, and welcome to the Patrick Industries conference call and webcast. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Steve O’Hara, Vice President, Investor Relations for Patrick Industries. Please go ahead, Steve.

Good morning, and thank you for joining us on the call today as we discuss Patrick Industries' acquisition of Sportech, LLC, which was announced this morning. I'm joined on the call today by Andy Nemeth, CEO, Kip Ellis, COO; and Matt Filer, Interim CFO. Andy will start by providing commentary on our strategic rationale, Kip will then discuss the acquisition and our powersports strategy in more detail, and then Matt will give the financial highlights. We will then turn the call over to the operator for questions. Before we begin, a little housekeeping. Our remarks in this presentation contain forward-looking statements, which could cause the actual results and events discussed to differ materially from those described in the forward-looking statements. You should carefully consider the foregoing factors and the other risks and uncertainties relating to Patrick as described in our annual report on Form 10-K for the most recently completed fiscal year and other reports and documents filed by Patrick from time to time with the SEC. In addition to our press release, which was posted at 7:00 a.m. this morning, Eastern Time, we have a slide deck on the Investor Relations section of our website at ir.patrickind.com. I will now turn the call over to Andy Nemeth.

Good morning, everyone, and thank you for joining us today. As highlighted in the video you just saw, we're very excited to announce and discuss our acquisition of Sportech, a leader in supplying high-value, complex component roof, cab, door and window solutions primarily to the powersports market and aftermarket. Sportech and its incredibly strong management team operate as a value-added design and manufacturing partner to their OEM customers and the broader off-road vehicle market. With long-standing customer relationships and a forward-looking approach, Sportech is trusted by its OEM partners to engage in a collaborative product development and the latest innovations in the industry, and brings an already robust and growing powersports platform to join the Patrick family. This acquisition helps Patrick to embed a leadership position as a supplier in the highly appealing and complementary powersports market, which we view as strategically important for a number of reasons that I would like to highlight. First, we view powersports, which includes side-by-sides, golf carts, motorcycles, snowmobiles, personal watercraft and other off-road vehicles, as a natural extension of our Outdoor Enthusiast market, and we believe Sportech's strong management team represents an ideal partner for Patrick in further developing this platform. Following the acquisition, we expect revenue from our outdoor enthusiast end markets to represent more than 70% of our total revenue. Second, this is a continuation of our vision and plan to strategically diversify within the outdoor enthusiast space and profitably grow our business, adding another attractive end market and significantly expanding Patrick's total addressable market. Third, Patrick is in a great position to support the Sportech team, given our strong balance sheet, existing OEM relationships and synergistic product lines and manufacturing processes in tandem with our existing powersports businesses. And finally, we expect Sportech to be accretive to profit margins and EPS, boost free cash flow and further drive shareholder value. I'll now turn the call over to Kip, who will go into greater detail on the acquisition and our growing powersports initiatives.

Thanks, Andy, and good morning, everyone. 30 years ago, Sportech began as a small team of snowmobile enthusiasts that worked together to create resilient and high-value windshields to protect and empower outdoor enthusiasts in the winter. Today, their more than 400 team members design, develop and manufacture a comprehensive portfolio of products while maintaining their passion for providing innovative solutions to the outdoor enthusiast market. Sportech is a leading provider of premium component product solutions, such as integrated door systems, windshields, roofs, canopies, cowls, and fender flares to OEMs in the more resilient utility vehicle space while also manufacturing premium components and accessories for personal transportation vehicles, ATVs, agriculture vehicles, motorcycles and snowmobiles. Over the years, Sportech has developed its existing OEM relationships while consistently adding new customers to its book of business. With 2023 estimated revenue of $255 million, resulting in a 5-year compound annual growth rate of 17%, Sportech has a strong track record of growth in alignment with the increasing demand for utility use case solutions in the side-by-side market. A long runway exists within Sportech's current product offerings, and we believe there remains significant untapped opportunity in the company's total addressable market, which we estimate at more than $2 billion. Additional upside potentially exists in the adjacent markets. Sportech is a strong fit both culturally and strategically with the Patrick family, with low integration risk, possessing a strong leadership team, an impressive track record of organic growth and a robust and complementary portfolio of products, while also providing us with immediate profit margin and net income per share accretion in fiscal 2024. Additionally, we believe numerous synergies exist between Sportech and Patrick that we can begin to unlock within in the next 12 to 18 months. These include, but are not limited to, complementary manufacturing and forming capabilities, our plastics and metal fabrication capabilities and 2 bending specialties, and over $100 million in similar sourced materials, including fabricated metals, plastics, polycarbonates, amongst others. Sportech helps to solidify our platform for future organic and strategic growth within the powersports market and, in tandem with our industry-leading platforms in the RV and marine markets, enable us to accelerate our momentum in the attractive outdoor enthusiast space. Our acquisition strategy remains centered around finding entrepreneurial businesses with strong leadership teams, compelling innovative product solutions, and a history of solid financial performance. We've worked hard in the past several years to continue to build a premium lineup of premier brands and organically cultivate a pipeline of strong acquisition targets. We will continue to drive this premium product position as we innovate and grow our share through highly engineered products and solutions. We continue to see the appeal of growing our aftermarket exposure and accessory building capabilities in our portfolio as we provide consumers with improved utility while strengthening our OEM product solutions at the same time. Sportech bolsters our aftermarket exposure with over 45% of its revenue being aftermarket sold through the OEM dealer channel. We expect to continue to invest in the powersports market along with our other strategic outdoor enthusiast end markets. We also see promising potential in the broader side-by-side market, given our existing businesses like the Progressive Group, Rockford Fosgate and Wet Sounds, and look to continue to expand in the space when advantageous from a financial, cultural and strategic standpoint. The utility vehicle segment of the side-by-side market has seen solid, steady growth and continues to be Sportech's largest end market. Utility vehicles overall have continued to increase their penetration over the years through OEM innovation supported by Sportech's engineering and its ability to expand the array of product solutions it provides. Through Sportech's value-added and highly engineered products, utility vehicles have increased their functionality and attachment to numerous industries, including agriculture, snow removal and law enforcement, just to name a few. I'll now turn the call over to Matt to discuss the financial details.

Thanks, Kip, and good morning, everyone. As announced, we have agreed to acquire Sportech for $315 million in cash. which we expect to fund through our strong liquidity position, including a combination of borrowings under our existing credit facility and cash on hand. Sportech's estimated 2023 revenue is $255 million and adjusted EBITDA is estimated at approximately $41 million. We expect to realize annualized synergies, as Kip mentioned, of more than $5 million within the next 12 to 18 months. Based on these figures, we estimate an acquisition multiple of 6.8x not including any potential tax benefits. Consistent with our brand-forward strategy, Sportech's management team will continue to operate the business as a subsidiary of Patrick in its existing facilities. We will support the Sportech team as they do what they do best: innovate and provide a growing portfolio of great products, services and solutions to their valued customers. We expect the deal to close on or before January 24, subject to regulatory approval. Post transaction, we will be highly focused on deleveraging and maintaining a strategic leverage position. As a reminder, our capital structure is solid and strong, with an estimated liquidity of $400 million-plus post-transaction closing and no major debt maturities until 2027. We expect the deal to be immediately accretive to profit margins and earnings per share for fiscal 2024. Given our strong financial position, liquidity and capital structure, flexible operating model and prudent working capital management, we will continue to proactively evaluate potential acquisition targets, and when appropriate and advantageous, we will deploy capital as we continue to focus on driving shareholder value while maintaining a strong balance sheet and generating solid free cash flow. That concludes our remarks. We would now like to turn the call back to the operator for questions.

[Operator Instructions] Our first question is coming from Craig Kennison from Baird.

Steve, thanks for the multimedia presentation. Well done. So I guess my first question, I'm sure you guys did a ton of diligence around this, one concern we have about the powersports channel in 2024 is simply we're at the end of what we think is a restocking cycle. So it may be more challenging to find growth in 2024 because you don't have that restocking tailwind. Is that something you contemplated when you made your forecast for 2024 in buying this company?

Craig, this is Kip. I appreciate the question and certainly understand the basis for it. We've -- into the diligence process, we really worked to get our arms around the side-by-side market and a mix that plays into this and where dealers sit from an inventory position. One of the things that we recognized is from a retail standpoint, with lending rates and that perhaps being a little bit of a hindrance on where things are headed for this marketplace, Sportech does work in the mid- to premium lines of these products with a high mix of cash buyers and continued really strong backlog from an order book standpoint. They've got views that go 20 weeks and beyond with customers. So we certainly feel they're in a position to start the year strong in '24, but we've taken a balanced perspective from an end market standpoint. But one of the things that really we're excited about from a tailwind standpoint is just continued attachment rates that we're seeing as more and more cab enclosures are being created in this space. There's a trickle-down effect that's occurring throughout kind of the laddering of these products in the marketplace. And so as we think about the market on a total units basis, they're not in that lower end -- or there's not a predominance of their products in the lower-end space, which we know that there's been some inventory fulfillment that has taken place there. So we feel good for the combination of the attachment rates they're seeing and the mix of that mid- to premium product space that they play in.

Yes. And then I'm wondering if you could just help us from a modeling standpoint with maybe the gross margin profile, the EBIT margin profile and then the cost of debt or interest expense associated with this transaction, just from a modeling standpoint.

Yes. So Craig, this is Matt Filer. So as far as the debt standpoint, so we're funding the acquisition through use of our existing credit facility, our revolver. If you look at the interest rate profile on that, we'll call it a little over 7%. If you're -- if we talk about the margin profile, I think you could see the $41 million in EBITDA, adjusted EBITDA, over the $255 million of revenue. So that will get you a decent percentage calculation for that.

Next question is coming from Mike Swartz from Truist Securities.

Just maybe a question on the growth profile of this company. I think if we go back 5 years, I think you said the CAGR for this business is about 17% or so. I want to say over the same time, the unit volume CAGR of this industry is probably low to mid-single-digit type growth. So can you help us foot -- how have they outpaced the industry so quickly? And maybe, within that 17% growth CAGR, is there any way to look at how much of that is volume versus maybe pricing or mix?

This is Kip again. I appreciate the question. And that is one -- we're continuing to work through getting our arms around the data for the mix of products. This is a young, growing space, and so the data in terms of the mix and how these are registered by the consumers, sometimes there's a little bit of kind of gray area there as to what type of side-by-side it might be. But the data we've been able to collect and the excitement we've got with regards to the attachment rates, the concepts of HVAC being something that's employed in these platforms now. So you've got heating and air conditioning in a unit, on a utility basis, that has the opportunity to bridge both the sporting/recreation usage mindset as well as utility and an array of different markets that we touched on in the script and in some of what we have presented here. So we think from an attachment rate standpoint, we've seen data showing the attachment rate, the continued expectations of the consumer in terms of creature comforts. In a lot of cases, these units are replacing Jeeps and pickup trucks in that off-road space, recreational space. And so consumers are pushing for the assortment of products that would come with that. And so Sportech has done a great job, there's inherently in doing a cab enclosure of developing roofs and windshields and doors and cowls, which they've worked very closely with the OEMs in getting completed to provide that enclosure. But they've also taken the opportunity to expand the product offering in doing that and to thinking about wiper systems, mirrors, lights and the like as they work to think about a complete offering for this customer. So that's one of the things we're excited about as well. We expect to see continued content growth from them independent of what the market may do. We're starting to see adoption rates that -- at a broader array of OEMs beyond the players that have initially brought the HVAC systems to the table. And then from a synergy standpoint, we see excellent opportunity within our organization for the legacy businesses that we have, that have products that fit within that same mindset about driving greater creature comforts in a vehicle like this, to emulate in some form kind of the expectations of what customers have if they bounce around a Jeep or a pickup or what have you. And so super excited about where this can go. And then it's not just side-by-sides, as I've touched on earlier. The personal transportation vehicle space, the golf carts is something that they're pushing into. They're -- they've got a good solid foothold with the key manufacturers within that space and the product portfolio is growing there quickly. So we see lots of good runway there, too. So a good balance. Independent of really what the market does on a total units produced basis, we see the content growth being something that absolutely will continue. But the shift from this utility platform standpoint is something that we view is highly attractive to us and one that we'll look to bolster with our products.

Okay. That's great. And then maybe just a question, just given the relative size, I guess, of the aftermarket business here, I think you quoted about 45%. Is there any way of digging even within that number and kind of contextualizing how much of that is maybe repair/replace versus upgrade/enhance?

So to this point, they've not explicitly provided a lot of detail that goes through the OEM parts and accessories groups. And so the visibility of what that is for Sportech at that level is somewhat not something that they've got a lot of transparency on, but we do know that the attachment rates for the vehicles from an upfit standpoint is something that they're seeing more and more demand. And it's a bit anecdotal, but we know through the proliferation of this that's occurring on the OE side, there's more and more push for that. And so a lot of these components as well are products that are still relatively young in the space. So from a repair standpoint and replace standpoint, we wouldn't anticipate that's mature just yet. So we see good pipeline and a tailwind with that as well. But certainly, accessorization drive the gaps in the absolute right product being in inventory at a dealer. And so what can be done by the dealer to support the upfitting the consumer may want has been something that we would have anticipated that's fueled us as well. But we'll get greater data on that as we continue to move forward but we think there's tailwinds both from an upfit standpoint as well as a maintenance/repair/replacement basis.

Your next question today is coming from Daniel Moore from CJS Securities.

Appreciate the color and taking questions. Maybe just the revenue, if this was clear and [indiscernible], forgive me, 17% CAGR, is that all organic, or was that partially via M&A as well?

The CAGR has been organic.

Yes. Okay. And maybe just talk to any customer concentration. I can sort of guess who the largest customers would be, but anything of note there?

Yes, Daniel, it's Kip again. So it's what you would expect. They've got a terrific presence with the leaders in the market. As you would expect, as you look at the mix of the manufacturers within this space, those that have been earlier to adopt the cab enclosure systems or those that they've got the appropriate presence and then some are growing quite quickly. But they've got a long tail as well. So that's one of the things we were really pleased to see, the entrenchment from a connection standpoint with these customers in working with them. They get visibility of these platforms a couple or 3 years ahead of when they come to market. So they've got a good understanding of how they can work and partner with these providers or these manufacturers to accessorize these units. So from a side-by-side platform standpoint, really any player that you can think of, they've got a relationship with in some form, and then the personal transportation vehicle space as well. The players that you would expect to see on a mix basis are aligned with Sportech as well.

Perfect. Appreciate it, Kip. Just -- you were just speaking to that. Obviously, you've got long-term long-standing customer relationships. But [ what are ] the other sort of core competitive advantages, is it core processes, thermal reforming? Why do they win?