Good morning, ladies and gentlemen, and welcome to the Patrick Industries Incorporated First Quarter 2019 Earnings Conference Call. My name is Paulette, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. During the question and answer session, if you have a question, please press star then one on your touch-tone phone. Please note that this conference is being recorded. I will now turn the call over to Ms. Julie Ann Kotowski from Investor Relations. Ms. Kotowski, you may begin.
Good morning, everyone, and welcome to Patrick Industries' First Quarter 2019 conference call. I am joined on the call today by Todd Cleveland, Chairman and CEO, Andy Nemeth, President, and Josh Boone, CFO. Certain statements made in today's conference call regarding Patrick Industries and its operations may be considered forward-looking statements under the securities laws. There are a 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 statement. These factors are identified in our press releases, our Form 10-K for the year ended 2018, and in our other filings with the Securities and Exchange Commission. We undertake no obligation to update these statements to reflect circumstances or events that occur after the date the forward-looking statements are made, except as required by law.
I would now like to turn the call over to Todd Cleveland.
Thank you, Julie Ann. Good morning, everyone, and thank you for joining us on the call today. Calculated end market diversification and the execution of organic and strategic growth initiatives were the theme that continued to play in our favor in the first quarter as the gap between wholesale and retail shipments grew in the RV market, which represents 56% of our revenues. RV OEMs continued to aggressively rebalance inventories and limit production in efforts to drive towards inventory and retail equilibrium in the industry. Dealer sentiment at virtually all the recent shows has been positive, and retail traffic and sales are off to a solid start for the year. We have been able to continue to increase our content per unit in all markets, despite incremental headwinds related to inclement weather in many parts of the country, interest rate speculation, uncertainty around tariffs, and commodity cost volatility.
Industry fundamentals and demographics remain strong, we carried a higher cost structure compared to our revenues for the first quarter, primarily related to operating expenses in anticipation of expected strong retail demand in all four of our primary markets. We have strategically focused on maintaining the integrity of our business model during the RV inventory rebalancing, as we expect retail demand to take hold and drive through once the new norm for inventory levels is established amongst dealers. Our revenues grew 10% for the first quarter to $608 million, and our first quarter 2019 net income was $21 million, or $0.90 per diluted share, despite an estimated 27% decline in wholesale shipments in the RV industry and an estimated 10% decline in wholesale shipments in the MH industry. I'll turn the call over to Andy, who will further review our primary markets and overall business outlook.
Thank you, Todd. As noted, we are very pleased with our diversification efforts to drive top-line strategic and organic growth in the first quarter in light of RV and MH industry-specific recalibrations and other factors. Our diversified market penetration in both the marine and our residential and commercial industrial markets, which we have been strategically targeting, have helped to offset wholesale shipment declines in the quarter in our two largest market sectors, specifically RV and MH, while our organic and synergistic growth and savings opportunities as a result of our acquisitions made over the last two years continue to be realized. With our RV market representing approximately 56% of our business, 44% of our revenues are now coming from our other three primary markets. This compares to approximately 31% a year ago.
Long-term demographic and demand prospects continue to be positive in both our leisure lifestyle and housing and industrial markets, despite the wholesale shipment volatility over the last several quarters. I will provide an update and some additional color on each of the core markets we serve. On the RV side of our business, our first quarter 2019 financial performance reflects the impact of continued rebalancing of retail inventories with wholesale production as dealers continue to optimize inventory levels. Our RV revenues were down $36 million, or 9%, against wholesale shipments that were down an estimated 27%. The gap continued to widen in the first quarter between wholesale production and retail shipments, which are only down an estimated low to mid-single digits after expected revisions and compares to the strongest quarter in 2018, where we saw double-digit retail growth of approximately 11%.
RV OEMs have aggressively managed production levels with improved capacities and efficiencies over the past four quarters to better align with improved lead times for dealers and strong demand expectations. Wholesale shipments over the last four quarters are estimated to be down approximately 15% on a trailing 12-month basis on retail shipments that are estimated to be up approximately 3% for the same period. Over 40,000 units have been pulled out of dealer inventories over the prior 12 months as we head into the traditionally strong spring and summer selling seasons, where retail is expected to continue to outpace wholesale shipments. Dealer confidence remains high, and retail sales in March and April to date have been reported to be very strong based on our touchpoints, especially with the recent break in the weather.
We continue to believe that the future retail demand trajectory remains positive based on current demographic indicators, including new young buyers and the emergence of incremental repeat buyers in the channel, increased participation by millennials and ethnically diverse families, the continued shift to smaller travel trailers, and overall economic conditions. In addition, used RV inventory levels remain generally low with rising prices, supporting the trade-in values and demand for new RVs. The RVIA's latest published expectations for 2019 project wholesale unit shipments to range from approximately 445,000 units on the low end to 476,000 units on the high end, representing low to high single-digit declines from 2018. We anticipate a return to equilibrium with a possible overcorrection amongst RV dealer inventories in the near term. The ultimate return to equilibrium should position RV OEMs to return to producing units in tandem with the expected retail demand.
We are currently assuming existing run rates to continue through the second quarter and anticipate the channel inventories will continue to normalize even further through Q2 2019 and support a return to more normal wholesale shipment levels aligned with retail demand in the latter half of the second quarter and into the third quarter of 2019. We currently expect a flat to low single-digit decrease in 2019 retail shipment growth with potential upside based on subsiding headwinds related to interest rates, tariffs, commodity price declines, consumer confidence, and equity market volatility.
Our marine business continues to represent a bright spot for us. The market is poised to continue its recovery with the potential for a long runway of slow and steady growth as OEMs in this market continue to offer more value-added content on boats, bringing increased comfort and convenience to allow for the ideal leisure lifestyle experience and managing inventory of used boats in the marketplace. Our marine portfolio companies are comprised of a high-quality strategic brand platform that is generating significant organic growth synergies, evidenced by our $45 million or 99% increase in marine revenues, which represented 15% of our consolidated sales in the quarter. Retail trends and demand patterns are strong in this sector as well, and our touchpoints and data sources indicate a strong start to the show season in the first quarter.
While overall marine powerboat retail shipments were down 7% on an unrevised basis in the first quarter of 2019, based on data from roughly 46% of the states reporting, first quarter shipments generally represent approximately 20% of full-year shipments. The decline was seen in all categories of powerboat segment, except for the continued strength in the ski and wake sector. Our strong stable of component product lines have the ability to flex with the value stream, both as marine OEMs continue to increase content per unit, as well as in the event that consumers push towards a lower-end value-oriented product. All indicators currently point towards another solid year in the marine industry and continued growth trajectory for fiscal 2019 of low to mid-single digits based on long-term fundamental demand, aging boats on the water and the related replacement cycle, and positive consumer economic metrics.
Turning to the housing and industrial side of our business, our manufactured housing sales represent 17% of our total revenues and were up $44 million or 70% over the first quarter of 2018, despite an estimated 10% decline in wholesale shipments. Approximately $40 million of the increase was attributable to the acquisition of LaSalle Bristol in November 2018. Similar to Q4 2018, manufactured housing continues to be negatively impacted by wet weather conditions in certain regions of the country, where moving inventory and setting foundations and houses has been difficult. In the first quarter of 2019, we focused on the integration of LaSalle and the further identification of synergies on the operating side of the business.
As we mentioned on our fourth quarter call, while we expect LaSalle to be initially dilutive to consolidated operating margins by approximately 50 basis points on an annualized basis, we believe there are significant annual operating synergy opportunities that can be realized over the next 12 to 16 months. We are increasingly excited about the overall long-term growth prospects in housing and in particular manufactured housing, driven by pent-up demand, multi-family housing capacity, and a lack of stick-built housing contractors and subcontractors, as well as the need for quality affordable housing and current demographic trends such as first-time homebuyers and those looking to downsize.
Our industrial business has continued to drive value both strategically and organically, and our revenues in these markets, which represented 12% of our overall sales mix in the first quarter and are focused on the residential housing, hospitality, high-rise, commercial construction, and institutional furniture markets, increased $3 million or 5% in the quarter. Single and multi-family residential housing starts declined 5% and 19% respectively for the first quarter of 2019, based on delayed U.S. Census Bureau reporting after the government shutdown, with combined new housing starts down 10% in the quarter. Interest rate increases and tariffs in the past year have created some headwinds, in addition to the lack of affordable housing capacity and inventories.
We believe these factors present opportunities for continued pent-up demand, along with improving consumer credit, strong jobs and wage growth, and demographic trends related to new buyers and those looking to downsize, and play well into our core housing and industrial market model. We are currently anticipating low to mid-single-digit growth in MH wholesale units for fiscal 2019 and low single-digit growth in new housing starts in fiscal 2019. We are excited about the upcoming spring and summer selling season in all of our markets, and our early indicators point to some of the macroeconomic headwinds we've experienced over the last 15 months subsiding in the short term.
Our 9 acquisitions completed last year and 16 total in the last 2 years continue to present additional organic growth opportunities and synergies to further drive market share gains, expand geographically, establish best practices across all of our brands throughout the organization, and service our customers at the highest level. On the acquisition front, our pipeline remains full and spans all 4 market segments, we continue to actively cultivate, review, and assess opportunities. We have pivoted with a lean operating structure in the short term to focus on surgically and strategically driving synergies and organic growth opportunities from our tremendous stable of acquired companies over the past several years, while certain end markets work through some overhang and short-term headwinds. We remain opportunistic and disciplined in the deployment of our capital allocation strategy. Our cash flows are very strong and are reflective of our ability to leverage the business model.
We generate over $7 of free cash flow per diluted share on a trailing 12-month basis. These cash flows, combined with our flexible balance sheet, position us to continue to execute in alignment with our strategic plan and drive increasing overall long-term shareholder value. I'll now turn the call over to Josh, who will provide some additional comments on our financial performance.
Thanks, Andy. Our consolidated net sales for the first quarter increased 10% to $608 million, reflecting the impact of acquisitions, acquisition-related growth synergies, and market share gains. As previously noted, the overall revenue improvement in the quarter was hampered by double-digit industry decline in the RV and housing market, which unfavorably impacted both our gross and operating margins. Revenue from our leisure lifestyle market, which is comprised of the RV and marine market, increased 2% with RV revenues down 9% and marine revenues almost doubling compared to Q1 2018. RV content per unit for the first quarter on a trailing 12-month basis increased 30% to an estimated $3,131 per unit. Estimated marine content per unit increased 118% to $1,490 per unit.
Revenues from our housing and industrial markets increased 37% in the quarter, with MH revenues up 70% versus the prior year by the 10% decline in industry wholesale shipment units. MH content per unit increased 42% to an estimated $3,389 per unit. On the industrial side, revenues increased 5% in the quarter housing starts were down 10% compared to Q1 of 2018. In alignment with the wholesale shipment declines in the RV and MH market, we have aggressively flexed our production schedules and workforce in the short term in tandem with market demand levels, without jeopardizing our long-term workforce needs or the ability of our plants to quickly flex up production in anticipation of improved market demand as we progress through 2019.
In addition, we continue to deploy strategic and targeted capital investments to help drive operational improvement, expand manufacturing capabilities, and position our business to be able to operate efficiently and capitalize on all of our end markets. Over the last few quarters, we have seen commodity prices stabilize, then begin to decrease in late 2018. As with increases in commodities, we partner with our customers and pass along price decreases in a declining commodity environment, and during the quarter there were notable price decreases to our customers. With the softer than expected demand levels from our primary markets, we were sitting on higher priced inventory relative to the current commodity market, and this in turn negatively impacted our gross margin. We expect to continue to work through the higher priced inventory through the second quarter in alignment with expected run rates.
Our gross margin in the first quarter was 17.5%, declining 20 basis points, which was impacted by the double-digit decline in the RV, MH, and housing market and the corresponding lost revenues. Maintaining a balanced workforce with reduced schedules and headcount, but staying in position to quickly flex our production with anticipated normalized wholesale demand and declining commodity costs and passing along pricing to our customers at the current market pricing while managing through higher priced inventory. We were able to offset part of the margin decline by leveraging our fixed costs on the marine and industrial growth and the positive contribution and higher margin profile related to certain of our acquisitions over the past 18 to 24 months. Operating expenses were 11.6% of sales in the first quarter.
Warehouse and delivery expenses and intangible asset amortization increased 110 basis points, primarily due to certain acquisitions completed in 2018 having a higher operating expense profile relative to Patrick's overall operating expense profile. SG&A expenses were 6.2% of sales in the quarter. Consistent with our gross margin, our operating expense margin, as previously discussed, was negatively impacted in the quarter as we chose to carry a higher cost structure relative to the cost structure currently needed to support the short-term depressed demand levels in our end markets, in order to be in a position to quickly respond to an improvement in market demand levels and maintain our investments made in our high quality workforce. Operating income was $36 million in the first quarter, a decline of 14% from the previous year. The first quarter 2019 operating margin of 5.9% decreased 170 basis points compared to the prior year.
We have been actively executing on synergies across the organization and are in the early stages of our $4 to $5 million cost reduction target with LaSalle, and we are on track with our internal plans to execute on the full run rate of cost reductions for LaSalle. For the first quarter, the operating margin of LaSalle resulted in a 50 basis point dilution to our overall operating margin profile. The margin dilution from LaSalle, coupled with the other factors previously described, resulted in the operating margin decline. In the first quarter of 2019 and 2018, our net income per diluted share included tax benefits associated with share-based compensation. For the first quarter of 2019, net income and net income per diluted share were positively impacted by $800,000, or $0.04 per diluted share.
For the comparable prior year period, the impact to net income and diluted net income per share was $2.1 million, or $0.08 per diluted share, respectively. Our overall effective tax rate, as reported, was 22.3% for the first quarter of 2019 compared to 19.6% for the first quarter of 2018. Excluding the impact of the tax benefits previously noted, our effective tax rate for the first quarter of 2019 and 2018 was 25.4% and 25.2% respectively. For the full year 2019, we are estimating our effective all-in tax rate to be in the range of 25%-26%, excluding the impact of one-time tax items. Turning to the balance sheet. On January 1st, 2019, we adopted the new lease accounting standard as required.
The adoption of this new standard resulted in the recognition on our balance sheet of approximately $80 million of operating lease liability, both short and long-term, with a corresponding amount related to operating lease right-of-use assets. There was no impact on reported net income and net income per diluted share for the first quarter of 2019 related to the adoption of the standard. In the first quarter of 2019, we generated approximately $28 million of operating cash flows. The first quarter traditionally requires a seasonal ramp-up in working capital. We will continue to aggressively manage and flex our working capital consistent with demand levels, as evidenced by the reduction in inventories of $8 million compared to December 31st, 2018.
Our current flexible business model and the businesses we acquired over the last 18 to 24 months provide flexibility and position us with the ability to generate strong operating cash flows to support our strategic and organic growth plans for 2019. Our leverage position relative to EBITDA at the end of the first quarter of 2019 remained at the same level as year-end 2018 at around 2.4 times. Our credit availability at the end of the first quarter was approximately $420 million. Along with our ongoing operating cash flows, we have plenty of flexibility to continue to execute on our disciplined capital allocation strategy.
We continue to put capital to work in the quarter, having invested approximately $10 million in capital expenditures to support our strategic growth and expansion plans for certain brands and for strategic investments in capacity, geographic expansion, and increased efficiencies, as well as new process and product development. For the remainder of 2019, we will continue to make disciplined strategic investments in our business to ensure we maintain sufficient capacity and can support expected volume levels. That completes my remarks. Todd?
Thanks, Josh. As we eagerly look to the second quarter and beyond, we are optimistic about the opportunities to leverage our operating model and resources to continue to strategically grow our business, capture additional market share, execute on synergies, and drive efficiencies. Our tremendous talent across the organization and our business model provide an operating platform that we can leverage off of and effectively execute in a dynamic market environment while staying focused on our long-term strategic initiatives and driving overall shareholder value. We remain excited and optimistic about the long-term fundamental growth potential in both the leisure family lifestyle and housing and industrial markets, as well as by the fundamental economic drivers and consumer migration trends supporting them.
We believe the inventory rebalancing in the RV industry that has and continues to take place in conjunction with the improved efficiencies and reduced lead times from the OEMs to dealers will provide a better end consumer experience for those buyers who have more specific preferences related to options and sizes, ultimately enhance and promote the already strong RV experience profile. Thus far in 2019, we have devoted our efforts and resources to fully digest and integrate the nine acquisitions we completed in 2018 and take advantage of the opportunities to drive efficiencies and synergies across the organization. Our acquisition pipeline continues to be full with candidates in all our end markets, we will remain disciplined in our strategic thought process and valuation modeling as we navigate through the ongoing dynamic market conditions.
We will continue to opportunistically deploy capital in alignment with our capital allocation strategy and free cash flows, all while maintaining an appropriate and disciplined leverage position. I'm extremely proud of our more than 8,200 talented team members whose dedication, commitment, and passion providing a premier level of customer service and high-quality products to all our customers has allowed us to continue to drive performance and operating results and capitalize on the strong leisure lifestyle market, stay well-positioned to respond to improvement in the MH market, continue to expand our opportunities in the industrial space. This is the end of our prepared remarks. We're now ready to take questions.
Thank you. We will now begin the question and answer session. If you have a question, please press star then one on your touch-tone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star then one on your touch-tone phone. Our first question comes from John Lovallo from Bank of America. Please go ahead.
Hey, guys. Thank you for taking my questions. The first question is on the 10% decline in manufactured home shipments. In the context of a broader housing market where single-family starts were down about 5%, as you said, through March, and new home sales were up marginally, call it 1%-2%. The entry level seems to be performing better than most other segments of the market as a relative bright spot. I'm just curious what you guys see as kind of the delta between the broader market and what's happening in manufactured housing.
Yeah, John, this is Todd. I think we touched on the fact that weather's been a real factor here. I don't like to use that as an excuse. However, if you take a look across the regions of the country, whether it's snowfall, rainfall, particularly in the Southeast, where the manufactured housing industry is extremely strong. Our contact points have just shared with us that as they've tried to get out and set homes, and just kind of the overall tone of the buyer, they're just not in a position to set the homes, and the buyers are just not coming out, knowing the fact that the homes can't be set. Based on feedback we're getting early on, as things have dried up, the sun's come out a little bit more. We're getting indications that retail traffic is picking up and things are starting to move along in those industries.
Really, we think that's the real delta between the two, particularly just based on the type of style and environment that the manufactured home has to be put through in order to get placed on the lots where they put them.
Okay, that's helpful. Then in terms of your industrial business, the exposure there to residential construction, any thoughts on what percentage is exposed to kind of what you would consider to be first-time or entry-level housing?
John, this is Andy. We've got, I would say, a better-than-midpoint percentage that's focused on first-time buyers. We also participate in the remodel sector of the market, so we participate both in new construction and remodel. We've got a heavy presence on the West Coast in both single-family and multifamily. Again, we've got kind of a nice presence from our perspective. The headwind that we've seen related to interest rates have definitely been a factor as well as the average selling price of new homes, new single-family homes have been an issue. We see that subsiding, we are optimistic about where the first-time buyers are going to be able to get back into the market, especially with some of those headwinds subsiding as we move through kind of the spring and summer selling season.
Great. Thanks for that. Finally, the higher-priced inventory, just to be clear, is this primarily in the RV and MH segments or is it across the portfolio?
This is Josh. John, it is primarily in the RV sector, relatively speaking.
Got it. Thanks, guys.
Thank you.
Our next question comes from Scott Stember from C.L. King. Please go ahead.
Good morning, guys.
Morning.
Andy, can you maybe just circle back to your comments about inventory and equilibrium? I know it's hard to tell exactly when we're going to hit a bottom, particularly since the days-on-hand situation with dealers and their expectations has changed a bit. It sounds like you're talking about probably towards the end of this quarter, where you would see some things starting to lighten up and to come back from a shipment standpoint. Is that correct?
Yes, Scott. We believe with the retail selling season coming upon us and the positive feedback that we're currently getting as it relates to March and April retail movement against the backdrop of some high double-digit declines in wholesale, we think that equilibrium point is definitely pushing sooner rather than later. Right now, we're kind of estimating continued run rates through the second quarter on the wholesale side, but retail demand, as we talked about a little bit, has been strong. If you look back, and you go back the past four quarters, we've seen progressive decreasing wholesale unit shipments over the last four quarters against pretty strong retail. We believe that equilibrium point is approaching us. There could be a little bit of overcorrection. Again, against the backdrop of that strong retail, we think that we're getting closer to it.
All right. Just circling back to the industrial side, can you just remind us how much is non-housing related? The part that's non-housing related, whether it's high-rise or hospitality, how are those segments doing compared to the housing markets, the housing-related?
Sure. We're about 60%-65% housing-related. Our commercial hospitality sectors are strong. We've got opportunities that continue to come into play, in particular on the West Coast, which we're very excited about. Multifamily has been strong on the housing side as well. What we're seeing, we're seeing two things happen, really. We're seeing first-time buyers, and we're also seeing the older generation downsize back into multifamily, into more urban areas. Again, we're optimistic about where that's headed. On the commercial high-rise sector, the hospitality has been strong, and we've got opportunities that continue to bubble up in those sectors.
All right. Just going back to the margin, and this will be my last question, then I'll get back into queue. You guys already talked about the drag from LaSalle Bristol and your expectations there, it seems like the new thing we have to consider is the price givebacks versus what's in inventory. Maybe just remind us or just update us on what your overall expectation would be from an op margin standpoint for this year, including Bristol and excluding Bristol. Thank you.
Yeah, Scott, this is Josh. If we think about our overall operating margin target for 2019, we previously discussed operating margins being flat net of LaSalle Bristol and RV market down low to mid-single digit. Including LaSalle Bristol, we had talked about operating margins being down 50 basis points, so them being dilutive to our overall margin profile by 50 basis points. In Q1, from what we're seeing here with the overhang from the higher cost inventory, a little bit into Q2. That with the decline in the RVs and all of our end markets, now we're looking at operating margin, the net of LaSalle minus 50 basis points and down 100 basis points all in.
Got it. Thanks so much.
Our next question comes from Brett Andress from KeyBanc Capital Markets. Please go ahead.
Hey, good morning. Thanks for taking my questions. First, some housekeeping. What exactly was the organic growth number in the quarter? If you look at that spread between your organic sales and the end market declines, can you just help us piece out the drivers of that during the quarter? What impact did price have? How much of that was new customers, new product lines? Just any color there would be helpful.
Yes, Josh. Organic revenues, net of industry growth were +8%. Still another strong quarter of strong organic growth, net of industry growth, even in light of a declining commodity market and price decreases going on in the quarter. Our consolidated industry growth for a backdrop, we're working off of the -20% from an industry growth perspective. Revenues were down 12% for the quarter, all in off versus a backdrop of -20% on our industry. As far as breaking out, as far as the organic growth for end markets, we really don't break it out from a product versus new customers. We are seeing a lot of strength and growth on the industrial and the marine side with all the marine acquisitions we completed in 2018. We're seeing market share growth and organic growth in all four of our market sectors.
Got it. Okay. You touched on this in an earlier question, can you just elaborate a little more on what you're seeing on the RV retail end throughout March and so far in April? Just any sense of maybe growth rates that you're seeing from your touch points. I guess ultimately, where do you think weeks on hand corrects to when all is said and done?
Sure, Brett. This is Andy. Based on our touch points through our transport operations, through our financing contacts, the customers, certainly all the other touch points as it relates to surveys and discussion points out there. What we've heard is a very strong March on the retail side, we've heard a very strong April to this point as it relates to retail. We've really tried to calibrate that with all those sources, and everybody's pretty much corroborated that. We feel pretty good about the retail side of it. From a weeks on hand perspective, from our tracking and our estimates, we continue to estimate that we are currently operating at the lowest level of weeks on hand that we've had in the last five years. We continue to see inventory turns improving.
We are kind of tracking and looking for this new norm as it relates to dealer inventories, given the opportunity with the reduced lead times. Again, dealers can get units in a faster timeframe than they used to be able to based on the increased capacities that have been brought online at the RV OEMs and the efficiencies that have been provided. Again, we're really looking for this new norm, we will tell you that we believe we're at the lowest level that we've seen in the last five years, and that number continues to decline as it relates to weeks on hand. Turns continue to improve on an overall basis. Again, weeks on hand continues to decline from what we're seeing and as we're tracking on a quarterly basis as well.
Brett, I'd just add, as Todd, when you think about us heading into the peak selling season against a backdrop of that 475,000-500,000 unit shipment level on the retail side, and you think about the number of units on a monthly basis that are going to come out of the inventory levels over the course of March, April, May, June, July, and August. We really feel like that delta between those two is going to at some point really cause kind of a pain threshold that is going to result in a second half need for replenishment.
Understood. If I could squeeze one more in. It sounds like the OEMs continue to adjust production into April after it used to be like a mid-20% March decline in shipments. Just any help on where you think production levels are trending so far into April, and how do you see that year-over-year shipment trajectory playing out the next few months as we kind of get to that equilibrium that you talked about, just the cadence there?
Sure. As we're moving in here into the second quarter, run rates are very similar. We're anticipating run rates to be very similar to that of what we saw in March. There will be some seasonality that will pick up. There's a few more days of natural production that occurs compared to the first quarter. Overall, again, I think when you take a look at kind of some year-over-year comps, we still have some big numbers to hurdle over in April and May, and then the comps become a little bit more comparable when we move into June.
Understood. Thank you.
Our next question comes from Daniel Moore from CJS Securities. Please go ahead.
Good morning. Thanks for taking questions.
Morning.
Maybe switch gears a little bit. In terms of M&A, given the retrenchment in the RV space, you're seeing
Even more opportunity for consolidation amongst suppliers, given the pullback here, and if so, how do you weigh those opportunities relative to the goal of continuing to create a more balanced and diversified portfolio?
Sure, Dan. This is Andy. As we talked about, we continue to have acquisition opportunities really across all four of our platforms today. We have not seen significant deterioration in valuation expectations. Really, most of the industry, if not all, kind of views this rebalancing situation as temporary. There's a solid belief across the spectrum that, again, we are working through inventory rebalancing and not a broader issue at this point. As we've kind of watched the volatility, certainly we've been working with our valuation model. We've not seen kind of a rush to the table of suppliers looking to consolidate. If anything, people have held pretty firm to their valuation expectations and we've looked at that and we continue to model that and be very disciplined and opportunistic in the way that we think about things.
That being said, we've also looked back at the 16 acquisitions that we did in the last two years, and it's given us an opportunity to really look at the organic opportunities that exist there, whether it be expansion, new products, cross-selling opportunities, and those are significant. We've really gotten very excited about those opportunities. We feel like we can execute either on the M&A side or organically through the acquisitions that we've been able to bundle up, and really continue to drive value. From an overall perspective, we still feel good about the pipeline. We continue to actively cultivate, and continue to talk to candidates, so we've got a nice stable.
We want to make sure we've got a good handle on the markets and that rebalancing point as we kind of look for the new norm for dealer inventories on the RV side in particular. We're going to continue to be very disciplined there. Overall, we would tell you that we still feel really good about the pipeline and our ability to execute in that at the right time, and based on prioritization of markets and products and customer opportunities. Nothing's really changed on the acquisition front.
Helpful. One more on the margin front, and appreciate all the color, obviously, Josh, but just in terms of Q2, how should we be thinking about given working through those higher priced inventories, gross margins for Q2 and operating margins either relative to Q1 or on a year-over-year basis? Thanks.
Yeah. We're going to continue to work through some higher priced inventory in Q2. It's going to moderate, but we'll continue to work through it in the quarter. Traditionally, Q2 has been our strongest operating margin quarter in prior years. I would say that'd be relatively consistent with this year. I would expect margins to progressively improve as we progress throughout the year, as we work through a little bit of the higher priced inventory, and as our cost structure kind of balances out with improving end markets and higher revenues as we progress throughout the year. Just as it relates to that higher priced inventory, we do pass along both price increases and price decreases. This is really just a situation of inventory versus lower than expected wholesale production. Nothing's really changed other than some timing as it relates to that movement.
It's just we had some inventory build up because of expectations on wholesale that'll work its way through. We're pretty aggressive, and we want to make sure that we pass along price decreases to our customers as we see those commodities move. We view that certainly as short term related to the margin and as it relates to the inventories that we're carrying.
Understood. Got it. Appreciate it.
Our next question comes from Craig Kennison from Robert W. Baird. Please go ahead.
Good morning. Thanks for taking my questions. You've addressed many of them already. Todd, I think early in your prepared remarks, you mentioned carrying some higher expenses early in the period. I'm just wondering if you could add a little more color to what some of those expenses might be and how long they would continue.
Sure. What I was mostly talking about is, I would say the talent that we've brought on over the course of the last couple of years that has allowed us to continue to grow our business and take market share in a very dynamic environment. I would say as we've looked at things and kind of evaluated where we're going from a long-term perspective, we haven't taken action to cut and align with current production levels. If we would see production run rates stay at current levels, there was further levers that we can pull, both whether it be operationally or from the SG&A side of things. All things that we're prepared to do.
Again, when we just look at things from an overall market standpoint, whether it is RV, MH, or any of the markets we serve, we really feel like the talent and the people that we have within our organization are critical to taking us to the next level as the market recovers.
Thanks. I apologize if I missed it. We're all trying to get after the same kind of wholesale shipment dynamic. Again, it looks like March shipments were off over 25%. Was your comment on April that we should see a pace like that down kind of 25% based on the kind of production days you've seen from manufacturers, or because the days are different, maybe it won't be so bad.
I'm glad you asked that, Craig. I think that's important. We don't anticipate that. Like I said, we've got some comps that were extremely high in the first quarter. As you start lining things up, the numbers are going to be less, probably, I'm going to say in the mid-teens in the second quarter as it relates to declines. Obviously, it'll probably be a little stronger in April, we'd see. Then obviously the number coming down as far as year-over-year percentage as you move towards the end of the second quarter on a monthly basis.
I'm sorry to be so dense here, by coming down, you mean the declines would shrink?
Correct.
As the quarter unfolds. Trends get better as the quarter unfolds. Got it.
Yes.
Last question, really on the marine side, you've built more critical mass in that segment. I'm curious if as you gain scale in marine, if you're able to identify synergies more easily, either revenue synergies or cost synergies. I'm sure in the RV space, you probably have a well-oiled machine, but it may be harder to develop that in marine. Now that you've been there, maybe they're coming more quickly.
Craig, this is Andy on the marine side. Without question, I wouldn't say it's necessarily scale-related synergies. It's as much of the quality of the product platform that we've got is very strong. The talent that we've been able to partner with is incredibly strong, very dynamic and very deep in the industry with a lot of knowledge, both at the customer level and at the operating level. We've been aggressively pursuing acquisitions in that space, really over the last two years. Like I said, as we've pivoted a little bit to focus on the organic side. Yet, without question, these opportunities are there and are bubbling up at a pretty rapid pace. We're very excited about that look. Like I said, we can continue the M&A, which we expect to do.
We can also pivot and make sure that we're focusing on driving synergy growth, we have seen that produce at a pretty rapid pace. Again, not necessarily scale related, just the value product of the platform that we've got today is extremely strong.
Great. Thanks for taking my question.
Thank you.
Once again, ladies and gentlemen, if you do have a question, please press star one on your touch-tone phone. Our next question comes from Timothy Conder from Wells Fargo. Please go ahead.
Thank you. Gentlemen, yeah, you've answered a lot of questions, so thank you for the color so far. Mostly mine are more clarification in nature. Josh, on the lease accounting change, it didn't impact net income, but was there any shift between operating expense and interest expense due to the new rule?
No, there was not.
Okay. On the commodity cost, if I've heard you right, the majority or all of those will be flushed through the inventory, the higher cost commodities by the end of Q2?
Yes, that's our expectation.
Okay. Todd, I think you'd mentioned that there's the potential maybe for a little overcorrection on the RV inventory side. Just maybe if you could give a little more color or elaborate on your thoughts there that why that potentially could materialize, that you're maybe seeing some evidence of that or not?
Sure. I think, given the environment that we came from where the dealers' demands were high, retail demand was high. They weren't able to get units when they wanted them. I think their view was to get as many units as they could get with retail as strong as it was and continues to be. As things have settled out related to retail demand, it's more steady, so to speak, coupled with the fact that pricing on units has moved. Interest rates have gone up. There's been some uncertainties in the, obviously equity market environment. Some of the geopolitical things that were kind of taking place back in late 2018 all, I think, kind of played into the minds of the feedback that we're getting in the dealers.
As we're watching inventories come down, I think naturally the sting of where things kind of would've been or have been pushed dealers to take pause and kind of step back and make sure that as they're looking at the data points, they're looking at all the data points. In doing so, I think that is going to push them to bring things down to a more critical level. Ultimately, I think the other piece that I'm not sure anyone really kind of understands or taken into consideration is we're running, I think we've been averaging over the last couple of months, somewhere between, let's call it 36,000 to 40,000 units from a production standpoint per
Per month. We're moving into a period of time where we're going to be retailing, assuming that we're down low single digits. We're going to be retailing an average of probably 55,000 to 58,000 units a month. That's taken out nearly 15,000 to maybe even 20,000 units per month that are going to be coming out. You couple that with the potential of an improved retail environment, strong seasonality, our perspective would be that there is that risk. Again, we can't speak for dealers, but the risk is what we're looking at, and potentially being prepared to be in a position to take care of the customers and ultimately the end consumer, if indeed that does happen.
Okay. Very helpful, sir. Thank you. Lastly, Andy or Josh, whoever wants to take this. Just wanted to reaffirm, did you or did you not have any kind of one-time benefits that pushed the Q1 tax rate to where it was at a little over 22%? I know your guidance has been in that 25%-26% range for the year.
Yeah. Tim, this is Josh. We did have a small benefit in the quarter of $800,000. That compares to $2.1 million in the quarter of the prior year. Four cents in Q1 of this year and $0.08 in Q1 of last year.
Okay. Thank you, gentlemen.
We have no further questions at this time. I'll now turn the call over to Ms. Julie Ann Kotowski for further remarks.
Thanks, Paulette. We appreciate everyone for being on the call today and look forward to talking to you again at our second quarter 2019 conference call. A replay of today's call will be archived on Patrick's website, www.patrickind.com, under Investor Relations. I'll turn the call back over to our operator.
Thank you, ladies and gentlemen. This concludes today's teleconference. Thank you for joining. You may now disconnect.