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DATE
Thursday, October 30, 2025 at 10 a.m. ET
CALL PARTICIPANTS
Chief Executive Officer — Andy Nemeth
President — Jeff Rodino
Chief Financial Officer — Andy Roeder
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RISKS
Operating Margin Decline — Operating margin decreased to 6.8% from 8.1% due to "short-term inefficiencies related to the model year changeover" according to Andy Roeder and "material and labor inefficiencies."
Gross Margin Contraction — Gross margin was 22.6%, down from 23.1% in the prior-year quarter, driven by the same transitional inefficiencies.
Net Income Decrease — Net income fell to $35 million from $41 million in the prior year quarter, with diluted EPS of $1.01 compared to $1.05, including a $0.07 dilution from convertible notes.
Cash Flow Pressure — Cash provided by operations over the first nine months of FY2025 totaled $199 million, down from $224 million for the first nine months of 2024.
TAKEAWAYS
Consolidated Net Sales -- $976 million, a 6% increase, with 4% organic growth, 4% acquisition growth, and negative 2% industry impact, offset by a 2% industry shipment decline.
RV Revenue -- $426 million, up 7%; RV content per unit (CPU) on a trailing twelve-month basis was $5,055, up 3% year over year
Marine Revenue -- $150 million, up 11% despite flat industry shipments; marine CPU was $4,091 on a TTM basis, up 4% year over year
Powersports Revenue -- $98 million, up 12% versus the prior year period; consolidated powersports revenue totaled 10% of consolidated sales.
Housing Revenue -- $302 million, up 1%; manufactured housing (MH) CPU was $6,682 on a TTM basis, increasing 2% year over year, despite a 2% decline in wholesale MH shipments.
Dealer Inventory Weeks on Hand -- Estimated RV dealer inventory stood at 14-16 weeks, down from 19-21 weeks, well below the historical average of 26-30 weeks; marine inventory was 16-18 weeks on hand, down from 19-21 weeks at the same time last year, versus a historical average of 36-40 weeks.
Adjusted EBITDA -- $112 million, down from $121 million in the prior year period; adjusted EBITDA margin contracted 170 basis points to 11.5% versus Q3 2024.
Operating Cash Flow and CapEx -- Operating cash flow for the first nine months of FY2025 was $199 million; purchases of property, plant, and equipment reached $26 million and $65 million year to date.
Liquidity Position -- Total net liquidity at quarter-end was $779 million, comprised of $21 million cash $758 million undrawn revolving credit availability.
Shareholder Returns -- Returned approximately $13 million to shareholders via dividends and repurchased approximately 377,600 shares year to date for $32 million, leaving $168 million authorized for repurchases.
Financial Outlook -- Guidance includes adjusted operating margin of approximately 7% for FY2025; full-year operating cash flow of $330-$350 million; capital expenditures of $75-$85 million; and free cash flow of at least $245 million.
2026 Preliminary Guidance -- Management expects RV and marine wholesale shipments to increase low to mid-single digits in 2026; operating margin expansion of 70-90 basis points is expected; and “organic content” growth aiding powersports as industry volumes decline.
Aftermarket Strategy -- Management formally launched an aftermarket strategy integrating direct-to-consumer, dealer, and third-party distribution, leveraging RecPro; several hundred SKUs have transferred to RecPro with more integration underway.
M&A Activity -- Management highlighted the acquisitions of Lillipad Marine, Medallion Instrumentation Systems, and Elkhart Composites, and cited an active acquisition pipeline across target markets.
Composite Solutions -- Unified all composite brands under Alpha Composites, with an estimated $1 billion RV-focused addressable market identified, and early marine initiatives underway.
SUMMARY
Patrick Industries (PATK +3.59%) executives pointed to a diversified model and direct-to-consumer aftermarket expansion as key factors supporting organic growth amid dealer destocking. Management highlighted robust CPU gains across RV, marine, powersports, and MH despite industry shipment headwinds. Near-term margin compression was attributed explicitly to model year transition inefficiencies and one-time costs related to new business onboarding. M&A opportunities and pipeline visibility were described as increasing, with completed deals already contributing to product diversity and end-market penetration.
CEO Nemeth said, "Our OEM and dealer partners continue to exhibit disciplined production, leaving inventory even leaner across all of our outdoor enthusiast markets, and positioning us positively for a potential restock when retailing flex."
President Rodino indicated, "We estimate RV retail unit shipments were approximately 100,100, and according to RVIA, wholesale unit shipments were approximately 76,500," implying a significant inventory drawdown.
CFO Roeder reported a net leverage ratio of 2.8 times and no major debt maturities until 2028.
Management said, "We have begun to see an increasing interest in adding HVAC and other creature comforts from some of the traditional legacy powersports OEMs, which should lead to a broader base of demand for enclosures, which SportTech provides."
Expansion in composite solutions is expected to drive future CPU growth and addressable market capture, especially in RV and emerging marine opportunities.
INDUSTRY GLOSSARY
Content per unit (CPU): A metric indicating the average dollar value of company-supplied components, features, or systems in each finished unit sold (e.g., RV, marine craft).
Attachment rate: The proportion of OEM-produced vehicles (e.g., side-by-sides) built with additional features or enclosures supplied by the company.
Alpha Composites: Patrick Industries’ unified brand encompassing all composite materials and solutions for RV, marine, and housing markets.
Aftermarket: Sales channel focused on selling replacement parts, upgrades, and accessories directly to end users, dealers, or third-party distributors, outside initial OEM sales.
Dealer inventory weeks on hand: The estimated number of weeks existing dealer inventory would suffice to meet typical retail demand absent further OEM shipments.
Full Conference Call Transcript
Andy Nemeth: Thank you, Steve. Good morning, everyone. We appreciate you joining us on the call today. We delivered solid third-quarter performance, demonstrating the resilience of our business in a dynamic and unique environment. Net sales for the quarter increased 6% to $976 million, with organic growth contributing more than 4% and offsetting an almost 2% decline in our industry shipments level. Earnings per diluted share were $1.01, including approximately $0.07 of dilution from our convertible notes and related warrant. On a trailing twelve-month basis, net sales were approximately $3.9 billion.
Results reflect both the strength of our diversified business model, solid organic growth as a result of our team's innovation and advanced product efforts, and their incredible execution as we continue to navigate dynamic demand levels across our end markets and challenges facing the broader economy. Our OEM and dealer partners continue to exhibit disciplined production, leaving inventory even leaner across all of our outdoor enthusiast markets, and positioning us positively for a potential restock when retailing flex. We remain well-equipped to capture meaningful upside when that inflection occurs both strategically and organically. We ended the quarter with a strong balance sheet and total net liquidity of $779 million.
Our financial position enables us to remain flexible and nimble in supporting our customers' growth needs with a variety of levers while continuing to execute a balanced capital allocation strategy. We expect to continue our investments in the aftermarket and new product development, both through heavy emphasis on model year prototyping and in combination with our advanced product group, which is focused on product development several model years out. Additionally, and importantly, we are continuing to invest in digital tools, data analytics, and AI-powered solutions across our business to drive greater efficiency, accelerate decision-making, reduce costs, and unlock new value for our customers.
We continue to be proactive in strengthening the Patrick platform through strategic initiatives like the acquisitions of Lillipad Marine, Medallion Instrumentation Systems, and Elkhart Composites, as well as the modernization of our processes, technology, and equipment and optimizing our aftermarket resources to create new opportunities for our brands. These investments are expected to continue to contribute to our share gains across our end markets. Building on strong revenue execution across our primary end markets, we continue to make meaningful progress in expanding our content per unit, or CPU, through a combination of innovation, collaboration, and targeted investment.
Our teams are working closely with OEM partners to integrate new products and technologies that elevate the functionality, design, and consumer appeal of products like RVs, boats, and side-by-sides. In the third quarter, we achieved content gains across all of our outdoor enthusiast markets and our MH markets, reflecting both our expanding product portfolio and a growing adoption of our integrated full solutions platform. These content gains underscore the power of our diversified model and validate the continued demand for Patrick's high-valued, individualized, and differentiated solutions that enhance performance, efficiency, and aesthetics across every category we serve. Subsequent to quarter-end, our marine brands had a successful and prominent showing at IBEX, the marine industry supplier show.
Our increased presence unveiled the scale of Patrick's platform while reinforcing our commitment to a brand-forward approach and showcasing our innovative product lineup, fully demonstrating the depth and breadth of Patrick's solutions. At the show, guests had the opportunity to explore a full solutions experience, allowing them to engage with numerous Patrick products, including Medallion's touchscreen displays, Wet Sounds speakers, BAT harnesses and wiring, LilyPad ladders, SeaDek flooring and lighted cup holders, XT carbon tops, and Taco seating. I also want to congratulate the team at Taco on their IBEX Innovation Award for their Altura luxury helm seat, a new flagship helm chair with a patented stainless steel frame concealed inside a teak ladder back.
Additionally, I am proud to share that our former president of marine, Rick Ranger, was inducted into the NMMA Hall of Fame. With more than forty years of leadership in the recreational boating industry, Rick has influenced many generations of colleagues and competitors alike. Finally, I want to again recognize the remarkable efforts of the Patrick team. Their commitment, adaptability, and focus on serving our customers have been extraordinary during these dynamic times and continue to drive our brand-fronted partnership model with our customers. Beyond cyclical dynamics, we expect to drive continued strategic growth through M&A, aftermarket expansion, innovative product development, and our diversified portfolio. Our solid balance sheet and solutions-driven strategy keep us well-positioned for sustainable long-term profitable growth.
I will now turn the call over to Jeff, who will highlight the quarter and provide more detail on our end market.
Jeff Rodino: Thanks, Andy. Good morning, everyone. Looking closer at our end markets, third-quarter RV revenue increased 7% to $426 million versus the same period in 2024, representing 44% of consolidated revenue. Our RV content per unit on a TTM basis was $5,055, an increase of 3% from the same period last year. On a quarterly basis, CPU increased 8% sequentially compared to 2025 and increased 9% year over year. The improvement in the revenue and CPU in the third quarter was driven by our commitment to working with and supporting our customers with model year innovations as they refine and upgrade their products, coupled with recent acquisitions.
We estimate RV retail unit shipments were approximately 100,100, and according to RVIA, wholesale unit shipments were approximately 76,500 in the third quarter. This implies a seasonal dealer inventory destock of approximately 23,600 units during the period, resulting in an estimated dealer inventory weeks on hand of approximately fourteen to sixteen weeks. This is down from nineteen to twenty-one weeks in 2025 and reflects continued OEM wholesale production. This remains well below pre-pandemic historical averages of twenty-six to thirty weeks, and we further believe the number of discrete units in the field is well below levels seen during the pre-pandemic period. Over the last year, we have revealed a long-term strategy related to composite solutions.
This highlights our efforts to seize emerging market opportunities through both acquisition and innovation. After several years of early-stage development and prototyping, we recently unified our composite solutions under the Alpha Composites brand name. Alpha Systems is a Patrick brand that is synonymous with high-level customer service, providing innovative solutions to RV and MH industries. The team at Alpha Composites will continue to build on the foundation through continued collaboration with our OEM partners. We believe our unified branding approach and dedicated resources will further enhance our competitive position as a leading composite solution provider and innovator in a market where weight, durability, overall cost, and sustainability matter to our customers.
Our third-quarter marine revenues increased 11% to $150 million, outperforming what we estimate were flat wholesale powerboat unit shipments. Our estimated marine content per wholesale powerboat unit on a TTM basis was $4,091, an increase of 4% from the same period last year. Estimated content per unit on a quarterly basis was up 15% sequentially compared to 2025 and increased 10% year over year. We estimate marine retail and wholesale powerboat unit shipments were 42,732,300 units, respectively, in the third quarter, implying a seasonal dealer field inventory destock of approximately 10,400.
Dealer inventory in the field remains lean at an estimated sixteen to eighteen weeks on hand, down from twenty to twenty-two weeks in 2025, and nineteen to twenty-one weeks on hand at last year at this time, remaining well below historical pre-pandemic averages of thirty-six to forty weeks. Like RV, we believe the discrete number of units in the field remains well below pre-pandemic levels. Our broad marine portfolio and design expertise position us as a key partner to new entrants and our existing base of valued customers alike. New entrants in the pontoon space have begun to leverage the breadth of our offerings and customer services early in their processes.
Additionally, related to Andy's mention regarding IBEX, we have identified opportunities in the marine market related to composites and are now offering a full composite deck solution, including composite flooring, woven fabric, and the adhesive that brings it all together, enhancing the strength, sustainability, and ease of installation for our customers. During the quarter, we completed the acquisition of Lillipad Marine, a Traverse City, Michigan-based designer and seller of premium, innovative boat ladders, diving board systems, and other marine accessories. LilyPad delivers their award-winning and patented products through both OEM and aftermarket channels, deepening our lineup of innovative solutions in the marine space.
Our powersports revenue increased 12% to $98 million in the quarter versus the prior year period, representing 10% of third-quarter 2025 consolidated sales. Our revenues improved across all powersports businesses, including those that serve recreation and audio markets, coupled with continued growth in attachment rates for Sportex products. Entering the fourth quarter, we believe the OEMs and dealers will continue to carefully monitor despite some positive retail signals in recent months. Recently, our Rockford Fosgate brand launched a new 2024 plus HD aftermarket solution at Sturgis. This kit includes Rockford's first aftermarket motorcycle amplifier with a built-in A to B digital interface. Not only is this a Rockford first, but it is also an industry first.
This digital amplifier pairs with Rockford's newly launched speakers to create a premium plug-and-play solution for newer Harley motorcycles. Finally, on power sports, as we have discussed on a number of calls, the utility segment of the powersports market has shown much better resilience than the recreation market, leading to improving attachment rates with existing customers. We have begun to see an increasing interest in adding HVAC and other creature comforts from some of the traditional legacy powersports OEMs, which should lead to a broader base of demand for enclosures, which SportTech provides. On the housing side of the business, our third-quarter revenues were up 1% to $302 million, representing 31% of consolidated sales.
In manufactured housing, which represented approximately 58% of our housing revenue in the quarter, our estimated content per unit on a TTM basis increased 2% year over year to $6,682. We estimate MH wholesale unit shipments and total housing starts both decreased 2% in the quarter. As evidenced by our solid manufactured housing content per unit in the face of lower industry wholesale unit shipments, our team continues to perform with strong customer relationships and our ability to align and scale quickly to demand while maintaining a lean fixed cost structure.
Despite recent softness in MH shipments, we continue to believe there is a lack of affordable housing options in the United States, and we believe our solutions can help both MH and site-built housing industries provide quality, cost-effective homes efficiently. We believe lower interest rates and improved customer confidence remain pivotal to unlocking pent-up demand. I will now turn the call over to Andy Roeder, who will provide additional comments on our financial performance.
Andy Roeder: Thanks, Jeff, and good morning, everyone. Consolidated net sales for the quarter increased 6% to $976 million. Our team drove increased revenues in both our outdoor enthusiast and housing end markets, including a 7% increase in RV revenues, an 11% increase in marine revenues, a 12% increase in powersports revenues, and a 1% increase in housing revenues. As Jeff noted, we generated solid content gains across our end markets during the quarter. Our total revenue growth of 6% was comprised of 4% acquisition growth, 4% organic growth, and negative 2% industry. Gross margin was 22.6% versus 23.1% in the third quarter of last year. The decline reflected items including short-term inefficiencies related to the model year changeover.
Operating margin was 6.8% compared to the prior year at 8.1%. This change was driven by the previously described factors. Our overall effective tax rate was 26.2% for the third quarter, compared to 24.8% in the prior year. Net income was $35 million or $1.01 per diluted share compared to net income of $41 million in the prior year quarter. Our diluted EPS for 2025 included approximately $0.07 in additional accounting-related dilution as a result of the increase in our stock price above the convertible option strike price for our 2028 convertible notes and related warrants. The prior year's diluted EPS included just $0.04 per share.
Adjusted EBITDA was $112 million compared to $121 million, while adjusted EBITDA margin was 11.5%, lower by 170 basis points from 2024. Cash provided by operations for the first nine months of 2025 was $199 million compared to $224 million in the prior year period. Purchases of property, plant, and equipment were $26 million in the quarter and $65 million year to date. This implies free cash flow of approximately $134 million for the first nine months of 2025. Total net liquidity at the end of the third quarter was $779 million, comprised of $21 million of cash on hand and unused capacity on a revolving credit facility of $758 million.
As a reminder, we have no major debt maturities until 2028 and continue to have the financial strength and capital necessary to capture long-term organic and inorganic growth opportunities. At the end of the third quarter, our net leverage was 2.8 times. In the third quarter, we returned approximately $13 million to shareholders through quarterly dividends. Regarding our share buyback, we remain opportunistic, having repurchased approximately 377,600 shares year to date through the third quarter for a total of $32 million, leaving approximately $168 million left on our repurchase authorization. Regarding tariffs, our strategy remains unchanged, and our teams are actively working with supply chain partners to minimize the potential impact.
This remains a dynamic landscape, and we will continue to utilize all of our tools that we believe will help neutralize the absolute impact to our pricing pass-throughs and ultimately mitigate any material impact to our operating margin. I will now move to our outlook. We estimate RV retail unit shipments will be down low single digits in 2025, with estimated full-year RV industry wholesale unit shipments between the range of 335,000 to 345,000 units, and continue to anchor on equivalent dealer inventory weeks on hand year over year.
In marine, we estimate retail shipments will be down high single digits and estimate wholesale shipments will decline low single digits, again with dealer inventory weeks on hand year over year remaining approximately the same. In our power sports end market, we now estimate that wholesale industry shipments will be down high single digits and our organic content will be up high single digits, offsetting the industry decline as our content continues to grow given ongoing increasing attachment rates for our cab enclosures. In our housing market, we estimate MH wholesale unit shipments will be up low to mid-single digits for 2025.
On the residential housing side of the market, we estimate 2025 total new site-built housing starts will be down mid to high single digits year over year. Moving to our financial outlook, we expect our full-year 2025 adjusted operating margin to be approximately 7%. We continue to estimate that our effective tax rate will be approximately 24 to 25% for 2025, implying a quarterly effective tax rate of approximately 26% for the fourth quarter. We estimate operating cash flow will be between $330 to $350 million, and we estimate capital expenditures will total $75 to $85 million as we continue to reinvest in the business, focusing on automation and innovation initiatives.
This implies free cash flow of at least $245 million. For modeling purposes, we would like to give our initial thoughts regarding 2026 based on where we sit today. We expect RV wholesale shipments to increase low to mid-single digits and RV retail to be flat. For marine, we expect wholesale shipments to be up low single digits and retail to be flat. In power sports, we expect low single-digit shipment growth and low single-digit organic content growth. For MH and housing starts, we expect both to be flat to up 5%. We believe improved consumer confidence and lower interest rates are key factors necessary for our end markets to rebound more aggressively.
Based on these estimates, we expect our operating margin in 2026 to improve meaningfully, an estimated 70 to 90 basis points. That completes my remarks. We are now ready for questions.
Operator: Thank you. We will now be conducting a question and answer session. If you would like to ask a question today, you may press star 1 from your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to withdraw your question from the queue. For participants that are using speaker equipment, it may be necessary to pick up your handset before pressing the star key. So as many as possible are allowed to ask questions, we ask you to please limit yourself to one question and one follow-up. Thank you. Our first question comes from the line of Scott Stember with Roth Capital.
Please proceed with your question.
Scott Stember: Good morning, guys, and thanks for taking my questions.
Jeff Rodino: Morning. Morning.
Scott Stember: A lot has been made of some of the increased optimism coming out of Open House. What are you currently seeing from your OEM customers regarding production? What are they telegraphing as far as their desire to start ramping up production to potentially put more units into the field?
Jeff Rodino: Yes, Scott. This is Jeff. You know, as I look at our production numbers or production numbers from the OEMs, we are seeing we saw a little bit of a slight increase in October. We are seeing a little bit more of an increase in November. So we do feel like just the pure production numbers would tell us that there is some ramping up, you know, to what degree that will be consistent through into the first quarter. But right now, we are seeing a little of that. You know, as I look forward, you know, after this week, we really only have six more weeks of production in 2025, with a week off for Thanksgiving.
There is some production in Thanksgiving, and then we will take two weeks off for Christmas. So I think early indications are if I look year over year, we are seeing some increases in the back half of the fourth quarter.
Scott Stember: Got it. And then moving over to the aftermarket. I know you guys have been doing a lot of cross-pollination with RecPro. Can you give us an update of new SKUs or just is that accelerating? Just give us an idea of what is going on.
Jeff Rodino: Yeah, Scott. This is Jeff again. On the RecPro side, you know, we have had several hundred SKUs that have carried over from other Patrick divisions into RecPro this year so far. We will be close to four or five hundred when it is all said and done since the inception of the acquisition. We are looking to accelerate that a little bit. We have really got them entrenched with our marine side now and all of our marine divisions to really start to grow that portfolio within the RecPro sites. So really excited. We have put a little bit more capacity in that area to help accelerate that.
So we are excited about what we have seen so far and what we are going to see going forward.
Andy Nemeth: One of the other things, Scott, this is Andy, is that we just formally launched our aftermarket strategy, which includes the combination of not only direct to consumer, but direct to dealer and third-party distribution. So we have rolled out a formal strategy. We are implementing structure to really kind of formally launch kind of an overall vision for where we want to take the aftermarket in alignment with our RecPro platform on the direct to consumer side. So we are looking forward to really driving some real value in the aftermarket.
Scott Stember: Got it. And maybe I will just ask for a little bit more granularity on your comments about the 70 to 90 basis points of operating margin expansion next year. I assume there will be some sales growth. Just trying to get a sense of how much is sales leverage, how much is internal self-help, like things that you have going on, like automation and AI and things like that. Just trying to flesh that out.
Andy Nemeth: Sure, Scott. This is Andy. A lot of it is going to be sales leverage, but I would also tell you content gains, the solutions that we are putting together for customers, allowing them to reduce cost overall, but allowing us with more product content with our customers is going to add value there. And then, you know, I think as it relates to the automation efforts, we are going to continue to push forward aggressively on automation amongst our facilities and continue to invest in CapEx. And we are definitely picking up nickels and dimes along the way as it relates to the automation efforts that we expect to see.
So a combination of all of those across the platform to drive that margin improvement. And certainly, volume plays heavily in there, especially if we go above and beyond kind of our industry expectations. So we expect to be able to really leverage our fixed cost structure today. You know, we do not need to add a lot of overhead to support significant incremental volumes.
Scott Stember: Gotcha. That is all I have. Thank you.
Andy Nemeth: Thanks.
Operator: Our next questions come from the line of Joe Altobello with Raymond James. Please proceed with your question.
Joe Altobello: Thanks. Hey, guys. Good morning. I guess just to follow-up on that operating margin commentary. Obviously, the outlook for '26 is encouraging, but it sounds like you are looking for operating margin this year toward the lower end of your prior range. So maybe what is kind of weighing on margin this year ahead of the 26% improvement?
Andy Roeder: Well, Joe, here in the third quarter, we really experienced some model change and efficiency. If you look back through the first couple of quarters, we have seen gross margin expansion driven primarily by the addition of our direct to consumer aftermarket business, RecPro, last fall. Along with that came a heavier OpEx profile. This quarter, our OpEx is in line, but we just had some, I call them one-timers, short-term investments. We brought on significant new business here in the quarter. CPU was up 9-10% for RV and marine. So it is significant new business, and with that just comes some material and labor inefficiencies.
Joe Altobello: Got it. Okay. And in terms of what were you seeing so far in terms of production and shipments in October and November? I think it was in the last call you guys thought that we might see some sort of restock either in the fourth quarter or maybe the first quarter of next year. Are you starting to see that potential restock? Or is this just kind of noise at the end of a year?
Jeff Rodino: I think there might be a little bit of potential restock. I mean, we are getting ready to get into the selling season. You know, you got Tampa right around the corner in January. I think if you noted during the prepared remarks, 14 to 16 weeks on hand is extremely low. It is, I mean, that is really the lowest we have seen since the pandemic where it was in the high single digits of weeks on hand back then. So there is a lot of room there. You know, in 2025, we are at about seventeen to nineteen weeks on hand.
So there has got to be a little bit of restock in there to be able to get the right units on the lot and be prepared for this selling season that is going to come in the first quarter.
Joe Altobello: Got it. Okay. Thank you, guys.
Operator: Our next questions are from the line of Noah Zatzkin with KeyBanc. Please proceed with your question.
Noah Zatzkin: Hi. Thanks for taking my question. I guess, first, maybe if you could expand on how you are thinking about CPU opportunity in '26. And I guess within that, you talked quite a bit about composites. So just would love to hear some more thoughts on how that kind of plays into CPU opportunity. Thanks.
Jeff Rodino: Yeah, Noah. This is Jeff. In 2026, we expect all of our businesses, as we always do, to pick up anywhere between, you know, 3-5% organic growth. You know, our expectation is composites is going to be a big part of that. I would tell you if we look right now where we sit today, we believe the total addressable market in that composite area is about a billion and a half dollars. If you net out, you know, some of the cannibalization that may happen, you know, it is close to a billion dollars. Our teams are poised and ready to attack that piece of the market.
And I think with some of the other things going on in the market, that opportunity continues to be very strong. Again, our APG groups are coming with new product development both on the marine, RV, and power sports side. We believe that, you know, the further increased attachment rate on the power sports side is going to give a lot of opportunity to SportTech as more and more OEMs are looking to go to that full attachment. So I think across all of our markets, we have a lot of opportunity to grow that CPU and continue to grow the business.
Noah Zatzkin: Really helpful. And maybe just one more. Maybe an update on just M&A and what you are seeing out there and kind of how you are thinking about that. Thanks.
Andy Nemeth: Sure, Noah. This is Andy. On the M&A front, we have been really active in the last quarter for sure. As it relates to cultivating the acquisition pipeline, we have candidates identified really across our markets, so we have been out actively kind of talking, kind of building that pipeline up. But as well, we are starting to see more deal flow come at us from outside sources as well. So both the organic side of it where we are working with potential targets, as well as the deal feed coming in from investment bankers, has increased over the last probably thirty to forty-five days in particular. So we are seeing increased activity on the M&A front.
Operator: Our next questions are from the line of Daniel Moore with CJS Securities. Please proceed with your question.
Daniel Moore: Thank you. Good morning. I appreciate all the color. To maybe ask, obviously, appreciate the color about dealers' weeks on hand, both in RV and marine. As you talk to OEMs and dealers and we have this sort of historic backdrop of what averages look like pre-pandemic, give a sense for or guess for what a new normal could look like in terms of weeks on hand in those key end markets when we get back to, say, low to mid-single-digit retail growth cadence.
Andy Nemeth: Trident, this is Andy. So if we look at historical numbers, pre-pandemic, pre-pandemic RV weeks on hand was roughly twenty-six to thirty weeks. And marine weeks on hand was roughly thirty-six to forty weeks pre-pandemic. So if you look at where we are kind of sitting today, RV at fourteen to sixteen weeks, and finishing out last year at roughly, you know, let's just call it eighteen weeks. We definitely think there is some restock needed. We absolutely feel that the inventories in the channel today across the spectrum are low. And that there is a restock needed even in the current environment. So we feel like there is some restocking needed.
We do not expect to see the historical pandemic levels, 26 to 30 on RV, and, again, 36 to 40 on marine. That being said, we definitely know it is, and we feel like it is, it is bigger than where we are at today. So it is marine today, as Jeff mentioned, sixteen to eighteen weeks on hand. Last year, at the end of the year, we were at twenty-two weeks. So again, we feel like there is some restock coming and needed. We do feel like inventories are low.
But we do think, you know, I am going to say, you know, let's just say twenty-two to twenty-four weeks is probably a good range to kind of think about right now. At least in our estimation. But we also know that dealers have gotten really good at working with less inventory. That being said, we also do feel across our spectrum. And we have multiple touches with the dealer network, whether it is our transportation business or whether it is our touches with the OEMs or dealers themselves, you know, we get a feel that inventories are lean and dealers will need some more balance out there. So do feel like there is some, again, restock needed.
Daniel Moore: Really helpful. Switching gears, initial guidance for '26 implies the operating margin getting back close to percent. As you look across the businesses and when demand starts to return, where do you see the most significant capacity and strongest kind of incremental margins opportunity for further expansion beyond that across the various businesses?
Andy Nemeth: Sure. Given what we have done with our business, our team's discipline in really managing their businesses, some of the consolidations that we have done, but as well just really maintaining a lean operating structure and continuous improvement environment, there is leverageability across all of our pillars and all of our business segments. So incrementally, you know, there are a few puts and takes. But overall, I tell you there is significant incremental opportunity for us to leverage the business in each of our markets.
Daniel Moore: Got it. And if you did, and I missed it. Forgive me. Could you maybe quantify in ballpark terms the impact of inefficiencies related to the model year changeover quarter?
Andy Roeder: Yeah, Dan. I mean, we saw in the first two quarters our gross margin expand by near a hundred basis points. There is some noise in there, you know, with tariff impacts and timing, but for the most part, you know, I think that is we expect a meaningful gross margin expansion driven by our RecPro direct to consumer margins in that acquisition last fall. So, you know, we were down 50 basis points. I guess I would expect us to be up, you know, 50 basis points to that ballpark as we look forward.
Daniel Moore: Got it. Helpful. Thank you. Appreciate it, Andy.
Operator: The next question is from the line of Tristan Thomas-Martin with BMO Capital Markets. Please proceed with your question.
Tristan Thomas-Martin: Hey. Good morning. Do you have any kind of soft or have you seen any of the consumer kind of changes based on model year '26 pricing being up, call it, the dice, you know, they just
Jeff Rodino: Can you repeat that question, Tristan? Sorry.
Tristan Thomas-Martin: Yeah. Just asking with model year '26 pricing up, mid-sized single digits kind of like for like, how are you seeing consumers and dealers react to that?
Jeff Rodino: Yeah. This is Jeff. I, you know, I think they have, you know, certainly passed that along in the channel. As we could tell, you know, we did see some increase retail year over year in June and July. That came down a little bit in August. But overall, you know, we can only tell you where the production numbers are telling us right now. Since we have not really seen retail for September and October. So once we see those, we will get a better feel overall of the retail demand. But you know, from what we can tell from production levels and where we think wholesale shipments are going, there is still demand out there.
And we feel good that they have been able to absorb that, which certainly will help mitigate some of the pricing that has happened. But overall, we feel good about kind of where the pricing has ended up, and I think that, you know, as far as what tariff noise has been out there earlier in the year, you know, we have got a few more countries they need to sort some things out with. But as we look, we have been working very closely with customers. We know that affordability is a big concern. And partnering with our customers to help with that affordability is something that we have been very active in over the last quarter.
Tristan Thomas-Martin: Okay. The obvious follow-up is how the production mix has been looking in terms of, like, are we seeing little chip towards fifth wheel away from single axle?
Jeff Rodino: Yeah. We have seen a little of that. I mean, it certainly does occur a lot of times in the fall where we will see a little bit more on the fifth wheel side as you get the full-time RVers. They are going to use it for the full winter getting into a fifth wheel versus, you know, the smaller entry-level. Certainly, the mix is not back to what I would call a normal mix that we have seen in the past with fifth wheel and travel trailer and the smaller travel trailers. But we have seen a little bit of a shift in the third quarter. We expect that will stay for the fourth.
You know, if we get into the first part of next year, I think the dealers were so, you know, kind of keen on the entry-level product for most of 2025. As we see that they need to refill some of the stock that is out there. I think we are going to see that is going to be in some of the mid to higher-end product. So we feel good about where the mix is at. I hope I do not think it will go back backwards into the more small travel trailers, but we are keeping an eye active look at that.
Tristan Thomas-Martin: Okay. Got it. And then just going to squeeze one more in. Is there any way to think about the composite $1 billion address market opportunity, kind of how that breaks out across your end markets? Thanks.
Jeff Rodino: Yeah. It is primarily in the RV market right now. When you look at the roofing and flooring solutions that we are providing, something that we are really not into that business right now. With roofing, flooring, and slide-outs, the interior and exterior skins are something that we are participating in right now, and we are very active in, you know, shifting from some of the wood products that we are currently selling into composites. And we feel really good about, you know, all the prototyping that we have done and the activity and the products we have been able to bring to market. Certainly, we see some opportunity on the marine side.
It is pretty fresh on the marine side. We have done a lot on the wood products within marine. And now we are starting to shift over into some of the composites. So I would tell you that the majority of what we talked about in the addressable market is going to come on the RV side to start with.
Operator: The next question is from the line of Craig Kennison with Baird. Please proceed with your question.
Craig Kennison: Hey. Thanks for taking my question. Apologies for joining a little late. I wanted to ask about Slide 15. You are talking about powersports organic content growth up low single digit. What is driving that?
Andy Nemeth: Hey, Craig. Without question, content gains that we have seen as it relates to attachment rates for our enclosures in particular. We have seen it as we have talked about kind of the utility side of the business, which is really where we have got tremendous focus. Being more resilient than the rec side of it. But that being said, the overall take rate continues to go up on enclosures, and it can continue to take rate on HVAC systems, which in the side-by-side markets continues to go up. So we are seeing that.
We are seeing some new entrants come back into the market in 2026, but as well some of the product innovations that we have had teed up over the last couple of years are expected to continue to drive content as well. So we are excited about not only the uptake rate, but some of the solutions we are bringing and then the opportunity for us to really exhibit our full solutions model as well into the power sports market. So not only in the closure, for example, but also a sound system, a wiring harness, a dash panel, instrumentation system, all combined into one solution for our customers going forward.
So a tremendous opportunity for us to continue to realize additional content gains in the side-by-side market.
Craig Kennison: Thanks, Andy. And then maybe just follow-up on the RecPro topic. How do you manage any sort of channel conflict that might come about from setting up a direct to consumer platform?
Jeff Rodino: Yeah. Craig, this is Jeff. I do not see a lot of channel conflict in what we are doing. You know, prior to having RecPro on board, which gives us that direct to consumer avenue for our products, we had very little aftermarket touchpoints with if you look at the content that Patrick is putting into RVs and marine, and then not really having an outlet to be able to get that product into the hands of the end consumer. This is really just giving us that avenue, so I do not see a lot of conflict.
Craig Kennison: Thank you, Jeff. And then maybe finally on the MH side, what will it take to see a more sustained recovery? It feels like there is ample need for affordable housing and we are going to get interest rates moving in our favor. You know, what are your industry contacts suggesting is necessary for that really to take off?
Andy Nemeth: Sure, Craig. This is Andy. It is a good question. I think as we look at the MH side of the business, we certainly continue to believe in the model that it provides the low-cost alternative, especially for first-time entrants into the housing market. Historically, MH has run nine to 11% of single-family housing starts. If you go back in history. And we continue to see that trend continue. You know, as far as I am concerned, as we continue to watch that, you know, we are going to continue to look for an inflection point where we see that trend change a little bit. We see a greater percentage of single-family housing starts as our indicator.
But overall, the model, the narrative, you know, makes a lot of sense, especially with where things are at. We just think some of the pent-up demand needs to be released into that market. But we are fully supportive of it. And as well, the quality of the homes has gotten so much better over the years. And so it really is an attractive solution. We are as well waiting for kind of that inflection point.
Craig Kennison: Thanks, Andy.
Operator: As a reminder, if you would like to ask a question today, you may press star 1 from your telephone keypad. Our next question comes from the line of Mike Albanese with Benchmark. Please proceed with your question.
Mike Albanese: Yeah. Hey. Good morning, guys. Thanks for taking my question. Just want to touch on, you know, Craig had asked a question about the power sports segment and as we think about attachments, rates, and products like HVAC and audio, is it possible to kind of frame, you know, maybe from an industry standpoint, you know, what percentage of the overall utility industry, you know, comes with enclosures?
Andy Nemeth: Let me think about that for a minute, Mike. So the percentage of the industry probably today, I guess, what utility vehicles are coming with enclosures. I mean, probably 60%, 70% is a guess. I cannot tell you exactly.
Jeff Rodino: And it is definitely going to be heavier on the utility side versus the side-by-side, Mike.
Mike Albanese: Correct.
Jeff Rodino: And then, you know, we are dealing primarily with a couple of the large manufacturers. There are some of the manufacturers out there that are not even offering that yet. But we believe that is a big tailwind for us when they start to go into that market. So within our customers, you know, it is that, you know, 60%, like Andy was talking about. But the overall market, I think there is opportunity beyond that.
Mike Albanese: Yeah. That is exactly where I was going with the question. To get a sense of, you know, as just enclosures proliferate, with that comes more to drive new product and increase attachment rates, right? So I was trying to get a sense of, you know, you know, that needle head.
Andy Nemeth: Not only that, Mike, but the frame, not only did so some come with a frame. Right? Some come with a windshield. The attachment to add doors, to add windows, then the additional content that we have talked about on top of that. From a solution perspective. Kind of all play into that.
Mike Albanese: Got it. Thanks, Greg.
Operator: Thank you. Thank you, ladies and gentlemen. I will turn it back to Andy Nemeth for closing remarks.
Andy Nemeth: Thank you. Once again, I just really want to acknowledge and thank our incredible team for just their continued efforts, dedication, and passion for really partnering with our customers, bringing new products to market, managing the tariff situation, and continuing to deliver consistent and predictable results. I am just so proud of the team and all their efforts. And as well, want to thank our customers for their tremendous support through these incredibly dynamic times, you know, as we continue to really work to partner to make sure, you know, we are promoting kind of the industry as a whole, in alignment with their goals and objectives. So really appreciate all the efforts of the team.
We will continue to push forward. I think there is a ton of opportunity for Patrick as we look at where the industries are teed up and where they can go. And not only that, the resilience and scalability of our model and the ability to inflect when our customers need it, you know, I am really excited about. So once again, thank you very much for joining us. We look forward to talking to you after our quarter results.
Operator: Thank you. Ladies and gentlemen, this concludes today's teleconference. Thank you for your participation. You may now disconnect.