Rockford Corp. (PATK) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for joining us this morning as we speak to the exciting capabilities we have added to the Patrick platform in the powersports and leisure lifestyle markets. Before we begin, a little housekeeping. Our remarks in this presentation contains forward-looking statements which could cause the actual results and events discussed to differ materially from those described in the forward-looking statements. With that said, we are excited to welcome the Rockford Fosgate team to the Patrick family. Rockford has been a pioneer in audio systems and solutions, and their iconic lifestyle brand offering to the powersports and automotive aftermarket sectors highly complements our broad portfolio of products and solutions, enhancing the customer experience across the leisure lifestyle enthusiast markets. As we introduce Rockford today, I also want to take the opportunity to speak about our recent acquisition of the equally complementary Wet Sounds, who joined the Patrick team in November of last year. Wet Sounds is a premium branded audio solutions provider serving the marine and powersports sectors. These 2 brands, coupled with our existing extensive product portfolio serving the leisure lifestyle enthusiast markets, has positioned us to continue our focus on strategic diversification and expansion into adjacent markets. Wet Sounds and Rockford will be able to synergistically leverage our broad national distribution network already in place in our penetration of the attractive consumer-facing dealer channel. Additionally, we'll also be able to capitalize on our long-standing OEM relationships as we continue to enhance our aftermarket direct-to-consumer offerings with the additional highly engineered and innovative products. I'll now turn the call over to Kip Ellis, our Chief Operating Officer, who will go into greater detail on our growing powersports and aftermarket initiatives.

Thanks, Andy. With Rockford Fosgate, we welcome a brand that has been very familiar to us over the years. Rockford's purpose-built audio products spearheaded the car audio revolution over 40 years ago. And today, they continue to drive and expand their legacy by designing and distributing high-performance audio systems and components, focused on innovation and quality for the automotive aftermarket, motorcycle, marine, UTV and RV, OEM and aftermarkets. Our partnership with Rockford dates back to 2016 when we acquired The Progressive Group, an award-winning audio and electronic sales and distribution firm representing leading brands, including Rockford, with an expansive presence in the U.S. connected to aftermarket dealers and consumers across the country. Through the years, via this connection, we've been impressed not only by the unique qualities of Rockford's audio products, but by the natural fit and overlap of the Rockford Fosgate brand in leisure lifestyle enthusiast markets, aligning with Patrick's presence and opportunity space. The strategic rationale behind our acquisition of Rockford has been cultivated over the past few years as we have come to increasingly admire their winning culture and strong performance and exceeding market expectations. Rockford's leading brand recognition and a product space driven by consumer preferences, along with its innovative design and performance, align with our existing footprint and product offerings. Rockford also signifies for us a material entry into the powersports market and affords us access to attractive market dynamics and addressable market size. We further expect to expand our aftermarket product platform while leveraging our growing consumer connectivity through diversification in premium brands, representing highly engineered, strong-margin component offerings in the broad leisure lifestyle and enthusiast markets. I would now like to turn to Wet Sounds. As Andy discussed, Wet Sounds offers a highly engineered and premium branded suite of leading audio solutions with significant penetration and distribution through OEM and aftermarket channels, primarily into the marine market, but also serving the powersports and outdoor audio markets. Wet Sounds was founded based on the engineering and management expertise of a deep bench of highly skilled, innovative audio veterans with a focus on high-quality solutions and product design expertise. Our thought process for bringing Wet Sounds into the Patrick family shared many similarities with Rockford, adjacencies to the enthusiast leisure lifestyle market, attractive market dynamics and addressable market size. Both Wet Sounds and Rockford offer a proprietary suite of highly engineered products to the powersports aftermarket and OEMs and include receivers, displays, signal processors and closures and amplifiers for the OEM and the aftermarket, a full range of wake tower speakers and subwoofers for the marine market and ATV, UTV, auto, RV and motorcycle audio and accessories. Patrick's platform, footprint and resources offer premium branded products to satisfy consumer trends driving OEM preferences. Our extensive network, our direct touch relationships with Progressive and our proprietary manufacturing capabilities are highly leverageable as we acquire and develop additional brands. Our audio solutions platform will foster direct-to-dealer and direct-to-consumer upfit connections within the Wet Sounds and Rockford networks. The premium branded quality of Rockford and Wet Sounds, combined with their collective engineering and R&D capabilities, poise these 2 lifestyle brands to drive our growth and presence in audio products that touch across our leisure lifestyle enthusiast markets. And now I'll turn the call over to Jake, who will discuss the financial and other aspects of our expansion.

Thanks, Kip. We believe that our extensive national distribution network, penetration of leisure lifestyle enthusiasts dealers and installers and meaningful OEM relationships will provide a solid platform to drive value with the additions of Rockford and Wet Sounds and provide the meaningful channels to leverage the growth of their market-leading brands and products. Consistent with our strategic growth strategy, we will provide these management teams with the support and investment that will help them drive growth and enable them to focus on the market-leading innovation that made these brands so successful. From a revenue perspective, our 2021 aftermarket activities, which are principally related to our leisure lifestyle enthusiast markets, totaled approximately $160 million on a pro forma run rate basis. With the addition of Rockford, which generated $155 million of revenue in fiscal year 2021, we anticipate our 2022 aftermarket revenue to approximate more than $300 million on a pro forma run rate basis. We expect that leveraging the reach and relationships with Patrick Industries with the world-class premium branded products of Rockford and Wet Sounds will enable meaningful top line synergies as we enhance their existing relationships and introduce new distribution channels and end markets. We will offer and provide administrative and back office support as needed as well as opportunities to leverage our meaningful scale to drive cost and input synergies, allowing our leisure lifestyle enthusiasts and aftermarket businesses to focus on product development and engineering, strategy and customer relationships. In other words, what they do best. We look forward to the continued growth of our aftermarket efforts, expanding the indexing of our products to the significant installed base in powersports, marine and RV. We will continue to add value, as we have successfully done with our past strategic acquisitions, through growth in their revenues and expansion of their profitability, which has led to the effective reduction of their purchase multiples. That concludes our remarks. We would now like to turn the call over to the operator for Q&A.

[Operator Instructions] Our first question is from Scott Stember of CL King.

Obviously, a nice addition here. Looks like doubling the size of your aftermarket business. Can you talk about, aside from just the sheer addition of $150 million, $160 million of sales, some of the cross-selling opportunities that you could see beyond 2022 and into '23 development?

This is Kip. Yes, it's one of the things we're really excited about. There's an intrinsic powersports platform that we get with these 2 brands which we're excited about. We see the opportunity to drive into a new space. But there's also nice crossover opportunities, particularly within the OEM space, within our marine and RV footprint. And then within the aspect of our Progressive Group, from a distribution standpoint, a rep standpoint, we've got a national footprint representing these products at dealerships throughout the U.S. And so we see a nice opportunity to begin to pull through these brands and some of our other brands and then also leveraging some of the manufacturing capabilities. We've got some of our sister businesses that could have the potential to roll up the [indiscernible]

Got it. And then on the supply chain, could you talk about where a lot of these parts are coming from. I imagine a fair amount from Asia. And just talk about how the supply chain has impacted the most 2 recent acquisitions?

Yes. Yes, good question. And most of this product predominantly is going to be coming out of Asia, I think a little bit coming out of South America, but predominantly it's been Asia. They're long-held partners. As we went through the process of working with these businesses to bring them online. Really, we feel good about the diversity they've got in the supply base. They've got multiple players they work with. And so we've monitored that carefully. The product pipeline supply chain challenges that face the broader electronics markets, semiconductors in particular, are something that they're not -- they've certainly recognized and been a part of in some form. They've had the ability through that supply base and some of the multiple partners they've got to work with their customers on quick alternatives to be able to pivot and execute. So we saw good product flow from them in '21. Early '22 is showing promise as well. There's a little bit of tightening that's continuing with the semiconductors, in particular. But broadly they're doing a nice job in managing the supply base and feel like they've got good diversity with their partners.

Got it. And then just last question. I know you guys don't break out margins to this level of detail, but just give us an idea of how much more profitable the aftermarket business is than the pure OEM business is.

Scott, it's Jake, that's a great question. One of the things we find really attractive about our aftermarket businesses in general, and particularly these 2 companies as they join us, is that significant penetration in the aftermarket which we find to be something that's going to be -- put great indexing to that installed boat park, car park, RV park, ATV park that's out there. You could say that the margins when you're going DTC or through the aftermarket to the installers are good 40% to 50% higher than what you might find from an OEM perspective.

The next question is from Daniel Moore of CJS Securities.

Maybe just a little bit more detail regarding the operating and cost synergies that you expect to achieve as kind of -- as well as the time frame.

Daniel, this is Kip again. We look at this -- it's something we've been working on, as we mentioned in the prepared remarks, as the Progressive Group came into the fold with Patrick 6 years ago. We had the opportunity to begin to work with Rockford in particular and think about the go-to-market strategies. And so one of the pieces that we know, there's been really an entrepreneurial spirit that's come with these types of products in the powersports market and the accessories that go into the powersports space on an aftermarket basis. Entrepreneurs really continue to drive energy in a dynamic environment for that -- for the enthusiasts that are in the space. And so we're excited because a lot of that's come from the aftermarket, from a dealer presence and a consumer presence at lifestyle shows and events. And Rockford, Wet Sounds are present and active at those events. And so as they have new products, they can stand up and present at those shows. And there's been a clear pipeline migration with some of those components you begin to see. As a result, the OEs react and look at equipping the units, having the opportunity to take advantage of that consumer drive and desire for the components. So they've been able to add content consistently over the past 5 or 6 years and with notable brands in Polaris, BRP, Harley-Davidson and really put premium products into that space at the OE level. And so while they do that, they continue to innovate and they continue to have a pipeline of products that's deep and thoughtful. They continue to think about using that aftermarket channel to drive the products into the market. So we feel great about this from our Progressive Group platform, as I talked about. We've got the best of these guys 6 years ago. It's 61 sales professionals around the country that we have calling on these shops that are doing these upfits for consumers, calling on dealers to really get them thinking about capabilities and what's out there. So we have a nice push/pull presence that's emanated from this. We've got good relationship that's been developed through Rockford and Wet Sounds with the OEs in the powersports space and then inherently with Progressive and the teams that both Rockford and Wet Sounds work with the ability to touch dealers and consumers on a full basis.

That's really helpful. So just if I'm hearing you correctly, the delta between the acquisition multiple and the slide deck and pre- and post-synergy is more based on revenue synergies. Is that the right way to think about it as opposed to cost or supply chain?

That's right, Dan. We have reasonable opportunities for cost synergies to really come from where we can help them out on some back office or leverage our scale, as I mentioned in some of my remarks. And this is Jake, my apologies. But you're right, a lot of it is revenue synergies. We take these companies that have great products and great penetration in the markets and the customers they have. And we can expand them across a much broader set of customers, whether it's to the -- as Kip mentioned, The Progressive Group and our nationwide distribution network that didn't have or taking folks that are strong in one market, say marine, and maybe introduce them to other markets such as RV, where we have obviously great penetration as well. So lot of top line, a little bit of stuff below that, but really adding a lot of value through that investment into these companies, which is not unique to this scenario. It's how we've exercised our acquisition strategy as long as we've been doing it.

And this is Kip one more time. I should add that, to play on Jake's point, Rockford and Wet Sounds broadly have gone to the market from a single delivery point. So that's one of the things they found intriguing, and we see intrinsic value in on the operational side is we're in 26 states. We have the opportunity to provide them the ability to position product in different segments of the country. And so that's something they find intriguing. They've got a logistics partner -- partners they each work with. And so to get some diversity in how they bring that in. And we see the inherent synergies comes with that.

Really helpful. And obviously, the big crux of it is continuing to penetrate the aftermarket with this, you get up closer to kind of double digits as a percentage of overall revenue. Is there a goal that you have in mind over the next 3 to 5 years from an aftermarket penetration perspective? Or will you just continue to be opportunistic both with OEM and aftermarket business?

Dan, this is Andy. Without question, we're working towards continuing to drive our margin profile. We like the OEM and then the subsequent aftermarket opportunities that are out there with some of the premium products that we've got. And so we're going to continue to diversify our portfolio while leveraging the strength of the foundation of our RV markets and marine markets. So we're excited about that. We think there's a lot of runway. We like the aftermarket. We also like the power sports component and the leisure lifestyle complement that it adds to our business profile. So this just extends our runway and we're going to continue to strategically diversify that platform, again, while leveraging the strengths of our foundation.

The next question is from Brett Andress of KeyBanc.

Just on the powersports market, that's a newer one for you guys. I guess what's the scope of the opportunity as you see it there? And how focused is the M&A pipeline going to be there?

The scope, we estimate the market is something north of $20 billion in terms of opportunity. The opportunity for us within that -- the audio space, there's probably a $3 billion to $5 billion opportunity given the premium level product they may use. And so we see a good runway. We see the opportunity to also think about from a pipeline standpoint there's players that have come to us. That's one of the things that's inherent value strategically with these acquisitions as these guys are plugged in at the aftermarket. They see the products that are moving. And so we've had opportunities to come to the table already. And we're being thoughtful on how we approach this. This is an early step into this. And we'll get -- we'll move further and further through the learning curve and better appreciating the marketplace and being -- ensuring that we're picking the right partners. So feels good about what we can do there. And we also feel good about the opportunities organically with our manufacturing capabilities throughout the country, in our metal forming, in our thermoplastics, thermoforming, the plastics for different components in this. We see an inherent opportunity as we think about plugging with brands through acquisition and organically to expand the presence via variety of products and, again, using that same push and pull type mindset. We've got the ability to have this network take an array of products to the marketplace.

Got it. And then just on helping the market give you credit for this aftermarket build-out, are you going to start breaking out aftermarket as a segment? Or is it just still too early?

Brett, it's Jake. It's a little early for that. We're working on growing it, as Kip and Andy both mentioned. Maybe in the future. But right now, it will probably be something we just cover down on when we speak to you guys on a quarterly basis.

[Operator Instructions] The next question is from Craig Kennison of Baird.

I wanted to understand the distribution angle on the aftermarket side again. Maybe just shed a little more light on how you get your product to consumers on the aftermarket side.

Sure. From a fulfillment standpoint, specific to powersports and what Wet Sounds and Rockford are doing, they've got logistics partners that will ship them. A lot of it goes out parcel service. So they've got a good framework in place there, and then we have the ability to do that through our sites as well. It's the presence that supports that on a regional basis. So we've got a footprint in the Upper Midwest. We've got a footprint in the Southeast. We made an acquisition in the latter part of last year within the powersports space that's based in Florida and Georgia and the Carolinas. And then we've got 6 other states. We cover the Upper Midwest through the plain down into Denver and then down in Arizona. So really looking at a solid presence of our own teams there. From a rep standpoint, provides a presence for these brands and, quite honestly, an array of others that are in the space. And so a good, solid presence, trusted resources in the marketplace for the dealers and consumers to look to. And Rockford and Wet Sounds have got reps that expand beyond our footprint with The Progressive Group. And so we're talking to those folks and thinking about where the opportunity may set to partner with them and to continue to expand that. But the strategy here is to look at providing a presence with some limited inventory on a distribution basis that these rep firms will carry in these regional locations to support some quick hit sales opportunities. But most meaningful is for them to be in these dealerships. With these consumers having displaced on a multimedia technology, they've got the ability to promote the products over the air live in real time with the displays, really innovative in the dealerships. And so we're excited about. So we have the ability to touch a fairly fragmented upfit market that's out there through distribution and representation footprint.

And then, Jake, maybe could you give us an update on the balance sheet post transaction and how well set up you are in the event of a recession or to chase future M&A given your desire to continue to consolidate.

Yes. Sure. Happy to, Craig. Again, it's Jake. So when it comes to those 2 points, we have a balance sheet that's built to do both no matter what situation we face. I would tell you from a strategic perspective, we're well set up. From a liquidity perspective, this is -- this acquisition doesn't -- it certainly going to costs us more -- about $135 million and it's going to put -- take a little bit of liquidity that we had at the end of the year out, that we have a -- as you know, as we transition here into the spring, there's a good working capital monetization. So we expect to have a real good, strong, call it, a couple of hundred million dollars of liquidity that we can deploy very rapidly to support our acquisition activity. Plus, we have a pretty broad market access. Appreciating that the markets have been moving around a little bit. We still feel like we have great access if we didn't need it for any type of strategic activity. When it comes to the composition of the capital structure, we don't really have any meaningful near-term maturities. We have a good mix of prepayable and long-term debt. We have great debt maturity ladder out there. But I think what's most important is our governance. So when you speak to any kind of negative cycle pressure that may come, there's a couple of things we have. As you know, we've got all the levers around cost that the company has successfully thrown in the past, have been very meaningful in their ability to contain expense as well. We have a pretty meaningful variable cost structure, as we've spoken about a lot in the past. Also that monetization of the balance sheet and all of our working capital that we would fully expect to see again in any kind of cycle, but certainly as we transition through the spring selling season. But we also have a covenant governance structure that's very supportive of our company for whatever we want to do, whether it's -- to be strategic or to be defensive. And that goes with our long-term debt, which have incurrence-based covenants only. So there's no maintenance covenants. And as long as we're making the debt payments, we're in -- we're in good shape with those lenders and investors. And then on our credit facility, we have a very supportive bank group that was -- we were fortunate to work very closely with them in April of 2020 to put together a new credit facility structure to give us liquidity, access to liquidity and changed our covenant governance structure, where we're governed only by a fixed charge coverage ratio and a net secured leverage ratio, which gives us the ability to ebb and flow with that working capital monetization to make sure we're in a good spot with them. So we expect to have great liquidity, whether it's up or whether it's down, and have great defense in this [indiscernible] capital structure for both scenarios as well.

And just to follow on that, how should we think about any incremental interest expense we should layer on to your income statement as it relates to this deal?

Well, we use -- a little bit of cash on the balance sheet and then the rest of draw on the revolver, which is about LIBOR plus [ 1.50% ]. So I would just model it out that way. I would say that our exposure to rising interest rates is limited to what's drawn in our revolving credit facility and our term loan A, which we report those on a quarterly basis. So I think you could take the end of the year and just liquidity measures and just pump them up a little bit for the proceeds here that we -- that I mentioned. And I can apply that LIBOR plus 1.50%, which is under 2% right now.

And we have no further questions. I will now turn the call back to Mr. Andy Nemeth, for closing remarks.

Thank you, everyone, for joining us on today's call. We're excited about the opportunity and runway that our premium audio platform brings and the potential for further growth and diversification. Our strong operational platform will help enhance the growth trajectory of Rockford and Wet Sounds and will help lead our aftermarket and powersports initiatives to drive value and profitability for our shareholders and new channels of success for our customers. This concludes our presentation.

Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.