Q1 2021 Skyline Champion Corp Earnings Call
The company issued an earnings press release yesterday after the close.
I would now like to introduce your host for today's call salaried data with the company director of Investor Relations and external reporting Sarah you may begin.
Good morning, and thank you for participating in our earnings call to discuss our first quarter results.
Joining me on today's call is Marciel, president and CEO, and Lori Hock eating p. as CFO.
To remind everyone that yesterday's press release in statements made during this call include forward looking statements within the meaning of the private Securities Litigation Reform Act up 1995.
These statements are subject to risks uncertainties that could cause actual results could differ materially from our expectations and production.
Such risks and uncertainties. We grew the factors set forth in the earnings release in our filings with the Securities and Exchange Commission.
Additionally, during today's call, we'll discuss non-GAAP measures, which we believe it can be useful in evaluating our performance.
A reconciliation of these measures can be found in the earnings release I would now like to turn the call over to Mark.
Thank you Sarah.
Good morning, everyone.
Today, I will briefly talk about our first quarter results.
Gross sort of strategic initiatives and then provide you with an update on activity so far at our second fiscal quarter and thoughts about the balance of the year.
What do you begin by say that I'm pleased to report better results for our first fiscal quarter.
I was originally expecting will be last reported results in may.
Despite a 26.5% reduction revenue the team adapted well and executed well take care of where people get our customers.
As a result, we preserve margins and operating cash flows is unprecedented times.
As we mentioned on our last earnings call, we temporarily idled many plants late in March and resumed operations at all but one of our facilities by Memorial day.
As we moved through the back half the first quarter demand improved even if some of our geographies like.
And our order volumes increased we have seen steady increase in production level since the beginning of the first quarter.
Back to approximately 90% of last years levels in June.
During the month of July strong order rates have continued.
Exceeding prior levels by over 50%.
Recently, we have seen strong year over year order increases across most of our markets due to pent up demand caused by government ordered shutdowns early in the spring selling season.
Strong demand for affordable housing as well as lower comps last year due to the inventory de stocking at manufactured housing retailers.
Our backlog grew by 65 million during the first quarter to 192 million from 127 million at the end of March 2020.
As a basis of comparison, our backlog grew 10 million during the same period over the prior year.
There are two factors contributing to the increase in backlog, notably strong demand and more production levels due to labor constraints.
First on the demand side, our sales team is doing a phenomenal job responding to product inquiries in quoting requests from our customer channels.
Under normal conditions, we would fully ramp up production activities to meet increased demand.
Although we are at moderated labor activity level.
We like many manufacturing operations have experienced the expected side effects from a supplemental federal unemployment assistance provided by the cares Act.
As natural employee attrition occurs as we speak to replace an add headcount to our facilities recruitment has been more children.
Once the cures act supplemental unemployment benefits expire we expect to see an uptick in qualified candidates and expect to increase our labor force to accommodate the increased demand for housing.
However, we are prepared to manage any of the various forms.
The next round of government support May take.
On the operation side, we continue to monitor manage and execute our enhanced safety temptation protocols at our facilities in our adhering to CDC guidelines for social distancing and other measures to reduce the spread of cobot Nike.
We continue to find and adapter manufacturing processes to maintain a safe environment for boys.
Encouragingly, we have filed but these adjustments are not significantly impacting your productivity or efficiency levels as the production teams have acclimated to incorporating these protocols in their day to day activities.
Our western Canadian plants have followed a pattern similar to our U.S. plans.
Sales volumes were down about 36% in the first.
Quarter of fiscal 2021.
As compared to the same period last year.
We temporarily idled these plants at the end of March 2020, and reopened the plants that produce production levels of during June the June quarter.
We saw a steady increase in orders in the back half of the first quarter in backlog is growing as orders outpaced production levels.
You watch retailers continue to see increased close ratios on their sales leads.
Which are coming more from online channels than walk in traffic.
Well walk in traffic is still below pre cobot levels due to various levels of operating restrictions throughout the U.S. those coming to look for homes are ready and able to buy.
In talking with dealers financing a strong inventory levels are leaving.
Even through the challenges presented by Cobot team was able to continue to make progress on our long term objectives.
The traction of our Genesis brand launched earlier this year at the I'd be a show in January continues to build.
We have seen success with smaller subdivision development and we're now working towards finalizing a few deals with a mid.
Size subdivision development.
With a continued social distancing in safety challenges, we continue to invest in our standardization.
Automation.
Digital solutions to make us a better partner to our customers.
Well, we're very encouraged by the strong order rates.
Growth in backlog, we remain cautiously optimistic about the broader macro environment.
Housing industry is experiencing strong demand overall due to trends the support long term growth opportunities.
In single family housing.
Our optimism is tempered by the short term supply and demand challenges presented primarily by the cares Act now set to expire and the new programs.
The U.S. government is considering.
We believe demand will continue to be robust over the longer term, but would not be surprised if there's choppiness in the home industry shipments in the near term.
Given the volatility in the economy and the disruption to normal business operating conditions.
It's more difficult to predict how volumes will trend in the next few months.
However, we anticipate the industry volume will be in line with recent homebuilding projections of being down 10% 2020.
Offsite manufactured housing demand could outpaced the overall housing industry, depending on its ability to increase production as well as the length and magnitude of the government programs.
We remain very bullish on the longer term potential tailwinds for the housing industry, specifically with Allstate construction opportunities and the need for innovation and attainable housing.
We believe that there will be a migration from crowded city environments to suburban or rural areas, which could be meaningful secular growth lever as manufactured homes have a better market penetration in rural and suburban geography.
As companies and individuals contemplate potential long term worked at home arrangements, we anticipate changes in the types of floor plans and amenities desire by homeowners.
Finally for people, who aren't ready to move.
Well undergo extensive home remodeling projects.
Turning to dwelling units offer a compelling value proposition for additional space.
You get into an existing back yard.
I will now turn the call over to Lori to discuss our quarterly financials in more detail.
Thanks, Mark and good morning, everyone.
I'll begin by reviewing our financial results in backlog position, followed by a discussion of our balance sheet in cash flow.
Also briefly discuss some margin headwinds were expecting in the near term.
Net sales decreased by 26.5% to 273 million in the first quarter. We saw revenue declines of 82.7 million in the U.S. factory built housing segment as well as the claims in our Canadian factory built housing segment of eight and a half million dollars. The decline in the U.S. factory built revenue was primarily.
Driven by a corresponding decrease of 26% or 1420 homes compared to the same quarter last year.
Well, 1.5% increase than the average selling price per U.S. home fault, the $61800, partially offset the decrease in volume.
The increase on the average selling price was due to a shift in product mix between our retail and wholesale channel.
Canadian revenue decreased 36% to 50 15.2 million driven by a 33% decline and the number of homes sold in the quarter average home falling prices decreased by 5% to $79100 due to a shift in product mix to more single section home sales in Canada.
Versus the same quarter last year, our Canadian business continues to be impacted by oil related industry dynamics in Western Canada.
Consolidated gross profit decreased to $54 million down 29% versus the prior year quarter.
Our U.S. housing segment gross margins were 19.5% segment net sales down 110 basis points from the first quarter last year.
Gross margins were impacted by the reduced leverage of fixed costs, which was the result of the sales volume decline.
In addition, we continue to support our employees by providing extended benefits, including increased the pay as well as consumer in health care benefits for furloughed employees, both of which totaled 1.9 million during the quarter.
I see in a in the first quarter decreased to $40.800 million versus 51.7 million in the same period last year.
The decrease was primarily due to reduction in variable incentive compensation elimination of nonessential travel and marketing costs and deferral of controllable expenses in order to minimize cash spend as we continue to evaluate the near and longer term impact of cold in 19.
We also saw favorability and I see in a cost due to the benefit.
Oh, not incurring expenses related to the acquisition integration activities of a million dollars as well is not having to record a charge for a fair value adjustment on an asset classified as held for sale of a million dollars that we experienced in the prior year.
We recorded other income of $4.2 million during the period related to a combination of subsidies from Canada emergency wage subsidy and the United States cares that enacted in response to the pandemic.
Canada emergency wage subsidy was initially scheduled to run through August 2020, but there's been a proposal to extend the program through December 2020, we will continue to monitor or eligibility to apply for financial assistance in any government programs.
Net income for the first quarter was $11.9 million or 21 cents per share compared to net income of $17.4 million core earnings of 31 cents per share during the same period on the prior year driven by a combination of lower gross profit, which was partially offset by reductions in es.
DNA and the benefit of the government sponsored wage subsidy.
On an adjusted basis, we generated 22 cents per not heard that share.
Compared to 35 cents in the year ago corridor.
The company, it's effective tax rate for the three months ended June 27, 2021, 27.7% versus an effective tax rate of 27.6% for the fiscal 2021st quarter.
Adjusted EBITDA for the quarter was 22.5 million a decrease of 29.7% over the same period a year ago.
Adjusted EBITDA margin compressed by 40 basis points to 8.2% largely due to lower production volumes and an increase in employee benefit costs that were partially offset by government sponsored wage subsidies.
Without the benefit of the wage subsidies are adjusted EBITDA margin would have been 6.7%.
At the end of June 2020, our consolidated backlog was 192 million compared to a backlog last June of 153 million.
Current U.S. backlogs are averaging eight weeks of production at the end of June as labor availability impede our ability to ramp production to match the pace of incoming orders.
We have also seen an uptick in Canadian backlog levels, primarily in the British Columbia market.
We will continue to evaluate and modify production schedule as we navigate the current environment.
As of June 27, 2020 weeks, we had approximately 200.
$37 million of cash and cash equivalents and long term borrowings of 77 million with no maturities until June 2023.
Generated 32 million of operating cash flow during the first quarter of 2021 compared to 27 million during the same period last year.
The increase in operating cash flow is due to our efforts to closely manage non essential spend and working capital during the period as well as castle benefits from government program.
Under the care that employers are eligible to just for the employer portion of payroll taxes until December 2021 as of the end of the first quarter, we've deferred almost $4 million of U.S. payroll taxes and have received almost $2 million from the Canadian wage subsidy program.
In addition, our customer and commercial deposits are up versus the same quarter last year.
The cash inflows from these transactions were partially offset by the decrease in operating income we plan to utilize our cash to reinvest in the business and focus on executing on our strategic growth and operational initiative.
Just seem to our outlook for the second quarter, we believe our financial results will continue to be impacted by labor constraints.
These labor constraints may cause us to consolidate product offerings from multiple facilities into one facility at campuses with more than one production line.
Currently and as of the out of our June quarter, we have two plants temporarily idled.
Both of these locations have a campus style lay out so we have consolidated production to one building on each campus to best use the available labor and effectively manage production efficiency.
Shifting to our input costs the demand for labor and LSB has increased along with the strength in the broader homebuilding and building products industry as.
Well, we've generally been able to pass on material cost increases. These pricing actions are delayed one backlogs increase there for creating some margin exposure.
Well, we've seen reductions involuntary attrition and absenteeism compared to this time last year. We may continue to incur elevated levels I'm employee benefit costs to maintain employee retention health and wellbeing in the wake up the printing pandemic.
Well, we're prepared to take additional actions if needed to control costs were also prepared to respond to growth opportunities and continue to drive our strategic initiatives.
I'll now turn the call back tomorrow for some closing remarks. Thank.
Thanks, Laurie well first quarter results were significantly impacted by Copel night team. We are encouraged by the improvements that we saw as we progressed through the quarter more recently in July with demand trends in order activity.
We are prepared to manage through the continued variability in the coming months, but remain very confident in the long term attractiveness of the marketing skyline champions ability to remain a market leader like.
I continue to be impressed with aware organization has responded in the current environment.
As are poised to adapt and work hard to continue to provide the market with affordable housing solutions for customers.
And consumer with that operator, you may now Lloyds for today.
Thank you.
At this time will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad confirmation total indicate your line is in the question Q. You May proceed start to if you'd like to remove your question from the Q participants using speaker equipment and may be necessary to pick up your handset before pressing the star.
Keith one moment, please while we poll for questions.
Your first question comes from line of Greg Palm with Craig Hallum Capital Group. Please proceed with your question.
Yeah. Thanks, Good morning, really good results given everything going on I guess, Mark just just to clarify something you said earlier in the call I think you've talked about July orders up 50% five zero did did I hear that right I mean, presumably that would.
Mean that backlog since quarter end is increased pretty significantly am I thinking about that right.
Yeah, I think you're thinking that that raised our orders in a in july or well over 50%. So our backlogs had been.
Having continuing to grow this correct, Greg <unk>, that's up 50% on a year over year basis correct.
Yes, it is actually.
Over 50% growth.
Wow.
Okay. Good.
Any sense for how long it'll these buyers are are they folks that lived in cities in rentals any change in the demographics I think everybody's trying to wrap their heads around on on you know sort of the demand for housing out there not sure if you have a.
Some sort of sense as it relates to manufactured housing.
Yeah, I think you're seeing several several trends kinda converge one obviously, we're starting to see a pickup in financing you see overall, well say don't housing financing you know improving your seemed to pick up there oh spreads with manufactured housing have.
Ben even more favorable so while we've seen.
Traditional mortgages improved by 50 plus basis points I'd say the spread differential for chattel lending has has been doubled the improvement of that type level. So you've seen a much better favorability in spreads.
Chattel lending because of the new competitiveness in image in the channel in the market. That's one driver second driver I would say is just we're seeing you know, we're seeing a little bit higher activity levels in rural areas and world demand.
Millennials currently buying homes in the marketplace you had I think you're also seeing a trend we're kind of mid.
Mid price point buyers are or renters are looking to buy but they're buying it'll it'll stuff down price.
I think you're seeing that as well just out of caution.
And wanting to lower their future payments.
In kind of going concern market, but overall demand is very strong.
Okay. Good I guess, we'll probably no more in the coming weeks about labor availability, but what's your expectation for production volumes in the September quarter, I mean could they be on par with last year or would you expect to continued my argument you have.
Maybe the production volumes and or the utilization in July versus June or that you mentioned that June was up to 90%.
Yeah, I I would kind of expect you know production levels and somewhere down 5% to 10% versus last years levels in the quarter. You know I think we're going to ramp up labor, but it'll be toward the tail into the quarter. We're obviously watching very carefully what the new aid packages are from the government.
And what effect that has on either evictions on unemployment and all those dynamics because.
That changes a little bit of these supply demand balance in the market outlook, we have so it'll it'll kind of.
A former strategy on how we deal with labor, we've got five or six scenarios on how we're going to ramp production coming out of this but it's somewhat dependent what form the government 80 rigs will be the strategy that we utilize too.
Increase production and build the supply and demand.
Okay makes sense, if I could sneak one last one in here I think lower you talked a little bit about labor costs and know us be.
Given the expectation of significantly higher volumes in the September quarter relative to June does that help offset some of the sort of the cost increase does that you're saying I'm just trying to get a sense for you know that 19.5% U.S. manufacturing gross margin do you put up anymore or you expect.
In something similar or what's your what's your expectation there.
Greg I think that's a that's a longer backlogs are actually cannot be an issue relative to the.
Volatility in the forest product.
Inflation, right, now and pricing and nine coupled with that.
You know lever and and the ability to ramp labor based on whatever the government subsidies that come out or or lack of them.
You know PV there.
Oh, okay.
Alright, well appreciate all the color best of luck going forward.
Thanks, Greg.
Your next question comes from the line of that Mike Dahl with RBC capital markets. Please proceed with your question.
Good morning, Thanks for taking my questions. So first question you know I'm, just trying to better understand that dynamics between orders backlog production volume, what ultimately ships because I think would the orders and bought backlogs do there's been some.
Some volatility over the past year as kind of backlogs got work down then started it normalize higher.
So I guess when we're thinking about just what is your expectation for shipments and in the September quarter or is that what should match that production down 5% to 10% is that what you're saying shipment should.
Trend towards or or how should we think about that.
Yeah, I think that's correct view I don't like I think you know we view the shipments during the quarter will fall in line with production levels.
Got it okay and is there some.
Is there some that future catch up in terms of the acceleration based on these orders or are these orders really just kinda replenishing the backlog.
Shipment trends, albeit potentially volatile around the economic outcome, a shipment trends should be.
You know glass.
Less robust and then what those recent order trends suggest.
No I think I think.
The backlog levels are building sales are very strong demand is exceptionally good. So when I view is we're going to see what some of the outcomes of some of the government programs are.
And as I mentioned on the prior call or some of our view is shaped based on will we see a pause as the housing market kind of later this year, depending on what happens with kind of the.
The situation happening with exemptions happening with unemployment.
Does that does that create a pause in the housing market. If we see a wave of evictions happening over the next.
X amount of time, if it doesn't get extended you know is that going to create a pause as renters and other people are trying to backfill those vacant properties right. So you could see a slight pause in home demand ordering so actually having backlog.
Currently is part of our view on how we want to manage forward depending on how the outcome of the remainder of the Eurs.
So if if we see that things get extended and things.
Our as choppy towards the tail end of year.
And we'll take strategies to continue to ramp production and shipments will outpace.
Later in the air.
Got it Okay and then my next question is it sticking with kind of demand or shipments.
But what are you seeing in terms of trends from Europe barge developer customers versus versus small or you know your retail channel.
No I'd say, it's a retail channel is is extremely strong right now I'd say most of the retailers are having a record month or a record.
Demand levels and sales period.
So I think retail channels extremely strong probably similar to the.
You know, what you're seeing and the difference in site built between build to order and you know.
Onsite ready to go product. So we're seeing the same thing with retail people are walking into filters actively buying and moving off the shelf and then retailers or.
Selling and script was again.
On the builder developer channel I think you know, we see a tremendous amount of activity because of the supply demand imbalance in housing in the shortage.
The affordable housing those obviously have a longer lead time.
I am encouraged as I mentioned on the call that we've seen the traction with our Genesis brand.
Where we've had very good success.
With a handful of smaller subdivision builders.
Day in and now we're getting into and finalizing agreements with.
Builders in the 100 to 500 units subdivision levels. So it's starting to progressing to larger scale developments.
I think there's a lot of activity in that market.
That's great accident, if I could squeeze one more in <unk> or worry I think you said that ex some of the wage subsidies your margins would've been 150 basis points lower in the quarter as you evaluate the different.
Stimulus proposals in Congress today.
Do you have a sense of kind of what the.
What the continuing support could be relative to that or or.
Or you know how to how to think about that as we kind of cycle through the rest of this year and and into next year.
Yeah late labor attention is really important so I do believe that we're going to continue to support our place anyway, we can chime in order to retain them. Despite what the government though.
I'm just given the demand.
You know, we need need our labor to get our production.
Okay. Thank you.
Your next question comes from the line of that math, you believe with Barclays. Please proceed with your question.
Hey, good morning, everyone. Thanks for taking the questions I think Mark you mentioned, some positive trends and the financing environment to an earlier question. Obviously, just you know mortgage rates being so low and all the strong demand on the site built side and clearly you guys are feeling that as well.
And any thoughts as to kind of the relative cost of financing for MH versus you know clearly how strong things have been for it for traditional mortgages and that's sort of how that's playing into these recent orders like it.
Yeah, I think right now with the spreads are ranging depending on FICA scores anywhere between 25 and 4%.
So somewhere in that range, our current spreads versus traditional mortgages. So that's come down quite a bit like that anywhere depending on the lender depending on the time period. That's that's come down you know 70 to 180 basis points over the past.
You know a.
Recent time period versus you know traditional mortgages, which has gone into some more tempered down about 50 basis.
It really depends on the lender and in this situation, but we've seen that spreads compress.
So that's been out of very positive dramatic.
Interesting Okay. That's that's helpful. Thank you and then just secondly with.
But what the demand environment, improving so much I did I hear you loud and clear around you know some choppiness in the back half.
But is there any thoughts to reinstating the margin targets. If if we're at a point, where you know, yes, there might be some volatility, but but clearly volumes are trending in the right direction.
Yeah, Matt, we're just going to keep an eye on the environment you know how much is dependent on.
The broader economy in unemployment rate, so keep an eye on it.
Okay. Thanks, Larry Thanks, Mark.
Yeah.
Your next question comes from line of <unk>, Daniel Moore with CJS Securities. Please proceed with your question.
Good morning, Mark Good morning, Laurie.
Yeah.
Again labor availability are you seeing missing or similar challenges across geography is across the country or are there specific areas where.
And maybe being pinched a little bit more.
No I think it's really a widespread I I think what we're seeing in essence is.
You know where where before we would we with an application now to hire an employee and you'd get 20 or 30 resumes.
Or applicants you know now you'll put went out and you do zero for one.
For that same jobs, so you know as who cares.
Unemployment.
As I view it stimulus you know expires and takes a different warm in the near term, we're going to watch that and see how we react to it. So it's it's just there's not a tremendous amount of a incentive for employees, who are currently unemployed to find work.
When the unemployment benefits were.
Very rich.
Helpful and just kind of looking at the supply demand dynamics, obviously favorable position if orders are growing 50% in production is down five or 10% call. It for for this quarter.
Clogs, clearly going to keep growing significantly how much further can backlog grow before you may be become a little concerned about losing potential sales to competitors or even to site built.
Yeah, I think we're seeing backlog.
No kind of across the industry continue to grow so I think bits of the there might be small competitors or other people who have different backlog levels.
Got a certain geography basis, but overall I see backlog to the industry or are keeping pace fairly well I view that the outcome of how we manage through this.
We will be highly dependent on.
How we react to what the new programs are rolled off by the government, we don't want to take a certain action.
To increase employment levels if.
If we then have a surprise reaction from the government the de motivates employs a different way. So I think we've got a plan in place.
<unk> increased production throughout the year.
And I'm, just really waiting another hopefully week or so before putting some of those policies in place.
Helpful. Okay, and then.
The the you know I'd focus on the optimism rather than the caution, but the cautious side of your cautious optimism it more related to demand and concerns about rising unemployment and supplemental checks running out or is it supply.
A couple available labor.
There is axis.
Attended a through the remainder of the year.
Yes, I actually view, Dan that you're gonna see almost like a.
A union to Yang type of structure here, so depending on what form. The next aid package has if you continue to be unemployment benefits.
That are currently extended through the cares after I think you'll see it will put much greater pressure on the supply side and we'll have to take one former strategies to react to that if you see that you vixens are not.
They allow evictions and that's Ah theres no unemployment benefits extended.
And certain other factors I think you're going to see a larger pause in the housing market and in that case, you're going to.
It'll be a demand side equation that you'll kind of.
One of the reasons, we're looking at the backlog. So so specifically is because if there is a pause from evictions or other things.
We'll have the ability to remain resilient and produce through that downward cycle.
We'll take probably two to three months to work itself through in kind of get resolved.
Okay, and then I apologize for asking similar question, but.
You mentioned your Genesis brand, obviously, starting to gain traction more generally what are you hearing from the computing community developers are they still sort of sitting on their hands wait and see or are you seeing more activity interest not orders et cetera.
Yeah, No I think the community channel is starting to return.
And Oh I expected to continue to grow through second half of the year I think they've they've seen had good success.
With collection they've had good success with traction.
And activity many home buyers coming into ran to you've seen last you've seen some some of the public Reits out there and what they have commented on I think I think they're very bullish on the outlook.
And so I think reach are starting to in the communities are starting to return.
Very favorably.
All right. That's very helpful. Thanks, Congrats and best of luck, we'll talk to them.
Thank you.
Ladies and gentlemen, we have reached the end of the question answer session and I would like to turn the call back to Mr., Mark Yost for closing remarks.
Thank you actor and thanks, everyone for joining the call today.
Very proud of the team and how they performed over this past quarter. It was a very challenging quarter.
It just shows the resiliency of our people, which our most important.
Factor and taking care of the customers without the outlook is very good long term demand in the tailwinds provided by not only the financing environment, but the trend from urban to rural and housing affordability are gonna be the key for us going forward. So look forward to taking care of arc.
Customers and our people they can have a good day.
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