Q1 2022 Skyline Champion Corp Earnings Call

Good morning, and welcome to Skyline Champion Corporation's.

First quarter fiscal year 2022 earnings call.

The company issued an earnings press release yesterday after the close I would like to remind everyone that yesterday'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 leased.

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.

Thank you for joining our earnings call and good morning, everyone.

With me on the call is Laurie Hough EVP and CFO.

Today I'll start off with some highlights from our first quarter, then provide an update on the activity so far in our second quarter and wrap up with some thoughts on the balance of the year.

In the first quarter, we saw an acceleration of the favorable trends, we highlighted on our year on call.

We are experiencing robust demand for our affordable housing and are generating improved output levels as our strategic initiatives continued to drive production efficiencies.

Demand is being driven by numerous factors, including favorable financing historically low levels of inventory and.

And rapidly growing base of customers looking to become first time home owners.

Our affordable price points. During these inflationary times contributed to strong order demand that resulted in backlogs growing by more than 341 million during the first quarter to $1.2 billion. Despite sequential unit production growth.

As a result of of the solid production increases we delivered 6757 homes an.

An improvement of 60% from the prior year and up 7% sequentially.

When adjusting for the extra week of production in the fourth quarter of fiscal 2021.

And for the Scottsville transaction sequential organic unit growth was 13%.

Excluding scottsville our U S manufacturing facilities continue to operate at capacity utilization levels near 80% for the quarter.

The utilization improved about 2% from the prior quarter's rates.

We achieved this despite facing ongoing operational challenges caused by supply chain disruptions across our manufacturing operations.

And the industry as a result of reduced raw material availability.

Our improved production efficiencies allowed us to increase daily production rates over the levels achieved in the sequential fourth quarter due in part to the progress made on streamlining product offerings.

Labor availability has improved somewhat over the last quarter benefiting our production levels, but is becoming more challenging as we experienced the peak vacation months prior to the governmental unemployment assistance for society.

In Western Canada, we generated healthy results from our plants with home sales.

William doubling from the prior year for.

<unk> did decline on a sequential basis due to the product mix and extra week of production in the sequential fourth quarter.

In June we completed the purchase of the 2 play at campus of the previously idled manufacturing facility never soda taxes.

It is our expectation to have 1 of the plants operational by the end of this fiscal year.

The addition of this facility will further strengthen our production capabilities and what are the most significant manufactured housing states in the country.

As mentioned on the previous call with the recently acquired facilities and our product streamlining efforts to date, we are resetting our total capacity levels.

Incorporating the additional production capabilities, considering all of our idle facilities. Our production capacity is now restated at 66% providing flexibility as we continue to grow our volumes.

We continue to expect the demand for affordable housing will be strong through the remainder of the second quarter, and then stay elevated but moderate to more normal levels consistent with our outlook on last quarter.

Earnings call.

Raw material availability and supply chain challenges across the industry are expected to continue in the near term and more golfer production levels in the upcoming quarters as demand outpaces supply.

While we anticipate the challenges of supply chain and regional labor to cause sequential declines in our second and third quarters. We expect that these challenges will subside bar by our fourth fiscal quarter.

As we navigate through short term supply side challenges during fiscal 'twenty..2 we remain focused on our long term growth opportunities.

With entry level housing supply hitting of 5 decade, low and millennial household formations, increasing we continue to gain confidence into our move into digital and turnkey offerings.

Inflationary and interest rate pressures will only hasten the transition away from the site built housing to more modern production practices.

Therefore, we are focused on expanding our capacity and investing in automation to our hance our processes.

Ultimately boosting the supply to our channel partners and our customers who are seeking a more attainable at home.

I'm exciting excited that we recently added rolling Manasseh R.

Our VP of manufacturing technology his experience at developing and deploying automation solutions with General Motors General Electric and most recently with Amazon will help us accelerate our solutions.

The growth in orders during the past few quarters has been driven by demand for affordable housing solutions, and our ability to enhance the customer's buying experience through our digital efforts and.

In fiscal 'twenty, 2 we plan to accelerate our investments into platforms to drive continued growth.

Today's consumers for award brands that they can trust and the deliver a simple and seamless experience digitally and at retail are.

Our recent investments in our platform and our team have resulted in early success.

And as the is our expectation that we will see continued success with the consumer as the leading and the most innovative manufactured homebuilder.

I will now turn the call over to Laurie to discuss our quarterly financials in more detail.

Thanks, Mark and good morning, everyone I will begin by reviewing our financial results for the fiscal first quarter of 2022, followed by a discussion of our balance sheet on cash flow I will also briefly discuss our expectations for the second quarter as well as the longer term outlook.

Before reviewing our numbers I would like to remind everyone that our results in the year ago quarter were negatively impacted by Covid related government restrictions, causing some of our plants can be shut down and other disruptions throughout the value chain.

Net sales increased by 87% the 500, the 10 million in the first quarter of fiscal 2022 versus the same quarter last year, we generated revenue growth of $208 million in the U S factory built housing segment as well as growth in our Canadian factory built housing.

Segment of 23 million the.

The increase in the U S factory built revenue was driven by an increase in the number of homes sold.

And an increase on average selling price the.

The increase in the number of homes sold was 58% for 2340 for unit for a total of 6372 homes compared to the same quarter last year.

The average selling price per U S homes sold increased by 16% to $71800 due to product mix and price increases in response to rising material costs.

We are pleased with the sequential growth in revenue in the U S factory built segment, which increased 15% in the first quarter compared to the fourth quarter of fiscal 2021.

This increase was driven by an 8% increase on Homestall and of 7% increase in average selling price.

When adjusting the fourth quarter 2 of normalized 13 week fiscal quarter and adjusting for the Scott belt transaction.

For organic revenue grew by 20% with U S factory built homes sold increasing 13 per se.

<unk> revenue increased 149% to $38 million compared to last year, driven primarily by a 100% increase in the number of homes sold to 385, yes. The.

The average home selling price in Canada of $98300 increased 24% versus the same quarter last year, driven primarily by pricing actions enacted in response to rising material costs.

Consolidated gross profit increased to $112 million up 107% versus the prior year quarter due to increased sales volume and higher pricing or U S. Housing segment gross margins of our 21.7 per cent of segment net segment net sales up 200.

Third 20 basis points from the first quarter last year due to improved operating leverage and efficiencies more than offsetting the deterioration in margin from material price increases.

Okay.

SG&A on the first quarter increased the $54 million from $40.8 million in the same period last year, primarily due to higher variable compensation and travel expenses as well as our continued investment.

And the company's online customer experience and other plant platform enhanced balance.

We expect these investments to continue to accelerate throughout the remainder of the ethical here and into fiscal 2023.

Net income for the first quarter was $42.9 million or 75 cents per diluted share compared to net income of $11.9 million or earnings of 21 cents per diluted share during the same period last year.

The increase on EPS was driven by a combination of higher revenue and gross profit.

The company's effective tax rate for the quarter was 24, 6% versus an effective tax rate of 27.7 per cent for the year ago quarter.

The company's effective tax rate decreased primarily as a result of greater pretax income while non deductible items remained kind of staff that.

<unk> of the U S vs Canadian income and a 1 time benefit from vested equity compensation.

Adjusted EBITDA for the quarter was $62.7 million, an increase of 178% over the same period a year ago.

The adjusted EBITDA margin expanded by 410 basis points to 12, 3% due to higher sales growth gross margin improvement and leverage of fixed costs.

The prior year's EBITDA included for $2 million of wage subsidies provided by government sponsored financial financial assistance programs that were enacted in response to the began bottleneck and did not reoccur in fiscal 2022.

While we've seen the prices for certain forest products declined during the first quarter inflation on other building products remains per se and as expected.

Spectrum to continue for the remainder of the year due primarily to the widespread supply chain challenges combined with high levels of demand.

We expect that labor will be challenging in the near term impacted by government and find out of and the peak vacation on launch.

As a reminder, there are several levers we utilized in response to increasing material on labor costs, including <unk>.

Price adjustments product standardization raw material substitution and further operational improvements.

Despite our efforts to continue the path on inflation and make operational improvements our production may be impacted by the availability of raw materials due to supply chain challenges the availability of qualified labor and the home buyers ability to qualify for financing at the higher inflationary.

<unk>.

As of July 3.2021, we had $288 million of cash and cash equivalent and long term borrowings of $39 million.

With no maturities until June 2023 with.

We generated 32 million of operating cash flow during the quarter in line with the prior year quarter.

On July 7.2021 subsequent to the end of our fiscal quarter Skyline champion entered into a $200 million revolving credit facility, replacing our existing 100 million dollar facility.

As a part of the refinancing we paid off our outstanding revolver balance totaling $26.9 million using the company's cash on hand.

The new credit facility expands the company's available liquidity for strategic initiatives and opportunistic acquisitions.

We remain focused on executing on our growth and operational initiatives and given our favorable liquidity position.

Plan to utilize our cash to reinvest in the business and to support strategic growth.

I'll now turn the call back to Mark for some closing remarks.

Thanks, Lori I'm encouraged with the solid momentum in our business and the results we delivered during the quarter.

Our strong backlog and efforts to expand our capacity and increase our productivity have us well positioned to respond to the growing demand for our homes.

Im even more confident in our ability to execute our strategy going forward. After this extraordinary quarter.

And with that operator, you may now open the lines for Q&A.

Thank you we will now begin the question and answer session to join the question queue. You May Press Star then 1 on your telephone keypad, you will hear atone acknowledging your request.

If you are using a speakerphone. Please pick up your handset before pressing any keys to withdraw. Your question. Please press Star then 2 we will pause for a moment as callers join the queue.

Our first question comes from Matthew Bouley of Barclays. Please go ahead.

Hi, This is Ashley Kim on for Matt today.

So last quarter, you indicated only seeing enough raw materials to maintain I think at least similar revenue levels for Q.

<unk> you actually saw a sequential improvement so could you just give us some color on what drove this was there are simply more material material or labor availability.

Or maybe better pricing that the a lot of that uptick.

Yes, good morning, actually I think the the <unk>.

First quarter benefited from.

Our ability to source.

Additional materials from the supply chain.

I think there was additional stock that we were able to get so I think the same day.

That we had in the in the last earnings call is what we see now is that there is a destocking of the supply chain, especially on the freight side currently happening.

So.

We were able to get a little bit extra material for.

<unk> during the quarter end of.

Allowed us to.

To outpace our quarterly estimates.

Great. That's that's helpful. And then just on the backlogs have you put any measures in place to restrict orders going forward of just to better align with production to control the absolute swelling any further.

Yeah.

No actually I think backlogs are very encouraging it really shows the demand for affordable and attainable housing.

As significantly strong and also to our investments in technology, making it easier for people to buy homes.

It really gives me frankly confidence in the future strategic direction that were going to so.

We're not putting in controls we're still at 36 weeks.

In terms of delivery time, which is very manageable.

Currently for our customers I anticipate backlogs to continue to grow throughout the calendar year end supply chain is still challenged.

Which is in line with what we said last earnings call. So I think we're seeing what we what we expected, but I think orders were very strong a little stronger than we anticipated really driven by <unk>.

Just I think the need that the customers have for a good quality attainable on.

Thanks, very much I'll leave it there.

Thank you.

Our next question comes from Dan Moore of CJS Securities. Please go ahead.

Hi, Good morning. This is Brendan Hoffman on for Dan.

You guys spent some time talking about automation and I'm just wondering if you could provide some specific examples and then if you could speak to how much incremental capacity you hope to achieve them and how long it will take to get there.

Yes, good morning, Brendan I think.

Very excited about automation with the Doctor Manasseh coming on board and his experience at.

Amazon and GE, and GM and what he's been able to automate and drive at those companies with with their technology.

Very excited about where we can hedge with debt.

It's too early to understand really what the capabilities are.

You know many companies have as I mentioned on the last call I have tried automation in our industry.

There were certain limitations of the off the shelf solutions. So I think over the next.

12 to 24 months, we're going to start automating.

And testing some of the automation of pilots that we already have in process and further developing those which are really lead to salvi.

Solving the labor challenges that we have making it a better place to work.

And also to doing things to really drive more attainable housing for the end customer, which is really what is it.

The in such high demand now.

So we look forward to it.

Great and then.

Just if you could speak to lumber prices it seems like they've they've reverse course on them in recent weeks on and just wondering how much of an opportunity there is to kind of hold the line on pricing and drive margins higher.

Yeah, we saw actually margin compression during the quarter on materials, we actually were not able to cover inflationary pressures with pricing. So we actually took of margin hit during the quarter for materials.

I think overall lumber has come down, but really what we've seen as other commodities and other materials increase in price.

Transportation and freight is increasing the cost of frankly, all the goods across the country.

So that transportation is coming to fruition.

In the shipping industry of the forwarders have started to compress and takeaway credit lines from certain shipping companies and other things that are going to limit the supply. So I think the cost of freight is going to be something that we see across the board.

And then we've seen inflationary pressures on resins and steel and other goods that are actually all set the lumber.

Declines that we've seen so I expect prices to remain high for the foreseeable future just because.

Many of these inflationary increases we foresee happening in staying in place for at least the next you know.

6 to 12 months.

Okay, great. Thank you.

Thank you.

Our next question comes from Mike Dahl of RBC capital markets. Please go ahead.

Hi, Thanks for taking my questions I wanted to go back to the conversation of on backlogs.

I understand thats, good problem to have but yes.

I'm curious when you think about it.

On the capacity you outlined what youre doing in Texas, and your new kind of recalculation of production.

Capacity I know there are some practical limitations around geographies and product mix, but with backlogs at these levels and expected to grow further.

Are you acting more aggressively to bring on new capacity.

Yes, Mike It really comes down the supply chain.

<unk>.

Overall as we have looked at it if we had available materials or more supply in the marketplace to run more effectively and frankly labors of part of that as well today I think right now we're we're seeing a uptick in the labor challenges I think in part due.

To the <unk>.

July and August are the peak summer months and holiday months in the U S primarily.

That combined with the government incentives that are out there are kind of.

Creating a situation where it's very difficult during the these 2.2 months period kind of to find labor.

Think that will subside as we get into the fall people head back to school vacations and holidays start to.

To wind down.

But overall supply chain continues and the freight challenges continue to limit the ability to increase output. So I actually expect backlog to continue to grow at least through the rest of the calendar year.

And then hopefully look to moderate them. So so I would expect actually backlogs continue to grow on.

What I meant by encouraging is the fact that some of the opportunities to provide affordable housing and making it easier for people to buy.

Is.

Is playing out the way we thought it would so I think that that's an encouraging sign for long term on our ability to add more capacity.

And grow further.

Got it okay.

And then and then my second question is around the kind of of the buyer profile.

Laurie I think.

You made a comment about.

You know some limitations 1 being the.

The supply chain comments, and then 1 being buyer qualification, but that was.

Boiler plate disclosure of a risk factor or if there's something specific that you're seeing saw 1 of the follow up.

I ask about what Youre seeing in terms of buyer qualifications. How you what metrics are you tracking to help you kind of gauge.

You know what the what the bar for can bear right now and on.

Anything like that.

Yeah, Mike so.

It's more anecdotal information on any specific metrics that we're tracking so we can see how the buyers are qualifying and the demographic of the buyers at our captive retail more than anywhere else.

And really what we're seeing on I think what drove the comment primarily is the fact that on land home purchases.

Appraisals are keeping pace with the the.

The increase in price and it's really more just the delay because you have to have a certain number of caps for land home purchases and qualification from a financing standpoint than anything else. So in order to have those comps at the higher price for an extended period of time I think in all over the last 12.

Months or whatever the qualification is.

They just haven't caught up so so that's really what it's more about rather than the demographic of the buyer of the buyer is still able to qualify for the home.

Okay and is that leading you to I guess slow play of your price increases a little bit or given the length of backlog in.

You know when your next customer in the door is looking at 36 weeks by that time, maybe the comps of caught up for the appraisals of how do you how do you balance of your your price increases against the.

Yeah, No. We really look you know price increases are really about our input costs and demand.

Got it okay. Thank you.

Uh huh.

Okay.

Our next question comes from Craig Paul of Craig Hallum Capital Group. Please go ahead.

Alright, I'm going on I'm going to assume that's me.

I guess first of thanks, and congrats on on the really good results I'm curious can you comment on what.

On the daily production rates have been in July and when thinking about kind of the corridor of the sequential decrease in volumes or you think you know me.

Mid single digits high single digits, what's gonna be the maybe the key lever that drives this either better or worse relative to what you're currently expecting.

Good morning, Greg.

Yeah, I think you know in July.

The first off we have are.

Our typical seeds.

Seasonal shutdown in July so the early.

Early July week, or slight weeks I guess, depending on the plant location will take part of the month down for maintenance for refurbishment and frankly, just for the holiday purposes. So we'll definitely see kind of a week outage.

For those maintenance in the hall.

Holiday periods in this in this current quarter, which is very normal.

So we will definitely see that but overall I think I'm going to be very dependent on the supply chain. So I don't think the.

E.

Decline.

And volumes of revenues will be larger than that I think it'll be better than we anticipated on the last call. If you remember last call I mentioned I think we thought kind of 5% of 5% I think will.

We'll mitigate that a little bit.

I think we'll just see of.

For the week outage will impact us for the quarter.

Got it and what's I guess surprised you I mean in terms of supply chain, maybe not being as worse I mean I look at the your volumes in their vastly outpacing what the industry is doing so are you doing anything differently or are you just sort of getting getting.

Better stocking orders relative to some of your peers.

Yeah, I actually think Greg to be honest debt or are people at the plant level.

Are really making things happen and solving problems.

The innovation happening is just it's blowing me away to be honest I'm just.

I'm amazed that our people.

I think the coordination communication problem solving working with multiple suppliers to make sure. We can get what we need when there is of disruption.

Resourcefulness and innovation is really what's driving I think some of the some of the performance. We saw this quarter. So it's very encouraging.

I do think we're seeing a shift in the outage related for the supply chain from for more supply chain disruption from the actual materials moving now to more freight and timing related shortages along with the <unk>.

Major shortages in certain commodities in the areas but.

We're seeing improvements in some areas of tightening and others.

It makes sense and then just last 1 of you know in terms of the demand levels and what Youre seeing out there anything of note in terms of the channel whether it's still dominated by retail versus community and I don't know I mean looking back on.

Last 6.912 months I mean do you of any further insights on you know.

Where are these buyers are coming from who are they are the renters are they coming from site built with just kind of curious to get some high level thoughts on on really what the.

Demand drivers are out there.

Yes, Greg I think.

<unk>.

We have our own captive retail, which we have insight to and then we also have conversations with our <unk>.

The independent retailers with the financing entities and community operators as well I think all of that points to the fact that people are looking for.

And attainable home I think the price of site built.

Homes have.

Gotten out of reach for many first time homebuyers.

<unk> seen the.

From multiple reports the starter homes are of 5 decade low at the time that many millennials.

Looking to create household formation, so theres not enough available supply for them to move into.

And the pricing for that supply is very high at the same time. Many people are moving geographies from urban to rural kind of work from home or a hybrid type model. So I think all of those factors are playing into it.

That are really driving the demand in volume for attainable housing.

So I think all of those factors are for relief.

Good tailwind.

Okay. Good alright, thanks for the color best of luck going forward.

Thanks for that.

Once again, if you have a question. Please press Star then 1.

Our next question comes from Jay Mccanless of Wedbush. Please go ahead.

Hey, good morning, Thanks for taking my questions on the first 1 I had.

For copper driven goods as well as steel could you talk about where pricing has gone on those and are you seeing that flatten out yet price is still going up for for those goods.

No I think I think.

The material inflation in kind of the metals.

You know and those goods are still elevated.

Still strong I think we've seen a majority of the jump already.

But we haven't really seen any any reductions as of yet so I think it's just across the board.

The material inflation.

Oh.

The second question I had.

Kind of a hypothetical but what.

If this is the new normal and you see these type of large backlogs for the next 2 to 3 years supply chain, hopefully gets a little bit better what steps do you take as is.

The management team.

The grow and get more share in the in this type of dark for Nick but I guess very very positive.

The demand driven market.

Yeah, I think we've got.

We've got idle facilities across across the U S debt, we would start to reopen when supply chain.

Allows us to to feasibly do so.

So I think we definitely open up more more factories to supply of capacity and increase our output our investments in automation will only enhance our capacity utilization and our ability to scale our production at our existing facilities in.

In combination with the fact that we've actually streamlines for product offerings and other things during this quarter.

And with the capacity additions in and those streamlining of products, we've actually freed up and given another 11% of capacity utilization. This quarter. So I think it's really those debottlenecking efforts the automation efforts of the opening up of additional capacity.

Because we have several plants that were.

We're excited to open at the right point in time.

As soon as the supply chain.

We feel confidence in that supply chain.

Okay, great. Thanks for taking my questions.

Thank you.

This concludes the question and answer session I would like to turn the conference back over to Mr. <unk> for any closing remarks.

Thank you for participating on today's call. We appreciate the time and your continued interest we look forward to updating you on our continuous progress on our innovation on our next call take care and be safe.

This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.

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