Q1 2023 Skyline Champion Corp Earnings Call
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Good morning, and welcome Caroline Thank Yang Corporation first quarter fiscal Q3 earnings call the company.
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Yeah, Hi.
Stephens, President and Chief Executive Officer.
Sir Please go ahead.
Thank you for joining our earnings call and good morning, everyone.
Joining me on the call is Laurie Hough EVP and CFO .
Today I will briefly talk about our first quarter highlights then provide an update on activities. So far in our second quarter and wrap up with thoughts about the balance of the year.
Following a very strong fourth quarter and an excellent year. We are pleased to report that fiscal 2023 is off to a strong start.
During the first quarter, we grew net sales by 42% and adjusted EBITDA by 159% expanding margins by more than 1000 basis points.
Our solid performance continues to be driven by initiatives focused on increasing production levels through improved operations added capacity to satisfy the demand for our products.
During the quarter, we continued our progress with these efforts in addition to the production of disaster relief housing for FEMA.
Reising tailwind and a disciplined cost management.
Production volumes were up again on a year over year basis as our focus on product rationalization is leading to increased output, which allowed us to reduce backlogs on a sequential basis.
The team's ability to produce more quality homes. During the quarter was also due to the production ramp of our Napa soda, Texas plant.
We expect output at this point to increase for the remainder of the year as it reaches optimal run rates.
The operations team far surpassed expectations and the production of FEMA disaster relief units this quarter.
During this quarter, we produced almost 90% of the $200 million order, which was more efficient than we had anticipated.
Many of these units were in finished goods at the end of June awaiting shipment or acceptance by FEMA.
As a result during the quarter, we recorded approximately $83 million worth of revenue from the disaster relief units.
Nearly all the remaining balance is expected to be recognized in the September quarter.
In total we delivered 6813 homes in the U S. An improvement of 7% from the prior year and up 4% sequentially.
With the inclusion of our recent maintenance acquisition indoor capacity calculation, our capacity utilization remained at 72% for the quarter compared to 72% in the sequential March quarter ends.
Higher production levels were offset by FEMA product mix and the inclusion of the Idaho facility and Laurinburg North Carolina.
Speaking of the maintenance acquisition, we closed on the asset purchase of maintenance custom builders in mid May.
And the integration activities are well underway.
This investment in a two plant manufacturing campus and one retail sales center in North Carolina.
Wows us to expand our manufacturing footprint and build upon our efforts to streamline our product offerings.
In the southeast of the U S.
A region that has seen strong growth as a result of key secular trends and demographics in home buying in that region.
We saw stable gross order rates during the quarter with sequential orders remaining flat.
After adjusting for the FEMA units.
We saw orders moderate and our independent retailers during the quarter, but see healthy demand across other key sales channels, specifically the community reach the builder direct channel and increasing builder developers.
In terms of cancellations, we saw minimal activity Africa, and consumer level as the need for affordable housing is only growing stronger, especially as apartment rental rates continue to rise.
And we continue to convert more traditional site built buyers to our more affordable housing solutions a trend that should continue in this economic climate.
As we anticipated on our last call, we did see dealer starting to right size. The number of display models that their sales center.
To control floor plan financing interest expense as interest rates rise.
We expect this to continue through the end of the September quarter.
Customer traffic in quoting activity in the first quarter was down about 20% year over year at retailers, but the quality of buyers remains strong and pull through order rates at retailers are up versus last year.
Backlog at the end of June was down 264 million to one 4 billion compared to the March quarter.
While the year over year increase in backlog was the result of home orders at higher pricing levels.
Our improved production capabilities the production of almost 90% of the FEMA disaster relief housing and our enhanced footprint led to a sequential decline in lead times.
Which at the end of June was 28 weeks compared to 35 weeks at the end of the March quarter.
We are confident that we will continue to see increases in production levels with the goal of reducing backlogs to pre pandemic levels of four to 12 weeks.
Getting lead times back to our historical levels helps the homebuyer lock in pricing and financing as well as benefits our direct sales channels to better meet the needs of our end customers.
From an industry standpoint demand remains healthy as rising rental rates higher interest rates and inflationary pressures are intensifying the need for affordable housing.
The current environment has increased the awareness of our housing solutions and our investments in enhancing the buyer experience has allowed us to convert more traditional site built buyers and expand our market share.
To further increase awareness in June we brought two homes to the innovative housing showcase in Washington D. C to promote the value of factory built housing policymakers the media and homebuyers.
Our homes were very well received interactions like this allow us to more efficiently promote the needs for expanded zoning access and financing for our housing solutions.
During the quarter, we saw improvement in the supply chain and labor availability.
These signs of improvement are encouraging indicators of our production levels and our ability to deliver additional output.
In the near term, we continue to expect headwinds in pending supply chain disruptions.
Emerging around labor day, and ongoing transportation challenges with the availability of drivers.
As we look forward market conditions remain healthy with the historically low affordable housing supply.
Favorable demographics and population migration.
With rising interest rates and inflation, we are seeing traditional site built home buyers moving into our more value oriented factory built home solutions.
Focusing on the longer term.
It is becoming more evident every day that the antiquated system of traditional homebuilding is not sufficient to meet the needs of today's customers.
Due to the early successes, we have seen in both manufacturing technology and consumer digital access we will be ramping up our investments in these areas to make homes more affordable entertain them more for our customers.
A focal point of these investments in 2023 and into 'twenty 'twenty four will be enhancing the customer buying experience.
In June we entered into agreement with Altice Sema and acquired 12 of its factory Expo home centers located at our manufacturing facilities across the country.
This acquisition emphasizes our commitment to elevating the customer experience directly with those consumers as ultra FEMA derives the majority of its leads through a variety of digital marketing campaigns.
In summary, we remain optimistic with the opportunities in the current environment that presents itself and.
And we are increasingly confident in the runway for long term growth as our strategic initiatives and operational improvements continue to enhance skyline champion's product offering and ability to gain share.
I will now turn the call over to Lori discuss our quarterly financials in more detail.
Thanks, Mark and good morning, everyone I'll begin by reviewing our financial results for the first quarter, followed by a discussion of our balance sheet and cash flows I will also briefly discuss our near term expectations.
During the first quarter net sales increased by 42% to $726 million compared to the same quarter last year. We saw revenue growth of 204 million in the U S factory built housing segment during the quarter, which was driven by an increase in the number of homes sold and an increase in average.
Selling price.
The increase the number of homes sold was 7% or 441 units for a total of 6813 homes.
Compared to the same quarter last year U S volume increases were attributable to shipments from the Navistar, the Texas plant and streamlining of our core product offerings FEMA.
FEMA unit sales during the quarter totaled 83 million.
We produced almost 90% of the $200 million delivery disaster relief order during the quarter and we will recognize the majority of this revenue in the September quarter as the units are shipped and accepted by female.
The average selling price per U S homes sold increased by 35% to $97000 due to price increases to offset inflation brought on by rising material labor and transportation costs.
In addition to price increases FEMA sales this quarter and drove about a third of the ASP increases as these units have more specifications that are typical of homes.
Okay.
On a sequential basis revenue in the U S factory built segment increased 14% in the first quarter of fiscal 2023 compared to the fourth quarter of fiscal 2022.
This increase was driven by an 11% increase in average selling price per home and a 4% increase in the number of homes sold.
The sequential volume growth during the quarter was driven by an increase in production levels and as Mark mentioned earlier on the call what have been higher had we seen more favorable timing of shipments as our finished goods inventory increased by $54 million.
We expect this to even out in the September quarter as FEMA units produced are shipped and recognized as revenue.
Canadian revenue increased 19% to $45 million compared to the first quarter of last year, driven by a 30% increase in the average home selling price, partially offset by a 9% decline in the number of homes sold.
The higher average home selling price in Canada of $128000, that's driven by price increases enacted in response to inflationary pressures on our input costs.
The decline in volume was caused by the timing of home shipments reflected in increased finished goods.
Production volumes at our Canadian plants were consistent with prior year levels.
During the quarter, we saw a shift in our product Mexican Canada to more multi section products, which led to a sequential decline in units.
Consolidated gross profit increased to 229 million in the first quarter up 106% versus the prior year quarter due to higher volumes and average selling prices. While also benefiting from the higher priced feed me your net and lower lumber cost.
Performance during the quarter also reflects our ability to maintain the structural margin profile across our core products on a sequential basis.
Selecting the returns on our investment and operations and footprint.
Our U S housing segment gross margins were 31, 7% of segment sales.
1010 basis points from the first quarter last year.
The improved operating efficiencies and higher prices and FEMA unit sales helped to increase gross margin next quarter. In addition to strong demand and pricing and continued product standardization, which all led to increased production and leverage our fixed costs.
SG&A in the first quarter increased to $72 million from $54 million in the same period last year, primarily due to higher variable compensation driven by higher revenue and profitability.
The increase in SG&A also reflects additional investment in capacity and ongoing investments to enhance the customer buying experience.
The online customer buying experience remains a key initiative and we expect incremental investments to continue through fiscal 2023 and enter 'twenty four.
Net income for the first quarter was 117 million or $2.04 per diluted share compared to net income of 43 million or earnings of 75 cents per diluted share during the same period last year.
The increase in EPS was driven by higher sales and improved operating efficiencies, resulting in improved profitability.
The company's effective tax rate for the quarter was 25, 7% versus an effective tax rate of 24, 6% for the year ago quarter.
Adjusted EBITDA for the quarter was 163 million an increase of 159% over the same period a year ago.
The adjusted EBITDA margin expanded by more than a thousand basis points to 22, 4%.
Due to gross margin improvement and leverage of fixed costs.
In the near term, we continue to be confident in our ability to navigate the current economic environment because of the structural improvements we've made to our operations and our product offerings as well as our ability to pull on cost levers such as price adjustments and raw material substitution.
As we move through fiscal 'twenty 'twenty three we do believe that margins will normalize back to fiscal 2022 level. After the one time effect of FEMA Subsides. In addition to anticipated headwinds to our product mix and margin as consumers seeking relief and writing monthly payments.
Well move to home with lots of options.
As of July 2nd 'twenty, 'twenty, two we had $464 million of cash and cash equivalents and long term borrowings of $12 million with no maturities until 2029.
We generated 47 million of operating cash flows for the quarter, an increase of $16 million compared to the prior year period.
The increase in operating cash flows is primarily due to the increase in net income, which was partially offset by an increase in inventory accounts receivable and capitalized cloud computing costs.
We expect the inventory and accounts receivable increases to normalize somewhat by the end of the September quarter.
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 to support strategic long term growth.
Now I'll turn the call back to Mark for some closing remarks.
Thanks Laurie.
While the current economic environment has raised a level of caution with the consumer due to the sustained inflation rising interest rates and global uncertainty. We believe skyline champion from continued to outperform the broader housing industry due to our affordable price points strategic positioning.
Core initiatives.
The outlook for demand is supported by the channel opportunities with community re build.
Build to rent and the builder developers as well as helping our retail partners adapt to different consumer demographic channels, where we continue to make progress and remain excited about.
In addition, the need for affordable housing continues to grow and we believe that the elevated cost of housing will drive more traditional site built buyers into our homes.
Before we open the lines for Q&A I wanted to take a moment to thank our entire skyline champion team, they're absolutely amazing.
Our consistently strong performance is a result of our focus hard work and ability to increase output for our customers.
And with that operator, you may now open the lines for Q&A.
Okay.
Bill will now begin the question and answer session.
To ask a question.
You May press Star then one on your touch times that you see.
Is any speakerphone, please pick up your handset before pressing the piece you said anytime. Your question has been addressed and you would like to withdraw. Your question. Please press Star then G. At this time, a little pause momentarily to assemble our roster.
The first question.
It's got a black box right.
Hi, Liam Catholic aircrafts. Please go ahead.
Thanks, Tim Arc Hilary congrats on the good results here.
Thanks, Greg good morning.
I guess just.
Starting with kind of overall demand I'm curious if you can go into a little bit more detail on what you're seeing by channel and more importantly, the strengthen community builds for red builder developer, what's your visibility into.
And to that demand continues to stay at strong levels here.
Yeah, I think those channels, Greg are actually considerably strong.
The community rights continue to want more and more product and so really trying to find allocation for them as an important consideration.
The build to rent channel is something that's emerging we're actually gonna be in Vegas.
The second week of September and displaying a model out.
Build to rent conference one of the largest build to rent conferences in Vegas to.
You know to build.
Build to rent developers to our homes.
And and build or develop a continues to escalate I think a lot of the small to mid tier builders continue to be under pressure in today's market.
And so as we continue to get you know are our speed to build down and other things will become more and more appealing.
Appealing to those various channels as well.
Retail demand is actually still very good as well.
You know the the traffic at retail is down a little bit I would say about 20%.
But the people who are coming in are actually buyers. So actually the pull through rate is actually up so.
A lot of retailers are reporting sales.
Sales traction that's equivalent to last year, maybe slightly down, but it's still very good demand at the retail level.
Okay. Good that's helpful.
As it relates to FEMA. So you mentioned that you completed 90% of the 200 million so that equates to a $180 million worth, but you only recognized $83 million of that in the quarter. So does that mean you left.
$100 million on the table can you confirm that and it sounds like you know that all shifts into the September quarter, but how should we be thinking about the September quarter sequentially. Just you know given that and given everything else going on.
Yeah, Greg I think that's exactly right. So we the production team you know this this quarter was really about production very efficient very effective production this quarter.
And the team did a great job in producing those FEMA units, we thought it would take two quarters to produce and they got 90% of it done this quarter. So yes, we've got roughly.
Rounding a $100 million I would say 97, if we want to be specific mills.
Million of revenue there.
It's been produced but needs to that will once it's accepted by FEMA will be recognized into revenue at that point in time, which we expect a majority of that by the September quarter. You know the way I look at the September quarter is we'll have that plus coming in.
This quarter had $83 million, so we'll have a little step up quarter over quarter and FEMA.
But we also have our normalized July shut down.
That takes a week out of our production for this quarter versus last so.
So net net I'm, assuming we should be relatively flat top line quarter over quarter.
Going into the September quarter.
Okay great.
Alright, I'll hop back in the queue, Thanks, and good luck. Thanks.
Thanks, Rick.
Our next question comes from Matthew Bouley Barclays. Please go ahead.
Hey, good morning, everyone. Congrats on the results wanted to ask about the Asp's I know I know you mentioned that you said a third of it in the quarter was due to the theme of mix, but just at a higher level, just thinking about sort of affordability pressures to the customers here.
And I think Lori you may have mentioned something along the lines of having levers like price adjustments. So can you just sort of.
Provide some outlook on asps easier or is there room for asps used to actually move lower.
And this type of environment, how should we think about that over the next few quarters. Thanks.
Hi, Matt Yeah next quarter, because you know as Mark mentioned, we're going to still see some FEMA units coming through we're going to probably see sequentially. A S. P is relatively flat in the second quarter versus the first quarter.
And then I think we're going to see them revert back to more normal level.
As I mentioned on the call last quarter I do think that we're going to see consumers choose fewer options on their homes, which also could impact mix and asps.
So you know generally I feel that in the second half of the year, we're going to see them revert back to more normal levels.
Likely saw possibly in the fourth quarter of fiscal 'twenty, two and then potentially a decreased slightly because of the next option that makes sense.
It does great no. That's helpful. Thank you for that Laurie.
And second one on the.
Backlog in cancellation side I know you mentioned.
Dealers continuing to maybe destock, a little due to Floorplan financing issue I think last quarter you said.
You know that.
There's a second part of that to where you might have consumers actually failing to qualify as a result of the move in interest rates and just looking for I guess a bit of an update on that and sort of how you're thinking about the stability of the backlog.
This environment here. Thank you.
Yeah, Thanks, Matt the stability of the backlog is fairly good.
I think the consumer cancellations in the backlog have been minimal.
Don't even received detailed reports on it because it's minor.
You know the dealer cleanup I think will happen in a two part sequence normally when dealers are.
Right sizing their inventory what they'll do first is cancel or pull back on the stock units that are in the backlog already so the ones that are kind of replacement units coming up.
That's kind of usually the first wave and I think we'll probably give or take two thirds of the way through that.
There'll be some minor cleanup I think going into the September quarter.
And then you know.
Second wave of dealer cleanup is where theyre going to actually reduce the models.
Inventory they have on their lives and that will actually show up probably instead of selling a consumer built home they'll sell their spec unit on their inventory levels. So we will see kind of a.
Clean up of our orders, if you will or a slowdown in orders in that second wave. So we see both of those but the consumer demand has been very strong still.
Quoting activity.
You know in the first part of the year was off 20%.
In July .
Quoting activity is only down 10% so.
I think you know the overall consumer is going to be there, but we will see that cleanup I think between what we saw in the first quarter and and what will happen in the second quarter.
Yeah.
Gotcha, alright, thanks, Mark Thanks Laurie.
Thank you Matt.
Our next question comes from lifestyle, but he thought RBC capital markets. Please go ahead.
Good morning, Thanks for taking my questions.
Ori I wanted to follow up on margins two part question first in the quarter. There were it seems like a few large drivers of the increase I was wondering if you could help us ballpark.
The relative impacts of.
Theme versus potentially some.
More favorable lumber purchasing dynamics and then just outright.
Volume leverage.
And then when you talk about normalizing down to 22 levels.
Oh good.
Second half of the year 'twenty two levels were still extremely elevated compared to your historical margins and even your prior long term target. So how do we think about what that means for.
You know, what you're defining as as normal and sustainability of that.
Oh, Hi, Mike Thanks for the questions. So just addressing this quarter's margins, we arent breaking out the impact by category. So I'm. All I can tell you is you know reiterate what Mark said that FEMA production went through those plants.
Much more efficiently than we were expecting so.
Certainly helped with the consistency of product and frankly, the production teams efforts to get the units.
Through the production process more quickly so that certainly helped gross margin.
And then in the second half of the quarter, we started to see because of.
The way, we buy our lumbar products, we did start to see some favorability.
From the decrease in forest product pricing.
Some of that is offset by higher labor and other material pricing. So it's kind of a give and take on some of that but we did see some benefit certainly from lower forest product costs.
And then to address your ear normalized margins going forward question Phil.
Fiscal 'twenty to margins I think we're in the 26, 5% range for the full year.
I do see you know as.
The consumer shifts to last option columns that we're going to continue to see.
Some some margin pressure because of those options.
Have higher margins generally so as the mix between our base product and a base product plus options switches in order for the end consumer to still target and affordable price point.
And the target monthly payment theyre going to have to back off on some of those more expensive options that we generate higher margins on if that makes sense.
It does thank you.
And then Mark I guess I'm still not entirely clear on the moving pieces.
Round order as you kind of talked about down 20 in quoting activity at retail and then downturn in July the other channels holding steady if I look at just I know this isn't.
Perfect looking at the backlog math, but the backlog math would suggest that orders.
Down pretty meaningfully in dollar terms on a year on year basis. So can you just help us and that's on a dollar basis <unk> units.
Even lower can you can you.
Give us a little bit more detailed work on.
What order trends you've seen it in aggregate across your business.
Sure Mike Let me start with the backlog math, because I think you know the story on backlog math is really a production story I think.
To put it in context.
If we go back to last year, I think everybody would say that last year was a good homebuilding demand here.
Last year, we sold $2 $2 billion worth of sales.
And we grew backlogs by 800 million. So all in all we were running at a sales pace of $3 billion, which is a good sales pace.
So on average that $750 million a quarter.
This quarter in production and sales, we actually sold $726 million.
And then we actually built the remainder of the FEMA units as we mentioned did it come out of the backlog, which is another roughly 100 million on top of that.
So we built.
And produce about $830 million this quarter.
So that even surpasses even the order rates from last year. So we would have eaten into the backlogs, even a phenomenal sales pace of last year.
With the excellent production that the team demonstrated this quarter. So I think you've got to take into account.
In your backlog math the thought process that are our sales plus the production of Philo, which we have not recognized into revenue was really somewhere around.
$830 million $840 million in rough math.
Oh produced units during the quarter, so that's a significant accomplishment.
Given that and if you didn't do that math on the sales pace, you'll actually see the sales pace.
There are actually orders during this quarter.
Barring the onetime FEMA order were on par with what we saw order rates in the fourth quarter of last year.
So actually our sales order rates have held flat.
Sequentially quarter over quarter barring the onetime FEMA order, which is just that one time adjustment so.
I think if you do that math.
You'll see that a majority of the.
Backlog pullback was really just due to the fact that we had good production.
In the quarter.
That's helpful. Just if I could to two quick follow ups. There when you are saying.
<unk> versus <unk> is that still in dollar terms and then to clarify I think you said.
It seems like your you imply that while you haven't shifted 100 million in remaining theme that.
He is no longer reported in your $1 4 billion of backlog is is that correct.
That's correct, so even though we have not realized the revenue for it.
Produced so it's no longer a backlog it is excluded from backlog.
That is correct once we produce it so anything that goes into it.
Finished goods or is ready for production or shipment then it's ready to go and that's roughly $100 million.
Yes.
Okay, and I'm, sorry orders as part of your question.
The order the order pace flat versus <unk> is that in dollar terms or units.
That is in unit terms.
Okay.
Thank you Bob.
Thank you Bob.
Our next question comes from <unk> <unk> with Jefferies. Please go ahead.
Guys, Congrats on a really strong quarter and a great execution from the team.
Mark I guess orders are trending somewhat differently between your retail channel versus re direct to builder and build to rent are there any noticeable mix differences margin differences between the channels and how easy is it for you kind of pivot some of that production capacity to some of these different trends.
Going forward.
Yeah, Phil Thank you.
The.
Is it a product is.
Easier than the pivots of geography, so what I would say is you know what.
What we're looking at today is that there's going to be a shift in where.
Where people buy and how people buy.
Our traditional retail channel.
Selling more to traditional homebuyers, which has a little bit different customer demographic. So we have to shift our product needs to shift our marketing materials.
And shift our digital footprint.
Foot print to help drive that traffic.
Two our retailers on a better basis to help them be even more successful.
In addition, the rights and other channels.
Different product the margins across our profile.
Are generally flat.
So what we try to do is do margins for our products on what we call margin per minute or emerging for.
Our basis, so if a product runs very slow through the production line.
Versus one that run twice as fast to the production line, we try to.
Equally wait, though the margin of those products.
In that profile.
So that's why the FEMA production this quarter was still beneficial because we hadn't assumed production rate of those that was very slow so it had.
Our standard gross margin similar to other products, but we ran it much more efficiently, which gave us much better margins.
Got you. So I think I think the product profile is meaningful what we really need to look at is I think there's shifts in geographic profiles. So we'll have to kind of monitor the strong markets versus the markets that are slowing and balance our production facilities accordingly.
Got it.
Mark It sounds like your orders have held up quite well certainly test them into maybe the 40 the value proposition on affordability with your product, but certainly investors are nervous about a potential slowdown in housing certainly your retail side of things.
Assuming if there is an air pocket call next calendar year, the trends that youre seeing in the backlog in orders, you're seeing and the other channels I E direct to builder and REIT.
Do you think that's enough to kind of offset some of the potential weakness down the road I'm appreciating some of the your mix profile and how you're set up there.
You know I do with with the caveat of geographic right I think some of the some of the build for rent and build a developer opportunities and others are.
<unk> a more developed in certain areas of the country.
And in certain geographies. So so we've got a balance that mix, but I think you know.
I hear people say that there's a.
Softening of demand for housing there is not a softening of demand for housing.
There is a softening of demand for very expensive housing.
Which is what they are.
Subject to today, and so I think I think the demand for affordable housing.
Is actually quite.
Quite strong people have substitution options and do they go to apartments do they go to.
No.
Build the house do they go to buy a used home in those trade offs are very difficult for people to manage from today's environment.
I don't know that Theres, a slowdown necessarily in demand.
Obviously people have other financial impacts in their lives today, and they're getting squeezed on many fronts, but I.
I think affordable housing will.
Either move through the cycle and if anything the slowdown in building activity.
Is actually I think creating a longer.
More durable.
Runway to be very candid because the supply shortage that exists.
And if there is a slowdown and people producing to supply that supply shortage. Then that means we will extend the runway of kind of longer term tail demand. So that's how I see them.
Obviously, we have to manage the short term and it's very volatile today.
But I think the long term outlook is quite good and we've got a healthy backlog too to help see us through as well.
Got you that's great and then just one last one if I could sneak it in for Lori you talked about how consumers may be taking less options and there could be a mix impact and certainly that will have a.
The drag on margins potentially but you know when we think about price cost over the last few years and a very inflationary backdrop, you guys have managed that exceptionally well and demonstrated really strong pricing power.
In a potentially slowing backdrop and I appreciate Mark do you haven't seen the slowdown yet but in a slower.
Demand backdrop, you know your level of confidence kind of get price to offset inflation, especially in that retail channel. Thanks, a lot guys.
Yeah.
So we have made some structural changes.
Our products, which impact our production. So I think that's why you know primarily even in a down cycle will be able to maintain margins similar to what we saw in fiscal 'twenty. Two so the streamlining of our product offerings.
Helps establish milestones even in a down environment.
That being said, depending on the severity of a down market.
Leverage of fixed costs, so I'll need to be managed closely.
Super Thank you I appreciate it.
Okay.
Our next question comes from Dan Moore.
P. J S Securities. Please go ahead.
Hi, Good morning, it's Pete Lukas for Dan.
Covered a lot just two quick ones for me.
Last quarter, you inked an agreement with your first top 100 builder developer just wondering how other conversions are progressing if theres anything you can add there.
Yeah, I mean, the the pipeline for builder developer activity is quite good.
The conversion rate of them, obviously is timing dependent but I would say overall builders in today's environment, probably more eager than they were three months ago or six months ago.
And it's very helpful and very beneficial the more we can get our production up and our backlogs down.
The closer we can tie our production to the timing of delivery for the build to rent channel for the builder developer channel for the REIT channel and frankly for the end consumer so that they don't have as much.
Interest rate risk.
Or inflationary risks in and they know what they are getting within weeks.
I think the more certainty in the hydro conversion will be so we're really focused on increasing output to help.
Lower our backlog time.
So that we can deliver faster and I think that'll help and aid in the conversion because of a builder knows we can supply them in the weeks for their subdivision.
That dramatically changes the economics and their return on invested capital for their projects.
Helpful. Thanks, and last one for me just kind of a bigger picture question in terms of state local and national codes and restrictions changing for M. H.
The most significant shifts or changes that you're currently seeing.
You know I would say zoning regulatory barriers are coming down.
The 80, new market is starting to open up in many cities and locations across the country.
The need for affordable housing is becoming more pronounced.
As a result, there is more and more.
Focus on state and local regulators to free up zoning for affordable housing because they are.
Their constituents wanted.
And it's needed, especially for good workforce housing the state of Florida has done some great things recently for instance in lowering the sales tax on MH units and.
You know is launching our homes for hero program.
For workforce housing for for citizens in their state, So I think youre going to see more and more.
Initiatives like that.
Create incentives for workforce housing for kind of heroes, if you will firefighters police.
Medical professionals teachers childcare workers.
Those are the people that really need housing and also first time homebuyers, So I think more and more state and local incentives were seeing pop up along with deregulation.
Great. Thank you.
Thanks Pete.
Our next question comes from Jamie.
With Wedbush. Please go ahead.
Hey, good morning, Thanks for taking my questions. So the first one I had with some of these new sales channels that you have whether it's built around etcetera. I mean, we're now as retail sales for the retail channel as a percentage of total sales for you guys.
Our retail sales is about 50% give or take of our total sales today.
I mean do you expect that to go down over time or where is that relative to historical numbers.
Yeah.
No I mean, that's probably it's probably gone down a little bit versus historical I would say you know we were probably closer to two thirds retail.
One third community rights in other channels, a few years ago.
And I think it's come down a little bit in percent terms, but then again Jay.
We've grown so dramatically.
Scale, but thats kind of misleading a little bit so the retail channel hasn't shrunk by any means it's.
<unk> grown considerably it's just not growing at the pace of some of these other channels.
So I think retail will still be very strong.
I'd, just foresee customers, having a more difficult time coming down up with the down payment to buy a home in the future.
With other inflationary challenges affecting their pocketbooks.
And so I think your your rental channels will become more prevalent I think.
Customers are people, who can get people into homes for build for rent or.
Or even builder developers, who do kind of affordable housing units will move.
We will really see a benefit in growth for those channels along with Ada user.
Untapped source for the future. So I think I think retail is very strong I, just think that given the down payment it'll slow down a little bit.
Got it and then maybe if you could give us an update on where charter rates have gone I know they were down.
For most of last year, just be interested to see where they are relative to.
Traditional conforming mortgage rates.
Yeah, I mean, they they have come down.
I would say, they're probably moving today in lock step with traditional rates, but shallow rates for a good cause you know good.
A good credit score good FICO score is probably about six 5% for channel.
Today.
So I think the spread is quite good versus traditional homebuyers and especially when you factor in the affordable price point that monthly payment is.
Quite a strong benefit for the end consumer.
Gotcha.
And I apologize I jumped on late.
When I jumped on Mark you were talking about something in terms of logistics or having some some driver shortages post labor day could could you repeat those comments and what are you guys seeing in terms of logistics, whether it's your own trucking fleet or suppliers.
Suppliers, bringing stuff to you to your plant.
Yeah, I would say the supply chain for trucking generally in kind of inbound transportation is actually improving a little bit.
The outbound transportation given the wide loads and other things that we have to transport I think finding drivers for the heightened demand that we see.
<unk> is really the.
The crux of the matter right, we've dramatically grown as an industry.
Overall, and so I think the.
New influx of drivers that are needed for that type of transport.
You know needs to grow as well so I think that is a little bit of a challenge that we've got to overcome its beneficial that we have our own trucking division that we're able to manage that probably fairly effectively.
Or maybe better than others I would assume.
But it's definitely something industries.
Faced with today overall.
Overall, I think as far as supply chain.
Still anticipate kind of post labor day, or starting to emerge around labor day.
Some hvac's shortages and other things starting to pop up due to supply chain constraints coming from China, and some of the circuit boards.
And control panels and other materials, mainly in HVAC.
Around that coming into September October November .
Got you.
And then just one other question I know historically, the Reits have liked to buy single section homes. What what are you seeing in terms of preference or home sizes from some of these newer build to rent and traditional builder channels, what what what type of product.
Asking for you guys to quote.
Probably depends on geography, but I would say.
Not as many single sections I would say double sections are probably more prevalent.
I've noticed some of their targeting a little bit different customer price point, they're targeting kind of a first time homebuyer very good FICO score very good credit worthiness someone that can actually afford to buy a site built.
But they they want something of value.
So they're choosing something that that is probably a better value proposition for them and their other.
Other alternatives to spend their money on.
And so I think it's a well you know.
Maybe a larger house you know.
That can be afforded by a first time homebuyer with a dual income or something like that.
What we're seeing kind of in some of those channels.
Okay. That's great. Thank you for taking my questions.
Thanks Jay.
Thank you.
To ask a question please press star one.
Our next question comes from Greg Palm with Craig Hallum Capital. Please go ahead.
Thanks, just a quick follow up for her to Lori in terms of the streamlining of the product and some of the benefits that you've seen you know the structural benefits that you've seen over the last you know 18 24 months are there still additional levers that you can pull there.
Or is the majority of that sort of complete at this point.
Yeah, Greg.
There definitely is still more to be done with.
With that initiative.
Okay. So fair fair enough to say that there is still even some room for margin improvements that's specific to the streamlining of product ahead.
Yes.
And then just on the builder developer in terms of the top 100 win that you disclosed last quarter.
Have there been any orders to date anything in backlog and maybe just remind us in terms of the ramp up period associated with that.
Yeah no.
Those orders will probably start to enter backlog.
I would say probably in the new calendar year, so that builders, giving their subdivisions ready.
So I would anticipate so theres nothing in backlog today, those are pending orders that will flow in.
Probably.
Sometime early.
You know it.
During the March quarter, I would assume of next year.
Okay sounds good alright, thanks, I'll leave it there.
Thanks, Larry.
Yeah.
This concludes our question and answer session I would like to turn the conference back over to Mark Yale for any closing remarks. Please go ahead.
Thank you Maria Thanks, everyone for participating in today's call. We appreciate the time and your continued interest in Skyline champion. We look forward to updating you on our progress on our next call. Thank you take care and stay safe.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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