LCI INDUSTRIES

QUESTION AND ANSWER SECTION

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question today comes from the line of Scott Stember from ROTH Capital. Your line is open.

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Good morning, and thanks for taking my questions.

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Good morning.

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Good morning.

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Before considering the proposed merger with Patrick and taking out the IEEPA tariff refunds, which you will be giving back to your customers, is there a broader program going forward of addressing affordability? Just – are you guys working with the Thors and the Winnebagos to help them bring prices down in the market? And if it is, is that baked into guidance for the remainder of this year?

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Scott, thank you for that question because that has been a big focus for us because our goal in cost reduction is to help stimulate and drive volume really where we all win. And so, outside of the IEEPA tariff giveback, we have really done a strong job on our self-help initiatives, whether it's through strong G&A reduction. We've had facility consolidations, five last year. We have another 8 to 10 planned at the back half of this year.

We've really worked really hard on our quality initiatives over the past 18 months, and we're really starting to see those dividends with significantly strong quality gains that are positively impacting our customers and our efficiencies. We've re-shored product procurement to look for more affordable countries for tariff mitigation. And overall, all of those coming together, we've really been able to see this impact that we could continue to drive forward to our customers.

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Got it. And then, moving over to the Aftermarket, you guys alluded to the wear and tear cycle starting to kick in. I know a lot of us have been waiting for that with the post-COVID jump in units and operation. Are we really starting to see that? Could we see aftermarket demand accelerate in the quarters ahead?

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We believe that we can see that, Scott. And being in this industry a long time, I'm very accustomed to where the Aftermarket side can drive sales, can also drive continued interest and use of vehicles for our customers and in the outdoor recreation space. So, we're confident that, that can continue to happen. We've worked hard to ensure that our new DC footprint will be able to further service all the dealers out there, anyone in the aftermarket space where we can really drive a lot of on-time deliveries to them, get the product to them quickly, so they can continue to take care of the customers that are in the market now that want to use their vehicles.

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Got it. And then, last question about cadence embedded in the guidance, Q3 and Q4, whether it's sales, margins, and EPS. How should we be modeling that with two quarters left?

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Yeah. I'd say, Scott, as we're looking at this year, it's probably a more normal year in terms of seasonality, whereas in past years we've talked about there's anomalies going on. So, I would say just typical seasonality that you would expect. Obviously, in Q3, we have summer shutdowns. In Europe, basically they shut down for a full month, which is very typical, again just normal seasonality. And then, you get into the fourth quarter, you start to get into the holiday shutdown. So, very normal seasonal cadence as we round out the year.

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Got it. That's all I have. Thank you.

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Great. Thank you, Scott.

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Thank you.

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Operator: Your next question comes from the line of Nathan Jones from Stifel. Your line is open.

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Good morning. This is Andres on for Nathan Jones. I had more of a broad question on end markets and specifically aftermarket. Can you kind of talk about the dynamics at play there and what your expectations are for the year?

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I'm sorry, you're cutting out a little bit. Can you restate the question again?

Yeah. Can you talk about the end markets driving increased Aftermarket net sales and what your expectations are for the year?

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Yeah. So, as it relates to the Aftermarket, you obviously have a few different elements that come into play. You have the – predominantly the OEM Aftermarket, so supporting our RV business. That's been going well and really what comes into play there is the service and the repair cycle. So, as units are coming out of their warranty years, entering that service and repair. One of the elements that does also impact that, frankly, are the uses of the units while they've been in service.

So, what I mean by that is if you've had a unit that every weekend somebody is camping and they're using it in essence full time, there's going to be greater wear and tear on the unit. So, you're going to have more opportunities probably to have aftermarket servicing there. Whereas if somebody is maybe a once a year type of RVer and has come into play, you're going to have probably less service or it's going to take more time for that unit to be coming into the service. So, we have definitely seen more used units being purchased is what we hear from the dealers, which does offer opportunity there.

As we think of the Aftermarket for – as it relates to the automotive side, I'd say that industry itself has been a little bit more tepid as we've moved through the year with the consumers being a little bit more sensitive to some of the affordability aspects out there and just kind of the global macros have impacted some of the consumer confidence. And I think we've seen some automotive weakness. That said, we have the benefit of gaining business, as we've talked about in prior calls, as a result of another competitor going through a bankruptcy process, and we've been able to pick up a nice amount of business from that.

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We've also put considerable focus on aftermarket upgrades. Innovation is a key lane that we are really strong in, and the team continues to put out products that give those consumers, as Lillian was mentioning, that are actively using their coaches, not only to look for opportunities when there is a repair needed, but when there's an upgrade. And the upgrade is the opportunity to further enhance their enjoyment in their coach and in their vehicle. And so, with that, we're going to continue on that focus, and our engineers do a great job of working with our teams on driving innovation.

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That's very helpful. Brings me to my next question, actually. Can we talk a little bit about the pricing dynamics in the market, given kind of a relatively soft demand and the company's ability to pass through higher costs? Generally, do you see easier to pass on price when it comes to the Aftermarket business? Are you seeing that currently?

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No, what I would say as it relates to pricing, so, first maybe more of a broad statement is, unlike other industries, we don't participate in just pricing for the sake of pricing. Generally, if we are taking pricing, it's because the input costs have gone up notably with commodity costs. So, as an example, when I look at steel and aluminum, which are our primary commodities that we use in our products, aluminum is up 80% year-over-year. Steel has been up about 20% year-over-year. They've been stabilizing a bit, but they're definitely up.

Those types of costs are on index pricing with our customers. So, we pass that along when there are increases. At the same time, as you saw us several years ago, as the cost came down for those commodities, we also passed that through. So, really, our approach and our philosophy with pricing is not to just pass on pricing for the sake of pricing. It really is as it's relating to those input costs, really predominantly those commodities. Aftermarket operates similar, in terms of, again, it's not opportunistic pricing. It really is related to the costs and the input costs of our products.

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And as Lillian mentioned, with aluminum, steel as examples, they have leveled off, but unfortunately, they've leveled off at a higher level. So, that puts more pressure on us to look at our cost focus because really cost volatility today really no longer exists in the index-driven areas alone. The real movers are tariffs and trades and trade policy, energy cost, geopolitical issues, freight, and demand uncertainty.

So, when we take all of that in, our team needs to work harder, which they have done. Our procurement team's done an outstanding job, as I mentioned before, looking to very creative sourcing solutions to re-shore products from different locations. And so, commodities, of course, are an impact to us, but there's just so many factors in play that I'm proud of what the group has done to help mitigate those costs.

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Thank you for answering my questions. I'll get back in the queue.

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Operator: Your next question comes from the line of Joe Altobello from Raymond James. Your line is open.

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Thanks, good morning. Want to start on the Aftermarket. You guys talked about a couple of different cross-currents going on, obviously gaining share from a competitor bankruptcy. Also, the RV space moving – a lot of RVs moving into repair cycle, for example. Should we start to think about that business as more of a steady state, high-single, low-double digit grower?

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Yeah. No, I think we have been seeing that type of growth recently, and I think that is as we look forward, I would expect to continue to see those levels of growth. That really is one of the areas of the business, I think from putting aside the cyclical nature and where we are right now in the RV industry, that obviously will be recovering. But what I'd say from a just organic growth and continuing to grow a part of our business, Aftermarket continues to be, I'd say, a bright spot for us as we look towards the future. Both the opportunities in the RV side from the repair/replacement cycle, the upfitting cycle, as Johnny was talking, and the automotive aftermarket, I think will continue to grow nicely for us on the top line.

I think the other important element to highlight there because we've been talking in the past few quarters of some of the headwinds from a profitability perspective from the Aftermarket business. As you know, we've been investing in the business for the infrastructure with the distribution centers. We've also – we're in the process of standing up a new facility down in Texas to support the Ranch Hand brand. So, there's been – there's been a number of investments that we've put into the Aftermarket business that will also start realizing the improved margins as those investments taper off and we start realizing business.

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With our investment that we've had, Joe, when we look at Texas, we look at the opportunity there, consolidating facilities, opening really a new beautiful facility that we are going to be able to double our capacity for the future for the Ranch Hand products. That is a strong investment into Aftermarket. When we look at the wins that we've had just in model year change earlier this year in the last 60 days or so, we have $140 million of new business awarded to us. That's on an annual run rate.

And every time that we get that new business and our customers continue to choose us for our innovation and for our brands, that also boosts our opportunity in the Aftermarket for any replacement or repair needs on those products that we've gotten into the market. So, with that, we're going to continue on that path. When we look at the Furrion brand and the opportunities in the industry on the Furrion Chill AC, the team's done a really strong job with getting that stronger in the market as well. And so, again, those opportunities for increased Aftermarket is there for us.

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Got it. Very helpful. Just moving on to the margin outlook, you maintained it obviously with roughly $250 million of lower – of revenue guidance here. What's the offset that's helping you maintain that margin? And is it more OEM or more aftermarket?

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Yeah. What I would say as it relates to the margin is the team has been doing an outstanding job, call it over the last 18 months, of really executing hard on the self-help initiative that we needed to be focused on. That includes overhead reductions, indirect spend improvements, lower G&A, really just dialing in our cost structure and how we're able to execute. And one of the things in – and I know this quarter is a little bit more complicated because of the various moving pieces.

But one of the things when you cut through the noise in terms of margin improvement from the self-help actions that we've done, there was actually 160 basis points year-over-year from the self-help. And it's because of that, frankly, that gives me the confidence as we go forward, despite the tepid top line outlook because of lighter industry. I have that confidence that we'll continue to be able to execute and deliver that margin consistent with where we thought we would be when we started the year and put it out initially.

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As I said earlier as well, Dan, that we've always done a great job on innovation. That's a strength of ours. But in this past year, we've really refocused innovation, and let's call it 50% of our time is really looked at value analysis and engineering work where we are taking engineering initiatives to really reduce cost and so – apologies, Dan, I meant to say Joe.

But when we look at that, that improvement that we're doing there in working on getting costs down, then taking the other half of our time in innovation, really look at customer experience. So, it's that combination of customer experience and bringing costs down that has really helped to hit the bottom line.

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Yeah. Just one last one for me. Will there be additional IEEPA refund pass-through in the second half?

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So, in terms of receipt of the tariff refunds, yes, there will likely be some continued receipts. But with the accounting treatment that we've chosen basically, we've accounted for everything that we'd expect – that we expect to receive back. It's a matter of when the cash actually arrives, and then when the cash arrives, we're able to then turn it around and refund it back to the customers.

So, from a cash basis, it really is as the tariff cash comes in, we'll get that back to our customers on the pass-through as we've talked about. But from an accounting perspective, we have fully accounted for anticipated tariff activity in the second quarter financials.

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Okay. Thank you.

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Of course.

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Operator: Your next question comes from the line of Dan Moore from CJS Securities. Your line is open.

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Hi, good morning. It's Pete Lukas for Dan. You covered most of my questions. Just, I guess, a bigger picture question in terms of retail demand. Obviously, lots of headwinds, interest rates, inflation, oil prices. But just kind of wanted to get your thoughts. Is it simply that we pulled forward so many units during the pandemic and still working through that or other factors in your mind impacting – the biggest factors, I should say, impacting demand at the current stage?

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There is, of course, you could say the tail on the adjustment from when the market was flooded at COVID. But we've done a better job. Our customers, the OEMs have done a great job on production watching that, and the dealers have done a really nice job managing their inventory levels. And so, when you look out in the marketplace today and see at the dealer level 18 to 20 weeks of inventory in the field, we think that's really responsible at this time of the year. It's putting them in a really good position in the back half of the year for them to see what's going to happen here at Open House, which happens towards the end of September, and then be in a better position to stock up for Q1 and Q2 of 2027.

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Very helpful. That's it for me. Thanks.

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Operator: Your next question comes from the line of Tristan Thomas-Martin from BMO Capital Markets. Your line is open.

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Hey, good morning.

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Good morning, Tristan.

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Did you update your retail expectation for calendar 2026?

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We did not put that out there. But what I would say from a retail perspective, we'd expect it a little bit higher than the wholesale. What we're hearing in talking to the dealers is that they're looking to continue to keep their inventories at a healthy range. So, not necessarily replenishing unit for unit with the retail.

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But seeing retail outpace wholesale, even by a small margin, puts us in a better position than we've seen traditionally over the past year.

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Okay. And then, just kind of curious with the model year 2027 release. Do you see any OEMs maybe trade down the product cycle kind of going for maybe a good product from better or best? Thank you.

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We have seen some shift there. Of course, entry-level product is always a focus to ensure that we get new people coming into the market. But where we have seen in some parts of the business, for example, in Marine, mid-to high-end products, wholesaling and retailing better, and that really for us is a strong thing because our product content is so much stronger in those price points. And whether it's windshields or power biminis, arches, high-end furniture, Lewmar, all of that is a good opportunity for us to be better represented in that price point.

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Great. Thank you.

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Thank you.

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Operator: [Operator Instructions] Your next question comes from the line of Alice Wycklendt from Baird. Your line is open.

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Yeah, good morning. Thanks for taking my questions. Just kind of back on that topic of affordability and pricing. Do you have any sense for where model year 2027 pricing is shaking out on kind of a like-for-like unit basis?

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I think you're going to see it up just a bit, which doesn't surprise us at this point with all that's been going on in the market. But there's been good mitigation to the best of everyone's ability. So, I don't see it in my early thoughts right now to feel that it's significant.

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Great. And then, maybe can you just provide an update on what's going on in your international end markets?

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Yeah. I'd say we've been seeing pretty consistent with Europe is what we're seeing here in North America. I'd say saying that we don't think – they've not been impacted quite as significantly as what we've seen here in the North American markets. I think overall the team is performing well there. I think we're continuing to see steady growth, I would characterize it as. So, it's – there's still some softness overall, which is not inconsistent with what we're seeing here, but it's not to the magnitude that we're seeing in the US.

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Great. And then, one more from me. Is there any way to frame your exposure to the Housing Act that changed requirements for manufactured housing chassis? Not sure it's material, but we've had a few questions about it.

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Yeah. I'd say it really comes to the materiality question. That really is a fairly small part of our business. So, not material at all for us in the scheme of things. It is something that we're continuing to monitor just as we're supporting customers in the overall marketplace, but immaterial in terms of our results.

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Great. Thanks. That's it for me.

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Thank you, Alice.

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Operator: Your next question comes from the line of Bret Jordan from Jefferies. Your line is open.

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Hey, good morning, guys. This is Patrick Buckley on for Bret. Thanks for taking our questions.

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Hi, Patrick.

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On the merger from where you're seeing things today, what are you seeing as the greatest regulatory risks on the deal and what has been the initial response from your peers and partners across the industry?

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Yeah. I think, Patrick, as I indicated before kicking off the Q&A, we're not going to be talking about the merger on today's call just as we're going through our regulatory filings and preparing the proxy. I think we'll be in a better position to talk to you and everybody about the status once we get the proxy out, which will be later.

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Got it. Makes sense. Just wanted to try. And then, I guess, as a follow-up here...

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Good try.

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...on the Aftermarket side.

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[ph] Well tried (00:41:18).

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Is there any profitability or sales difference when you compare sales related to a used RV unit moving to a new owner versus existing owners that are investing in their current unit and performing maintenance?

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Well, there's always the opportunity when you look at somebody buying a used coach, they might be investing in that unit that the previous owner did not further invest in and take care of their unit. So, we like to see those people with enthusiasm come into the market. There's, of course, a better price point opportunity for them when they're buying used. And so, you see that enthusiasm and seeing people want to upgrade and maybe some of the flaws in the coach that the previous owner was willing to accept, the new owner wants to make that change. And so, that's a space that we enjoy then keeping them enthused, and it's our job to keep them in the market then.

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Great. That's all from us. Thanks, guys.

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All right. Thank you.

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Operator: And that concludes our question-and-answer session. I will now turn the call back over to Johnny Sirpilla for closing comments.

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