Skyline Champion Corporation (NYSE:SKY) Q2 2024 Earnings Call Transcript

Skyline Champion Corporation (NYSE:SKY) Q2 2024 Earnings Call Transcript November 1, 2023

Operator: Good morning, and welcome to Skyline Champion Corporation Second Quarter Fiscal 2024 Earnings Call. The company issued an earnings press release yesterday after the close. I would like to remind everyone that today’s press release and statements made during this call include forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from the company’s expectations and projections. Such risks and uncertainties include the factors set forth in the earnings release and in the company’s filings with the Securities and Exchange Commission. Additionally, during today’s call, the company will discuss non-GAAP measures, which it believes can be useful in evaluating its performance.

A reconciliation of these measures can be found in the earnings release. I would now like to turn the call over to Mark Yost, Skyline Champion’s President and Chief Executive Officer. Please go ahead.

Mark Yost: Thank you for joining our earnings call and good morning, everyone. I am pleased to be joined on this call by Laurie Hough, EVP and CFO. Today, I will briefly talk about our second quarter highlights and then provide an update on activities so far in our third quarter and conclude with our thoughts on the balance of the year. We saw healthy demand from end consumers through our captive and independent retail channels. Community REIT channel saw continued as expected through the September quarter as our RIT partners worked through their backlog of existing new home inventory before placing new orders. This pause in the community ordering, combined with the absence of FEMA related sales that were in the second quarter of last year drove our year-over-year declines in both production and revenue.

Backlog as of September 30th was $258 million compared to $260 million at the end of the June quarter as sequential quarterly unit increases were offset by decreases in price. Average lead times of 8 weeks have normalized within our local range of 4 to 12 weeks and are consistent with lead times at the end of the first quarter. Order volume during the quarter increased again sequentially, and we are seeing the expected decrease in home prices as consumers shift to smaller homes or homes with fewer features and options given the current interest rate environment. Shifting to some of our strategic actions we have taken recently, on September 26th, we closed our investment in ECN Capital and the establishment ofour new captive finance company, Champion Financing.

We believe that the formation of a captive finance company will unlock home volume growth and bring value for our key stakeholders by providing broader and more attractive financing options and services to our customers. It will enable us to provide a comprehensive home buying solution while becoming more deeply connected with our channel partner customers and the end consumers who purchase our homes. The investment aligns with our longer term strategic view on offering digital configuration and selling to homebuyers. As we continue to ramp up Champion Financing, we believe the benefits will create a deeper connection with our dealers and end consumers. As we drive more volume to ECN, which will help to increase the diversity of capital sources that will accelerate a growth of the industry overall.

Additionally in October, we closed on the acquisition of Regional Homes, the fourth largest HUD manufacturer in the United States. The largest independent retailer and the company we have long admired. We are confident that the addition of Regional Homes to the Skyline Champion platform will allow us to accelerate profitable growth through the expansion of our retail and manufacturing distribution across the Southeastern United States. Regional Homes has a customer centric selling approach and is dedicated to providing an exceptional home buying experience to its customers, which directly aligns with Skyline Champions core value and our strategic initiative to enhance customer buying experience. In coordination with the closing of the acquisition, I am excited to welcome Heath Jenkins to the Skyline Champion Leadership Team as he will serve as president of our captive retail operations.

Heath brings years of industry retail experience and strong leadership capabilities, but most importantly exhibits an unwavering commitment with the customer first. Altogether, these investments represent an exciting opportunity as we strengthen our efforts to support the long term growth and solidify Skyline Champion’s market positioning as a leading provider of attainable housing solutions, for which the market is in tremendous need of today. Moving to the third quarter outlook. We continue to see stronger order rates from our retail and builder developer channels and while some REIT customers have returned to the market, as others are continuing to destock as we move into our normally seasonally slower period. We expect the third quarter revenue to be up mid to high single digits as a result.

We have seen orders strengthen five quarters in a row, by the growing need from consumer for affordable housing. We anticipate this need for housing to be longer in duration than we initially anticipated due to recent indications from the Federal Reserve. Additionally, this need is driving more regulatory tailwinds for our products that give us increase in confidence in the long term growth potential of our housing solution. With our long term strategic investments into retail, financing, digital, and automation, we are adding value and enhancing the buying experience with the end consumer and our channel partners. I will now turn the call over to Laurie to discuss our quarterly financials in more detail.

Laurie Hough: Thanks Mark and good morning, everyone. I’ll begin by reviewing our financial results for the second quarter followed by a discussion of our balance sheet and cash flows. I will also briefly discuss our near-term expectations. During the second quarter, net sales decreased 42% to $464 million compared to the same quarter last year, in which we recognized $118 million in FEMA unit sales. The decrease in net sales reflect a 15% year-over-year decline in average selling price per US home due to FEMA unit sales last year, which carry a higher ASP than our core product due to the complexity of sales. In addition, our core product ASP declined due to product mix and the decrease in material surcharges. During the quarter we sold 4842 homes in the US compared to 7274 homes in the prior year period.

US home volume was down year over year due to the absence of FEMA related sales and reduced production schedules to align with order rates. On a sequential basis, US factory built housing revenue was in line with the first quarter consistent with expectations that demand would remain relatively flat. An increase in the number of homes sold was partially offset by a decrease in the average selling price per home as core customers opt for smaller and less optioned homes, in an effort to maintain affordable monthly payments in the current interest rate environment. Capacity utilization decreased to 53% compared to 56% in the sequential first quarter of fiscal 2024. Capacity utilization is being adversely impacted by newly opened plants and a rightsizing of production rates at certain plants that serve end markets in which current order trends remain softer.

Canadian revenue decreased 25% to $29 million compared to the second quarter last year, primarily due to a 23% decline in the number of homes sold, driven by slowing demand. The average home selling price in Canada decreased to a $126,100 compared to a $129,400 in the prior year period, primarily due to the fluctuation in the translation of the Canadian Dollar to the US dollar for the year-over-year period. Consolidated gross profit decreased 58% to a $116 million in the second quarter and gross margins contracted by 890 basis points versus the prior year quarter. On a sequential basis, we saw gross margin declined 280 basis points. Our US housing segment gross margins were 24.5% of segment net sales, down 950 basis points from the same quarter last year, primarily due to higher margin seen in unit sales in the prior year quarter as well as lower core product sales volume and a mix shift to homes with less features and options, allowing the homeowner to hit monthly payment price point given higher interest rates.

Gross margins were also negatively impacted by lower production rates as we are choosing to operate plants at lower run rates in order to be prepared to quickly ramp upon the return to normal order volume. SG&A in the second quarter decreased $19 million to $64 million primarily due to lower incentive compensation expense on reduced sales activity.Net income for the second quarter decreased 68% to $46 million or $0.79 per diluted share compared to net income of a $144 million or earnings of $2.51 per diluted share during the same period last year. The decrease in EPS was driven by the decline in sales and reduced operating leverage on lower volume. Diluted EPS for this quarter includes approximately $0.03 of transaction related costs incurred for the acquisition of Regional Homes.

The company’s effective tax rate for the quarter was 24.5% versus an effective tax rate of 25.0% for the year ago period. Adjusted EBITDA for the quarter was $59 million compared to $197 million in the prior year period. Adjusted EBITDA margin of 12.7% compared to 24.4% in the prior year period, reflects the return to more normal profitability levels. In the near term, we remain focused on maintaining efficient production lines as channel conditions improve and order activity returns to a more regular cadence. The structural improvements and investments made in our business have strengthened our operational capabilities, protecting profitability in periods of lower output. That said, we reiterate our expectation that the mix shift by customers looking to maintain affordable monthly payments in the current interest rate environment will continue for the remainder of fiscal 2024.

We expect margins to compress further in the sequential third and fourth quarters due to product mix shifts newly added production capacity continuing to ramp and the purchase accounting implications of the Regional Homes acquisition. As of September 30, 2023, we had $701 million of cash and cash equivalentsand long term borrowings of $12 million with no maturities until 2029. We generated $54 million of operating cash flows for the quarter compared to $231 million for the prior year period. The decrease in operating cash flows is primarily due to lower net income and working capital impact of producing FEMA units in the prior year. During the quarter, we allocated $143 million of the capital for the strategic purchase of common and preferred shares of ECN Capital.

Subsequent to quarter end, we used $318 million of cash to purchase Regional Homes. In addition, we assumed $93 million of debt primarily related to inventory floor plan liabilities. We remain focused on executing on our operational initiatives and given our favorable liquidity position plan to utilize our cash to reinvest in the business and for opportunities that support strategic long term growth. Since closing on the ECN investment, we have been working to develop the business plan for the strategic partnership with Triad financial services, including the roll out of Champion Financing branded floor plan programs for our retail and community channel partners as well as tailored retail loan programs for our retail network. We are targeting launching these programs in January 2024.

As a reminder, the partnership is an asset white structure, leveragingTriad’s existing origination and servicing infrastructure and ECM’s funding capabilities, which include relationships with community banks and leading institutional investors with no loan risk on the Skyline Champion balance sheet. We will be reporting the impact of the ECN common stock investment and the results of the captive financing partnership on a quarterly basis. We began the integration of Regional Homes upon closing of the transaction in mid-October. The teams have been meeting to share best practices and to begin to capture synergies.As a reminder, we anticipate synergy capture of $10 million to $15 million over the next two years, including manufacturing procurement synergies leveraging our national footprint and operational improvements from sharing of best practices across production and sales.

The regional balance sheet including retail finished goods inventory, will be revalued to its fair value and will negatively impact the company’s consolidated gross margin in the next several quarters as those homes are retail sold.In addition, SG&A will increase for the amortization of intangible assets generated from the acquisition. I will now turn the call back to Mark for some closing remarks.

Mark Yost: Thanks Laurie. As we manage through the rebalancing of our channels, we believe Skyline Champion is well positioned due to our affordable price points, strategic positioning, and our core initiatives. The long term outlook for demand is supported by the channel opportunities with community REITs, manufactured rent, and builder developer growth as well as helping our retail partners adapt changes in consumer demographics. In addition, the need for affordable housing continues to grow each and every day, and we believe that the elevated cost of housing will drive more traditional site-built buyers to our homes. Before we open the lines for Q&A, I want to take a moment to thank our people. The entire Skyline Champion team, as our consistently strong performance is a result of the amazing things they make happen each and every day. So with that, operator, you may now open the lines for Q&A.

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Q&A Session

Operator: Thank you. [Operator Instructions]. Our first question is coming comes from Greg Palm with Craig-Hallum Capital Group. Please proceed with your question.

Greg Palm: Yes. Good morning. Thanks for taking the questions. I wanted to start with gross margin. It sounds like in the quarter, the maybe the weaker than expected result, it was more of a function of some of these plant operating costs versus maybe increased competition or discounting. So I just wanted to make sure that was right? And then just sort of going forwardis the thought process that you’re maybe keeping more employees on or keeping more shifts, in preparation for that returner of demand.Is that why one of the reasons why gross margin is going to maybe stay a little bit subdued here in the near term?

Laurie Hough: Yes, Greg, I think that you summed it up pretty well. We are definitely seeing in addition to the things that you mentioned, a product that product mix shift that we were anticipating but to a greater degree as well.So yeah.

Greg Palm: And just in terms of maybe quantifying a little bit more relative to this previous quarter, what kind of compression should we expect over the next quarter or two?

Laurie Hough: Yes. For the next few quarters, we’re definitely it’s going to be there’s a lot of moving parts.So we’re going to continue to see the product mix shift, with the consumer trying to reach a more affordable monthly payment with interest rates, where they are todayas well as the ramping plans and then the impact of the Regional purchase accounting on gross margin. So we are expecting probably around 200 basis points.

Greg Palm: And the purchase accounting was kind of 40 to 60 basis points correct?

Laurie Hough: Yes, I did mention that last quarter, we are still working through all the numbers based on the closing balance sheet.

Greg Palm: Yep. Okay.And then I don’t know if you can maybe talk a little bit more about Champion Financing and what that looks like over the next one or two years, I know ECN, the partner here, they have publicly stated the expectation of that JV contributing $40 million of pretax income per partner in calendar 2025.I think maybe they said at least $40 million if I remember right. Is that something you want to bless as well? And if that’s the case, just kind of curious what that ramp might look like over the next couple of years?

Mark Yost: Yes, Greg. I think the ramp is out there. I think ECN mentioned 12 to 24 for their 50%. So I think that’s where you’re looking at that piece for that. The JVs obviously in a great position.We are very excited about that, especially given the banking conditions that we are seeing today. I think the fact that ECN has capital flow partners from Blackstone and Carlyle is tremendous in today’s market. We have already seen two or three banks regional and community banks start to exit out of the lending space for our customers and as there is further pressure and we anticipate some further pressure on regional and community banks, making sure our customers have access to liquidity is very important for our dealers and obviously our partners and builder developers as a matter of fact.

So I think having that partnership with ECN is vital and especially with the strong relationships they have with Blackstone and Carlyle, who committed an additional $1.3 billion worth of capital.So infusing liquidity into the market when community and regional banks.So that really is a strong leg forward to us. So as Laurie mentioned, we are getting things set up right now. We anticipate we will have the systems and other things ready to go by January time period and so we will really start to ramp it in the calendar year of 2024 and so I think everything’s on track for that and the teams are working very well together.