May 3, 2015
Executives
Julie Ann Kotowski - Director, IR Todd Cleveland - President & CEO Andy Nemeth - CFO
Analysts
Daniel Moore - CJS Securities
Operator
Good morning, ladies and gentlemen, and welcome to the Patrick Industries, Inc First Quarter 2015 Earnings Conference Call. My name is Laura, and I will be your operator for today's call.
At this time, all participants are in a listen-only mode. Following the prepared remarks, we will conduct a question-and-answer session.
Please note that this conference is being recorded. I will now like to turn the call over to Julie Ann Kotowski from Investor Relations.
Ms. Kotowski, you may begin.
Julie Ann Kotowski
Good morning, everyone, and welcome to Patrick Industries first quarter 2015 conference call. I am Julie Ann Kotowski, Patrick's Director of Investor Relations; I'm joined on the call today by Todd Cleveland, President and CEO; and Andy Nemeth, CFO.
On the call this morning, we are going to discuss our first quarter results and provide an update on our business outlook and the markets that we serve. However, before we do so it is my responsibility to inform you that certain statements made in today's conference call regarding Patrick Industries and its operations may be considered forward-looking statements under the securities laws.
As a result, I must caution you that there are number of factors, many of which are beyond the company's control which could cause actual results and events to differ materially from those described in the forward-looking statements. These factors are identified in our press releases, our Form 10-K for the year ended 2014, and in our other filings with the Securities and Exchange Commission.
Also please note that certain financial numbers we may use on this call, such as adjusted net income and the related diluted earnings per share amounts are non-GAAP measures. We undertake no obligation to update these statements after this call.
I would now like to turn the call over to Todd Cleveland.
Todd Cleveland
Thank you, Julie Ann, and thank you all for joining us on the call today. This morning, I would like to briefly discuss the company's first quarter results for the period ending March 29, 2015, and then provide an update on the major markets we serve.
Andy, will then provide specific details on our financial performance and I will conclude by providing an update on our business outlook. The first quarter of 2015 marked the continuation of improved performance for the company with increased revenues, improved profitability, and market share gains over the prior year.
Our revenues in the first quarter increased 31% over the prior year, and we posted a 39% increase in our net income for diluted share in the first quarter of 2015 to $0.89 cents compared to $0.64 in 2014. The overall revenue and market share growth we experienced in the first quarter was largely attributable to a solid start to 2015 in all three of the primary end markets we serve.
On the RV side of the business, the first quarter was in line with our expectations. The strong start marked the continuation of strength in the order rates that we saw in the fourth quarter of 2014 that exceeded typical season patterns matching the goals of the OEMs to level low debt facilities during that timeframe and further mitigate the risk of potential weather and transportation delays in the first quarter of 2015 in anticipation of the strong retail demand.
Overall, OEM and dealer sentiments in the RV industry remained positive, and we remain bullish on the industry as a whole as we head into the height of the selling season. As it relates to the correlation between the retail and inventories overall production levels, industry reports indicates RV dealers inventory levels continue to be in line with the expected retail demand with strong retail traffic on dealer lots and expected continued year-over-year growth.
Turning to the MH and the industrial side of our business, the MH industry began the first quarter with its strongest start since 2012, with shipments up approximately 15% in January, and 10% in February. We estimate March shipment to be in line with February for an expected 10% to 11% increase over the prior year in the first quarter.
We've gained market share and expect to continue to see month-over-month improvement in 2015 when compared to 2014. On the industrial side of our business, residential housing starts were up approximately 4% from the 2014 first quarter, and our industrial sales were up 23% as a result of our continued market share penetration, and a 12% increase in the housing starts in the second quarter of 2014 based on our six to nine months lag in this industry.
The company's industrial revenues have increased very significantly over the last several years, reflecting both acquisition and organic growth. Approximately 51% of our industrial revenue base was directly tied to our residential housing market in the first quarter of 2015, with the remaining 49% tied to the commercial side of the business, mainly the retail fixture, and office and institutional furnishing markets.
While our sales mix in the residential side of the business shifted slightly in proportion to commercial side, all of the industrious market segments experienced growth in the first quarter of 2015 with especially strong sales in our office furniture segment and a rebound in the retail fixture business. On a macroeconomic level, as consumer confidence is generally intended higher over the last five years, there has been a related consistent trend year-over-year increase in the RV shipments for the same time period.
Strong demographic indicators point to positive long term outlook, not only increasing number of baby boomers hitting retirement age, but as well shift towards younger generational buying appetites. While the MH industry has some hurdles in front of them related to financing, credit standards, and slower job growth, we expect to see continued year-over-year improvement with limited risk in the near term and believe there is a potential for the market to grow at a much higher rate in the future, especially given historical trends when compared to residential housing starts and pent-up demand in single family housing.
Also, while we do not currently anticipate significant growth in this market in 2015, we do believe we are well positioned to capitalize on the upside potential of the MH market, and are optimistic about the future of this industry, especially given the combination of our nationwide geographic footprint, available capacity in our current MH concentrated locations, and our current content of excess of $1,700 per unit. With growing single family housing and pent-up demand and expected improving overall economic conditions, as well as continuing low interest rates, we anticipate there will continue to be positive momentum pricing housing industry growth in 2015 and into 2016.
And for the full year 2015 and 2016 the MH [ph] is projecting housing starts to increase in neighborhood of 10% to 27% respectively versus the period year periods. As we previously announced in fourth quarter call, we completed our first acquisition of 2015 by acquiring Better Way products, a $50 million manufacturer of wide array of fiberglass components for OEMs and the RV marine and transit vehicle industry.
Better Way is performing in line with expectations and we are excited about the team and the expertise that bring to Patrick model. In addition, over the past three years we've acquired average annualized revenues of $80 million per year, so the acquisition of Better Way provides us a nice start to our 2015 when compared to the prior years consistent with our balanced strategic plan and capital allocation strategy.
In 2014 we explored and evaluated approximately 17 different acquisition candidates with annualized revenues ranging in scale from approximately $2 million to over $270 million. We plan to continue on the same path in 2015 where we have already evaluated six acquisitions to-date to further grow our business in wider region, both adjacent and potentially into untapped markets.
Our primary focus in the acquisition arena is still on the RV and industrial markets where we currently see the highest potential for growth. The acquisition pipeline continues to have opportunities that we are actively exploring and that we are being brought to our attention as buyer of choice in the marketplace in our core captaincies.
Now I'll turn the call over to Andy, who will provide additional comments on our financial results. Andy?
Andy Nemeth
Thanks Todd, and welcome everyone. I would like to review some highlights of our financial results for the first quarter 2015.
Our net sales for the first quarter of 2015 increased $53 million or 31% over the prior year period to $223 million, reflecting a combination of industry, organic and acquisition growth. Specifically, the acquisitions that we completed post first quarter 2014, namely Precision Painting Group, Foremost, PolyVan Three, and Charleston; and our most recent acquisition of Better Way in the first quarter of 2015 contributed approximately $38 million to our first quarter 2015 increase in net sales.
Our RV revenue base, which accounts for approximately 78% of first quarter sales, was up approximately 35% in the first quarter of 2015 over the first quarter of 2014, reflecting an 8% increase in wholesale unit shipments during the quarter, coupled with continued organic and acquisition growth. Our RV unit content on a TPM basis grew 19% from $1,364 per unit in 2014 to $1,629 per unit in 2015.
Our MH revenue base, which accounts for approximately 12% of first quarter sales, increased 18% for the quarter on estimated unit shipment improvements of approximately 11%. Our content per unit continues to strengthen and show positive trending as we are well positioned for improvement in this market sector when the MH industry begins to recover.
Our MH unit content on a TPM basis increased 8% for $1,599 per unit in 2014 to an estimated $1,723 per unit in 2015 reflecting additional market share gains and penetration with our existing customer base. Our industrial revenue base which accounts for the remaining 10% of first quarter sales was up approximately 23% in first quarter of 2015 over the first quarter of 2014.
We are excited about the opportunities that currently exist in the industrial space as we continue to benefit from the positive momentum in residential housing, and a slight shift in our sales mix towards the commercial side of the business, particularly in the retail fixture and office furniture segments. During the first quarter 2015, our gross margin declined slightly by 20 basis points to 15.8% from the 16.0% achieved in the first quarter of 2014, primarily reflecting the impact of lower gross margins on certain 2014 acquisitions when compared to historical consolidated gross margins.
The integration of certain operations light in the year that are anticipated to be accretive in 2015, and as a result of additional direct shift distribution business picked up late in the year. Operating expenses which were 8.9% of sales in the first quarter of 2015 decreased slightly from 9.0% in the prior period.
Our overall warehouse and delivery expenses were down by 60 basis points due to reduced field cost and more efficient utilization in terms of our truck load capacities. Partially offsetting the improvement in delivery expenses as a percentage of sales was increased amortization related to our acquisition activity over the past year which contributed approximately 30 basis points quarter-over-quarter, and as we previously mentioned, the impact of increased sales, salary, and administrative spending to support expected growth and incentive long term compensation programs designed to retain key management and personal.
Operating income increased $3.8 million, or 32% in the first quarter of 2015 compared to the prior year. And operating margins increased 10 basis points from 6.9% in the first quarter of 2014 to 7.0% in the first quarter of 2015, primarily due to the factors previously descried.
The acquisitions of Better Way that we completed in the early February of this year and the acquisitions we completed post first quarter 2014 have enabled us to continue to drive content improvement and improved overall consolidated operating margins, and we expect these acquisitions in the aggregate to be accretive to net income per share for full year 2015. As Todd previously mentioned, our net income per diluted share in the first quarter 2015 was $0.89 compared to $0.64 in the prior year.
I'm now going to briefly discuss our balance sheet and cash flows. Our total assets increased approximately $68 million from December 31, 2014, from earlier reflecting overall growth in our business year-over-year, the full impact of acquisitions completed in 2014 and 2015, and the related working capital ramp up in the first quarter, and traditional seasonal trending in our legacy businesses.
In the first quarter of 2015 we used cash off approximately $3 million from operations, primarily to meet working capital demands during the strong start to the year. We still expect improved operating cash flows on a full year basis.
In terms of our debt, since year end 2014 our total debt increased by approximately $49 million, primarily reflecting the funding of the Better Way acquisition of approximately $40 million, stock repurchases of approximately $6 million, and capital expenditures in the first quarter of approximately $2 million. Our leverage position relative to EBITDA remains well within our comfort level and the unused availability under our credit facility as of the end of the first quarter 2015 was approximately $34 million.
Excluding the increased capacity afforded by our expanded credit facility which I will discuss shortly. We expect to continue to maintain an appropriate leverage position consistent with our capital allocation strategy in order to optimize our resources, continue to grow the business, and focus and execute on our strategic plan.
As we've discussed previously, our capital allocation strategy is centered around realizing our capital resources including targeted leverage capacity to grow our business model. Our top priorities include acquisitions, investments in infrastructure and capital expenditures, maintaining an acceptable leverage position to provide maximum opportunity while managing downside risk and buying back our company stock at prices and volumes deemed appropriate by our Board of Directors and the management team.
In terms of our stock repurchase program in the first quarter of 2015 we repurchased over 130,500 shares of our common stock at a total cost of approximately $6 million. Since the stock repurchase program begin at February of 2013, through March 29, 2015, we have repurchased in the aggregate over 882,000 shares in an average price of $29.07 per share, and a total cost of approximately $26 million.
We may continue to repurchase share from time to time in the open market based on market conditions and pre-established guidelines as determined by management and our Board of Directors. Additionally to meet our current projected operating needs, as well as to improve operating efficiencies, our total capital expenditures thus far in 2015 of approximately $2 million included a strategic replacement and upgrading of production equipment in maintenance expenditures at certain of our facilities and ERP related costs.
We will continue to invest in our infrastructure and flex our capital spending where necessary to align with our demand levels. And for full year 2015 estimate our total capital expenditures to be approximately $8 million.
On that note, we are very excited to acknowledge that on April 28 we amended our existing credit agreement to expand our existing credit facility to $250 million, and extend its maturity five years to 2020. The expanded credit facility which includes our three current banking partners; Wells Fargo, Western [ph], and KeyBanc, and our new partners, Bank of America and Lake City Bank, is comprised of $175 million revolving credit loan and $75 million term loan.
This expanded credit facility updates for the existing credit package that was originally established in 2012 with capacity of $80 million, and subsequently expanded in stages to $185 million. Our amended reinstated credit agreement provides us with increased availability, liquidity, and future capacity, as well as a strong financial platform to support our long term strategic initiatives, organic and acquisition related growth needs and our ongoing working capital requirements.
Finally, in support of our strategic initiatives and our long term operational and financial outlook, on April 27 our Board of Directors declared a three for two stock split, that is effective for shareholders at record as of May 15, 2015, and will be repayable on May 29, 2015. That concludes my remarks.
Todd?
Todd Cleveland
Thanks, Andy. Overall, as I previously noted, we are pleased with the first quarter start of 2015 and are optimistic about the future of all three of the market sectors, both in the short and long term.
Our team continues to be focused on meeting any challenges we face head on with a goal of always striving to provide the highest level of customer service and high quality of innovative products. In terms of our business outlook for the remainder of 2015, our execution goals continue to be focused around our organizational strategic agenda in utilizing our capital allocation strategy to increase our topline, both organically and through acquisition in generating improved operating income, net income, earnings per share and cash flow.
Finally, I would like to reiterate Andy's earlier comments that we are eagerly looking forward to the continuation of our valued partnership with our bank group, not only from a structural perspective, but from a growth perspective as each of our partners has additionally capacity to support our growth needs into the foreseeable future. In addition, I believe our upcoming stock split is a vote of confidence by our Board in the ability of the management team and all our team members to continue to execute on a strategic plan and take the company forward, and continue to provide shareholder value in the form of potential liquidity to the market.
This is the end of our prepared remarks. Thank you for your time today.
We are now ready to take questions.
Operator
[Operator Instructions] And we have question from Daniel Moore from CJS Securities. Daniel your line is open.
Daniel Moore
Thank you and good morning.
Andy Nemeth
Good morning.
Daniel Moore
Andy I apologize if you've mentioned this but the contents for per RV is up 19%, once again very strong growth. How much of that was acquired, is it all acquired or there is some organic?
And then as a follow-up, you are now above $1600 per RV given the areas and markets you play, how much for additional growth do you see over the coming years?
Andy Nemeth
Yes, Dan, as it relates to our content increase it's a combination of both acquisition and organics, so we're continuing to take market share, as well as certainly the acquisitions have been certainly important to increase content. And then as it relates to content in the existing products that we have, we certainly see plenty of runways still to continue to take additional content in the product lines, and so from our perspective, again, there is additional runway there as well as new products as we continue to explore acquisitions.
Daniel Moore
Very good. And then, looking at the manufactured housing side, it appears to be picking up albeit from a low base after – the last two to three years majority of acquisitions were RV focused, you know talk about where the opportunities lie going forward or are you looking more now at MH and industrial and other market opportunities for acquisitions going forward?
Andy Nemeth
Sure Dan, this is Andy again. Primarily I would tell you that today we are still focused on the RV and the industrial spaces that relates to the acquisition priorities, however, that doesn't preclude us from looking at any MH acquisitions, we did see a fairly strong start to the MH industry in the first quarter of the first two months, and so as that continues to – as we hope that continues to grow, certainly that opens up additional opportunities for us to go into that space.
But at this point we are still prioritizing the RV and the industrial space.
Daniel Moore
Okay. And then, just looking at balance sheet – you have given the expanded credit facility still significant headroom for further acquisitions, by our estimates leverage will be probably down below 2X based on 2015 EBITDA.
To talk about your appetite for acquisitions, you're comfortable moving back up to the 2.5X to 3X range temporarily. And I think Todd you mentioned there was $250 million plus deal that you looked at, what's that sort of top end of the range of deals you will be comfortable looking at, at this stage?
Todd Cleveland
Andy, why don't you take the first half of the question and I'll talk a little bit from a comfort standpoint so you can take a leverage piece.
Andy Nemeth
Sure, on the leverage you're correct, we expect to be below 2X – we're below 2X at the end of the first quarter. The credit facility definitely provides additional capacity for us to continue down the strategic plan, we put that in place to allow us to continue to do those normal, I would say in the box acquisitions that we have done so far.
The larger scale acquisition is something that we would look at with our partners, and as it sets in the facility and maybe even expanding the facility which is something that again we wanted to put in place a bank group that has additional opportunity to expand beyond its current limits, and this bank group certainly has that. So, it provides us a lot of flexibility continuing forward.
Todd Cleveland
Yes, this is Todd. As it relates to the larger deals, we looked at a two in the RV space last year and one outside the RV space, and I think really our appetite to kind of push the leverage boundaries are specific to the product line that we see the intellectual property that they bring to the table and just where we see the products going in the future and what we can do with our relationships with our existing customer base and growth the business.
So I would say, as Andy mentioned, we've got great support from our banking group through the process, and I think those particular cases they would be very supportive of helping us get to where we need to on the larger acquisition.
Daniel Moore
Okay. And lastly, Andy you have mentioned cash generation, obviously there was little late in Q1 but I think you said you expected growth on that year-over-year, any color on the outlook for 2015 will be helpful.
Andy Nemeth
Yes, we anticipate full operating cash improvement. The first quarter was – we saw a very strong launch to the first quarter, thus our working capital needs were pretty significant as well, we put some pretty good drivers in places that relates to driving inventory returns and continuing to aggressively manage our inventory.
So from my perspective we have just had a strong start, we ramped up but no concerns from our perspective as it relates to operating cash, we fully expect to increase operating cash flow year-over-year.
Daniel Moore
Okay. Thank you again.
Andy Nemeth
Thank you.
Operator
[Operator Instructions] Alright, and we have no further questions at this time. I would like to return the presentation back over to Julie Ann Kotowski.
Julie Ann Kotowski
Thanks, Laura. We appreciate everyone for being on the call today and we look forward to talking to you again at our second quarter 2015 conference call.
A replay of today's call will be archived on Patrick's website, www.patrickind.com under Investor Relations. Now I'll turn the call back over to our operator, Laura.
Operator
Thank you, ladies and gentlemen, this concludes today's conference. Thank you for participating and you may now disconnect.