Q2 2023 Skyline Champion Corp Earnings Call
Good morning, and welcome to Skyline Champion's Corporation second quarter fiscal 2023 earnings call.
The company issued.
In your 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.
These statements are subject to risks and uncertainties that could cause actual results 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 you place 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.
I'm pleased to be joined on this call by Lori Hock.
VP and CFO .
Today I will briefly talk about our second quarter highlights then provide an update on activities. So far in our third quarter and wrap up with thoughts about the balance of the year.
I'm pleased to share that our team once again delivered strong profitability metrics this quarter, including new highs for home closings gross margin and earnings per share.
We achieved these results despite supply chain challenges as well as the short term impacts from Hurricane Ian.
Thankfully our team members in plants came through the storm safely and we are thinking of all those impacted.
During the second quarter, we grew net sales by 54% and EBITDA by 170% expanding margins by more than 1000 basis points.
Our strong performance continues to be driven by initiatives focused on enhancing the customer buying experience and improving operating efficiencies to protect our margins.
The teams hard work and operational efficiency and completing the FEMA disaster relief housing order also contributed to this quarter's over performance.
Production volumes were up on a year over year basis, as our focus on product rationalization led to increased output.
In total we delivered 7577 homes, an improvement of 21% from the prior year and up 6% sequentially.
Our capacity expansion, including the production ramp at our <unk>, Texas plant the maintenance homes acquisition in Orenburg, North Carolina, and the expansion of our retail footprint through the acquisition of 12 <unk> retail locations also contributed to our year over year increase in home sales volumes as a.
<unk>, a stronger production levels below right sizing of inventory and customer supply chain challenges the backlog at the end of the quarter was down 555 million to $814 million compared to the June quarter.
Lead times improved during the quarter to 19 weeks compared to 28 weeks at the end of June .
Normalizing production to reduce backlogs to pre pandemic levels of four to 12 weeks pulps, the homebuyer lock in pricing and financing and benefits our direct sales channels to better meet the needs of their customers.
As expected, we saw retailers right sizing inventory levels during the quarter as they destock existing inventory, resulting in the cancellations of orders in our backlog as well as selling homes out of their existing inventory ahead of placing new orders.
With interest rates continuing to rise in consumer confidence waning, we do expect retailer inventory destocking in selling out of existing stock to continue through the remainder of fiscal 2023.
We estimate that the industry is currently over inventoried by approximately 7000 units.
With the Destocking, we expect our third quarter top line to be flat to prior year and fourth quarter to be down year over year.
We also saw during the quarter community and builder customers put their orders on hold due to supply chain issues in their new developments.
Primarily related to the availability of concrete and transformers.
Despite the near term right sizing of dealer inventory in the supply chain dynamics impacting new developments, we see healthy demand in the medium term.
While retail our walk in traffic is down the economic conditions and digital leads are driving good credit quality consumers with higher closing rates.
As a result, we see year over year increases in the number of deposits at many retailers and quote activity remains healthy.
Additionally, REIT and tiny home demand remains good and we are seeing increased engagement from builders and manufacturer to rate channels.
To increase awareness of our homes. We attended the build for rent conference in Las Vegas in September where our Genesis home was well received.
We will also be displaying a home at the National League of cities conference to increase city officials awareness of our products as an affordable housing solution.
In the near term, we continue to focus on streamlining our production as we have seen significant benefits from these efforts.
Most recently, we have been working to tool and staff one of our idled manufacturing facilities in North Carolina.
This facility is scheduled to begin ramping later this year and will further streamline production in the Carolinas and the surrounding states.
Additionally, we are starting to invest in the opening of our Bart how Florida plant to support growing builder developer demand and additional short and long term housing needs from the impact of Hurricane Ian.
As we look forward homebuyers are facing rising interest rates and inflation.
As a result, we are seeing our traditional site built homebuyers moving into a more value oriented factory built home solutions.
Our confidence in the long term growth potential is further strengthened by the growing upside from the build to rent channel expanded penetration into our traditional community re channel and growing interest from mid sized builders and developers.
While these growth drivers will take time to mature we are excited by the progress we've made so far and encouraged by the longer term impact on our results in the overall housing accessibility.
In this environment, we need to double down on innovation and introduce more offerings that connect with the growing number of consumers who need affordable housing given the continued economic uncertainty.
We are accelerating our investments into production automation and the customer experience. So we can help consumers have a great place to call home.
I'll 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 second quarter, followed by a discussion of our balance sheet and cash flow I will also briefly discuss our near term expectation.
During the second quarter net sales increased by 54% to $807 million compared to the same quarter last year, we saw revenue growth of $283 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 in <unk>.
Increase in average selling price.
The increase in the number of homes sold was 23% or 1372 unit.
A total of 7274 homes compared to the same quarter last year.
Volume growth is being driven by increased capacity.
Year over year capacity expansions are driven by the continued ramp of our <unk> plant and the acquisition of maintenance tolerance and the factory excellent retail locations. In addition to our continued efforts and streamlining our core product offerings across our existing manufacturing footprint.
During the quarter, we finished producing and shipping the remaining FEMA disaster relief homes, bringing amine unit sales during the quarter to $117 million and $200 million year to date.
The average selling price per U S homes sold increased by 30% to $103700 due to product mix, including higher priced <unk> unit and year over year price increases on our core products to offset higher input costs, including labor and transportation.
<unk>.
As a reminder, FEMA units have more specifications and our core product that's driving asps higher.
On a sequential basis revenue in the U S factory built segment increased 14% in the second quarter of fiscal 2023 compared to the first quarter of fiscal 2023.
This increase was driven by a 7% increase in both the average selling price per home and the number of homes sold.
Sequential increase in price was driven by a change in product mix and low single digit price increases.
Volume growth during the quarter was primarily driven by a decrease in finished goods inventory as capacity utilization remained flat sequentially at 72%.
Canadian revenue increased 2% to $39 million compared to the second quarter of last year, driven by a 20% increase in the average home selling price, partially offset by a 15% decline in the number of homes sold.
Higher average home selling price in Canada of $129400 was driven by a continued shift in mix to a larger multi section homes and price increases to combat ongoing inflationary pressures on our input costs.
The decline in volume was caused by the shift in product mix and a softening of demand in certain Canadian market.
Consolidated gross profit increased to $274 million in the second quarter up 112% versus the prior year quarter due to higher volumes and average selling prices.
Our U S housing segment gross margins were 34% of segment net sales up 930 basis points from the second quarter last year.
The improved operating efficiencies and higher prices on FEMA.
<unk> helps to increase gross margin. This quarter. In addition to core product pricing lower product costs and continued product standardization, which all led to increased leverage of fixed costs.
SG&A in the second quarter increased to $84 million from 61 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 to expand our capacity and footprint.
Net income for the second quarter was $144 million or $2 51 per diluted share compared to net income of $51 million or earnings of 89 per diluted share during the same period last year.
The increase in EPS was driven by higher sales and improved gross margin, resulting in an improved profitability.
The company's effective tax rate for the quarter was 25% versus an effective tax rate of 24, 4% for the year ago quarter.
Adjusted EBITDA for the quarter was $197 million, an increase of 170% over the same period a year ago.
The adjusted EBITDA margin expanded by more than 1000 basis points to 24, 4% due to gross margin improvement and leverage of fixed costs.
The structural improvements in our business over the last few years has strengthened our operational capabilities, leading to increased output and profitability.
These improvements also enhance our ability to navigate periods of economic uncertainty, while continuing to service our customers and protect our margin profile.
As we move into the second half of fiscal 2023, we continue to expect a normalizing of margin back to fiscal 2022 levels now that the impact of FEMA unit sales have been fully realized and as we anticipate headwinds to our product mix with consumers moving to.
Homes with less options to maintain more affordable monthly payment.
As of October <unk>, 2022, we had $677 million of cash and cash equivalents and long term borrowings of $12 million with no maturities until 2029.
We generated $231 million of operating cash flows for the quarter, an increase of $174 million compared to the prior year period.
The increase in operating cash flows is primarily due to the increase in net income coupled with the higher receivables and inventory balances at the end of the first quarter converting into cash during the second 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 ill now turn the call back to Mark for some closing remarks.
Thanks, Laurie while the current economic environment has raised the level of caution with consumers due to the sustained inflation rising interest rates and global uncertainty. We believe skyline champion can continue to outperform the broader housing market due to our affordable price points strategic.
Positioning and core initiatives.
The outlook for demand is supported by the channel opportunities with community rights build to rent and builder developers as well as helping our retail partners adapt to different consumer demographics.
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 to our homes.
Before we open the lines for Q&A I want to take a moment to thank your entire skyline champion team.
As our consistently strong performance is a result of our focus hard work and the ability to take care of our customers.
Cannot express how blessed we are to have the great team of people that we have.
Operator, you May now open the lines for Q&A.
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Yes.
Welcome to the call.
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Yes.
Hi.
Mohan.
Hi.
Thank you.
Ladies and gentlemen, we apologize for the technical delay we will now begin our question and answer session. If you would like to ask a question. Please press star one on your telephone keypad at this time, our first question will be coming from the line of Greg Palm with Craig Hallum Capital Group. Please proceed with your question.
Yeah. Good morning. Thanks.
Can you hear me okay.
Yes, Greg good morning.
So wanted to start with.
The retail inventory positioning out there Mark I'm just trying to.
Figure out if you can give us some sense of how far along the destocking process. We ourselves are 7000 units last where were we to start and I'll.
And then I think you said last in throughout the fiscal year. So does that just assume that backlog comes down another a couple of times.
Before we maybe.
Get more of a normalized position.
Yes, Greg I think I think what's important to note on the backlog.
But the backlog change is more about floor plan credit and set crews than it is about end consumer demand.
And consumer demand is actually healthy.
So what we've seen is as the retail channel canceled stock model units.
We've seen a predominance of of retail solids go.
<unk> to dealers.
And the reason that's important is because a retail sold unit takes about a week to set and finish and.
And the stock unit takes about a day.
So with with more and more retail sold is going to dealers in Washington, livestock models, because they've been leaning down stock models.
It limits the set cruise capacity to deliver those homes. So they've seen about a reduction of I'd say, 20% to 25% reduction because of the mix shift.
In the products that they are setting in finishing and what that's driving usage.
He is an increase in their inventory levels and their floor plan levels, which is actually only compounded by inflation.
In terms of their full time limits.
At the same time that that's happened.
Small player lenders over the past year have allowed.
Retailers to have overages in their floor plan lines because of pending inflation. So they were giving an additional let's say overage of 20% to 25% on their floor plan lending lines.
To allow retailers to.
Order in advance of inflationary changes.
With the pullback in lumber.
They've gone back to just revert to not giving them those overages. So really what we've seen backlog wise and inventory wise with the retailers is there have their product mix shift is slowing down their ability of certain finished driving up their inventory by 20%.
At the same time their floor plan lending limits have been pulled back by roughly 20%, 25%. So this is really kind of a short term credit thing where they have to get their floor plan lines back in in a while I do think that's about 7000 units today.
So we're going to we're going to slow down to let them catch that up.
But what we're seeing is strength in the end consumer demand our quote activity is still very good.
Our deposits at our captive retail are actually up year over year by about 9%. So we've seen strengthening retail deposit activity.
Not only in our own captive retail, but we're hearing the same from other retailers, especially digital ones.
So the end consumer demand is still good but I think we've got the short term.
Issue, where floor plan lines had been pulled back and we've got to help our retail channel kind of manage through that so I think it's about 7000.
We probably started off double that.
Somewhere in that neighborhood of 15000 to start with so we're probably about halfway through but the pullback on the flooring credit line Overages is probably exasperating the length of time that they are taking.
Got it understood. That's helpful color I mean, just on the consumer demand point can you give us any other kind of metrics out there by by channel.
So if deposits quoting and traffic are still healthy at retail what are you seeing on the community side of things and then also important just in these.
Having channels build around pillar developer or are you seeing more conversations now that backlogs are coming down.
Yeah definitely I mean, the the REIT community channel very strong activity.
As I mentioned, there theyre slow down on a few of their greenfield developments, just because the transformer timing and supply chain.
Along with.
Concrete issues and other things so that's delayed probably a good quarter or so.
Two we will see that coming through in many of these new greenfield developments have been pushed out four to six months roughly.
So that will start coming through but the demand there is extraordinarily healthy.
Arc model in tiny home demand is actually accelerating.
Builder developers picking up there is more conversations.
We are working to tool up our Bartow, Florida plant.
Because of the demand for builder developer. So we're opening up that idled facility and working on that that should be opened up.
Early in <unk>.
Calendar or early to mid calendar.
23.
So that'll be there so I think the demand for all the channels is still good retail is just going to have to work through this.
<unk> inventory issue to get their floorplan credit lines and why.
Okay.
And then Lori you mentioned the outlook for margins I guess.
A little bit surprised that they would hold up as well in this type of environment.
This level of revenue that you're looking at for the next couple of quarter. So, but I just wanted to confirm is your expectation that mark.
Margins in that 26% to 27%, which is what sort of the average was in fiscal 'twenty two and that's for the back half of this fiscal year I'm asking.
Hi, Greg.
Yes, that's exactly what we're expecting gross margins I'm not 26, 27% range.
For the next couple of quarters.
Given the streamlining of our product offering and the structural changes we've made.
To proud.
Got it okay, all right great I appreciate the color I'll hop back in the queue. Good luck. Thanks.
Okay.
Thank you. Our next question is coming from the line of Daniel Moore with CJS Securities. Please proceed with your question.
Thanks, Mark Thanks, Laurie I apologize for the first one I was typing fast I can mark can you just repeat the.
Production outlook expectations for Q3 and Q4.
Yes, So we expect top line for Q3 to be.
Even with last year.
Even third quarter last year, and we expect fourth quarter.
To be down from last year's levels and may be slightly down from three three third quarter as well just to get these inventory levels back in line.
Got it that is helpful.
And then.
Yeah.
I think you gave some color on this and then the last question Craig's question, but maybe just any.
Any more specificity about the.
<unk>.
The level of magnitude of order cancellations that you experienced in the quarter.
I know you're expecting another 7000 unit normalization.
In terms of dealer inventories, but.
Of that what's the sort of magnitude of cancellations that you experienced into are seeing so far in this quarter.
Yes, the cancellations have been mainland stock model units, Dan that we we talked about so we've seen very few customer cancellations in terms of that actually those have been actually really good they've held up well.
The cancellations on the stock model side.
Have been probably running.
20% or so of our total.
Order rates from prior year.
But I think that's about done with the clean up we've actually seen cancellation start to slow.
So I think the stock model cleanup is just about done.
And kind of wrapping up.
That cancellation pace.
The real thing is just going to be these stock model units dealers cannot place an order with us.
Unless they have floor plan availability on the credit line.
So we won't see new orders coming in.
Until these destocking happens because they just they actually physically cannot.
Technically cannot place an order until they have that availability on our floor plan line. So.
So I think that'll that'll impact kind of new orders, even though quote activity is good and all of that so once they get this destocking done that will fill up the pipeline.
As we go forward.
Really helpful and maybe one more and I'll jump back, but on the financing side, we talked about the inventory floor plan financing about on the consumer side, obviously rates well documented are going up but as the spread between stick.
Stick built and comparable land home for MH.
Remained narrow as it started to widen again in recent weeks months, what are you seeing there and and just the overall level of activity.
Our participation on the lending side for consumers. Thanks.
The financing for the end consumer is still remain very good.
Is narrow versus traditional mortgage.
Which is a very big positive I will say that we have seen more and more cash buying customers, especially in certain regions.
Of the country, where we're seeing more and more buyers who.
I actually have good credit healthy credit scores maybe cash.
Come in and probably had enough for a site built home last year, but now they're priced out of the cycle market and coming to us. So.
Healthy activity.
Alright, I'll jump back with any follow ups. Thank you again.
Thank you.
Thank you. Our next question is coming from the line of Matthew Bouley with Barclays. Please proceed with your question.
Hey, good morning, everyone. Thanks for taking the questions.
On the 7000 units of excess inventory a couple of clarification points on that I guess how.
How many I guess units per dealer do you think that represents like what did they have previously and where does it go to and I mean is your estimate of 7000 sort of based on it.
An expectation of what they what they've carried in past recessions I guess, what I'm trying to get at is what's the risk that they could sort of cut inventory further than that thank you.
Yes, Matt Thank you for the question.
7000 is really to get back in line with their floor planning credit lines. So it's less about.
Okay.
The app so in other words, the fact that the floor plan lenders are not allowing that overage in terms of what they have historically allowed them to Eric just reverting back to pre pandemic kind of credit limits.
That's pulling back that inventory so they have to they have to get.
Their inventories back in line, so it's actually less about physical it is in part physical destocking, but.
It's also about the number of units they have in the field waiting to be set and delivered.
Is probably more of the driver of that than even their physical dealer inventory, but I would say.
There is roughly 20.
2500, 3000 retailers in the U S.
So you figure two to three models per dealer and you get there, but it's really driven more by the pullback in floorplan availability that they have to get back in line.
Got it okay, that's great color.
So I guess the latest kind of following up.
On the gross margins I know you mentioned in the second half still needs to sort of normalize that to the prior year, but I mean I know this was kind of touched on earlier, but.
Okay.
Okay.
<unk>.
And margins again.
Okay.
I'm just curious is the mix change.
To drive that sequential decline or is there anything else that.
Great.
To normalize that quickly.
Yeah, sorry, it's Laurie.
Your question really.
What's choppy you cut out many times can you repeat sorry.
Sorry about that.
Yes, basically the gross margin. This is the starting point is high right.
It would be from Q2, and so is the mix change that you alluded to in terms of pressure is that enough to drive.
Okay.
Okay.
Sorry, you're cutting out again, I think youre talking about mix relative to margin. So.
In this quarter, obviously, we had the benefit of FEMA as well as favorable forest product pricing as we talked about on the call last quarter.
So we're going to have obviously, the correction I'll help ourselves as well as.
Some pulling back on material surcharges in order to.
Our job is to price for.
Our change in input costs, and then also the last variable, which I think you are alluding to is the change in product mix.
Test smaller less optioned homes. So all of those dynamics are kind of happening at one.
Hopefully I answered all your question yes.
Yes, yes, thanks, Laurie and thanks Mark.
Thank you. Our next question is coming from the line of Phil <unk> with Jefferies. Please proceed with your question.
Hey, Mark.
Great color.
This is probably not a fair question, but I guess once you kind of work through this inventory destocking at the retailer level. What's your early view on how volumes could look next fiscal year, certainly some new site build home builders are talking about call. It double digit declines in orders and at least to buy sides anticipating that level of decline youre situations are little different.
And you got some good guys at the right side.
Direct to builder side, so kind of help us unpack, how youre thinking about.
<unk> you take youre going to be able to grow next fiscal year from a volume standpoint.
Yes, that's a great question, obviously, we're watching what the fed's going to do.
Over the upcoming actually today in weeks and months.
So thats a hard visibility to look at but you know.
I see that.
Our deposit activity and quote activity is good and stable. So I don't expect that we will see.
The same magnitude of decline.
Next year that the builders do I know, they're talking significant.
Digit declines in many of them that we're hearing from.
We should be able to take significant share we haven't disclosed any type of guidance yet on that but.
We will be taking share from say boat next year for sure.
Gotcha.
And then similarly, I guess, Laurie just kind of unpacking.
Matt question more looking out to next year, you guys have been able to manage price cross pretty well mix is going to be a headwind next year.
Is the basis for 2024, we should just use kind of.
Last year's as a base in and apply normal Decrementals should we expect price cost to be.
Our positive sales you guys have been able to manage it quite well and we're certainly seeing some pullback on some of your inputs like lumber.
Yes.
Phil as we mentioned, we think we're going to the gross margins are going to come in around the 26, 27% range.
I think that that's going to continue based on our structural changes that we've made barring any catastrophic change in demand, but we're.
We're not expecting that.
Okay.
Sorry, just to sneak one more in.
Steve do you mean, it's been a good guy deposit for this year and into the queue. Mark you alluded to Hurricane Ian is there an opportunity there to kind of pick up some business for next year.
Yeah, obviously FEMA hasn't.
<unk> disclosed any orders yet I think they've got a few thousand units still in inventory.
That they can deploy for the state of Florida, the demand or or so there could be a replenishment order for those units.
What I will say that the <unk>.
The need.
And devastation in Florida is.
Pretty extensive so I think there will be a short term and a long term need.
<unk>.
There's we.
We don't know if and when FEMA will issue an order, but it is highly likely.
There will be some type of disaster relief housing I can't imagine how.
With the extent of the damage that theres not.
Some type of either replenishment order or something else in the future.
Most importantly, as we got to figure out a way to get those those people that are suffering down there.
Into a good quality homes.
Thank you great color.
Thank you. Our next question is coming from the line of Mike Dahl with RBC capital markets. Please proceed with your question.
Good morning, Thanks for taking my questions.
So mark.
Just to press on kind of the order environment and some of the comments around inventory.
Inventory units cancellations I guess, if I look at the <unk>.
7000 units or even the 15000 units.
<unk> point you guys have.
At 20% ish market share so you're really talking like 1500 to 3000 units that in theory would be applicable to skyline.
Seem to really.
<unk> come close to bridging the delta between what you're seeing in <unk>.
Decline in order activity.
At least on our math it seems like it's much more meaningful than that so I don't know maybe you could give us a little more color help us square.
Square that a bit more.
Just my first question. Thanks.
Yes, Mike I think youre looking at it just in terms of the absolute inventory number.
I think what you have to also consider is roughly the 20% to 25% pullback in floorplan credit availability.
So if there is roughly.
30, 30 35000 units normally in.
And the entire sales channel and they were over inventoried by let's say 15 give or take.
There is something in the neighborhood of 45000 units over inventoried in the in the channel inventory in the channel and if you pulled back the floorplan limits by 20% right Thats a fairly significant number just to pull back in addition to just getting the inventories.
Down too.
The normalized levels and then you have the stock model units that were in the backlog numbers not physically in inventory.
That would kind of be matching with stock model decline. So I think I think.
You had a number of units in the backlog that we're not physically on the ground that were canceled because youre not going to replace those stock model units.
The inventory at the dealers needs go down physically and then you have the pullback in floor plan.
Availability and credit lines, So I think.
You really have to look at it I think in those three lenses and then.
And then the magnitudes.
Really large.
Okay.
Okay that helps and as a follow up and this also.
It's up on Matt's question from before you know it sounds like some at least on the inventory side Youre talking about here's what it would take to get back to poor plan limits in past cycles.
What have you seen out of dealer behaviour and what have you.
<unk> seen out of four plan credit availability I E do dealers drive typically drop below their full utilization of floor plan lines or lenders curtail for plan.
Limit lines, because it seems like maybe at your some of your commentary.
Looking out seem to.
Maybe assume that this is all resolved shortly but that that may not really account for potential further weakening in the consumer and housing environment.
No I'm actually looking this is is really destocking to be honest, Mike the the floor plan limits. The overages were really done due to.
Once in a lifetime inflationary changes right.
Inflationary market.
For homebuilding materials was.
Very unique.
In terms of the timing so so I think the floor plan lenders.
<unk> that and not wanting to try to over manage every single invoice.
Just said, we're going to give we're going to just give you an overage, let you ride because we don't know what the price is going to be given the length of the backlogs. So I think we're just reverting back to normal on that but that is a change in delta from where they were.
And consumer demand and traffic still remains very good at the dealership level.
Like I said walking traffic is lower so the dealers that are.
Really just focused on walk in traffic I think we'll see a slowdown in their activity, but the dealers who have a more digital presence.
With <unk> and other things are seeing much better traffic.
And much more convertible traffic so I'm.
I'm not concerned about the end demand currently.
So Marc if I could just to press on that a little bit more I guess more of what I'm asking is we've gone through cycles before and a broader macroeconomic sense and in a recessionary environment you do tend to have credit the credit environment high enough we are seeing that.
Across a variety of parts of the credit environment today. So so when you're assuming past cycles. How does the floor plan lending credit environment change that's kind of on the availability of credit side and then even if you've got available credit.
If we were to go into a recessionary environment, where anyone today as an operator as a dealer you may choose not to use I don't know maybe this isn't right, but one may choose not to use all of their available credit depending on the environment. So that that's more what I was getting at just at like what have you.
How do these cycles work in the past when you think about availability of credit.
In a recession or use of credit in a recession.
No I think the floor plan lenders are our robust there's the the housing value.
Today is as strong, especially for affordable.
Product, which we have.
I don't think the floor plan lending environment is.
Is at risk in a even in prior cycles.
It really wasn't in risk.
Except when various companies went out of business. So if the banks go out of business.
Then maybe you've got that.
Well I think the banks are in a much healthier position than they were in eight or nine in prior so I think.
I'm not as worried about that and frankly this is an asset backed.
Type of credit facility.
It has strength to it in this market.
And even in a recessionary market, especially when we are short supply of housing.
Dealers will typically have availability on their floor plan lines and manage to that.
And manage to that level and it really comes down to what is the traffic patterns how much they see.
They will.
And it also depends on the certain finished Cruz one of the reasons, we've gone more into certain finish.
Is because the longer it takes a retailer.
And certain finished product.
The longer it takes them for them to monetize and get that off their floor plan lending line and with higher floorplan lending rates.
Speed is actually a cost advantage for them.
So I don't I don't think dealers are gun shy about how much their floor plan lending radios as long as theyre, turning product, which with the deal pipeline that they are experiencing is the case.
And.
And it really just comes down to the fact that there's a need for affordable housing.
I don't foresee the banks.
Sure.
A majority of banks going under and leading federal support.
<unk>.
Support the banking environment today as we saw in prior cycles.
Got it okay. Thank you.
Thank you. Our next question is coming from the line of Jay Mccanless with Wedbush. Please proceed with your question.
Hey, good morning, everyone.
Just to be totally clear here.
I guess the bottleneck in the equation right now.
The lack of certain finished cruise to get those homes put in a timely fashion is that the upshot of all of this.
I would say two pieces Jay one is is the lack of certain finished cruise or maybe the mix change impacting the satin finish crews right. If it takes you a week longer.
To do a retail set her to do a retail set than it does the stock model set.
If you have a dramatic shift in mix.
Then it will impact your capacity of those seven finished cruise so but.
That being said certain finished crew availability is a key that's absolutely one the other one is the fact that the floor plan lines have reverted back to normal levels and theyre, not allowing inflationary overages as they were before because theyre seeing lumber prices come down.
Other things.
Those are the two drivers.
Okay.
I mean.
Is that an opportunity in addition to getting deeper in certain finished.
Or sitting on a pretty sizable amount of cash is it time to look at it may be doing a little bit of four client lending to help.
<unk> increased the return potential on that cash sitting on the balance sheet.
I think we have discussions on financing solutions all the time, Jay So that's definitely an opportunity.
Okay.
And then could you just.
Give us an idea of where current charter rates are and also where land home rates mortgage rates are running relative to conventional financing.
Hey, Jay.
For good credit quality customers that spread between the 30 year fixed and a channel right would be 100 150 basis point sell so relatively flat.
What we talked about last quarter.
So yes.
That's what we're seeing today not a lot of change in the financing environment.
Are you seeing any tightening.
Lending standards.
I know there's people additional.
These are coming into the business I don't know what <unk> seen in terms of underwriting standards have NIM does tightened up at all.
What's happened the last six or nine months.
Not significantly different.
Okay, all right cool thanks for taking my questions I appreciate it.
Thank you Jack.
Thank you. Our next question is coming from the line of Greg Palm with Craig Hallum Capital Group. Please proceed with your question.
Yeah. Thanks, just one quick follow up I guess, just in light of everything going on.
<unk> and how youre thinking about capital allocation strategy, I mean kind of on a real time basis, you're now sitting here with.
Yes, 25% of the market cap in cash so just curious if you're looking at maybe more of a buyback.
And M&A as a complement or if M&A is still sort of the main focus area.
Hey, Greg.
We are staying the course with reinvesting in the business enhancing the customer experience increasing capacity opening idle facilities and looking at strategic M&A.
And what about.
Capex expectations for the year do you have a number in mind.
Yes, we haven't put anything out, but we do expect it to be.
Higher than where we have been in the past of just as we start to increase.
Our production automation initiatives.
Okay fair enough. Thanks.
Thank you. It appears we have no additional questions at this time, so I'd like to pass the floor over to Mark Hughes for any additional closing remarks.
I want to thank everyone for participating in today's call. We appreciate the time and your continued interest in the company. We look forward to updating you on our progress on our next call. Thank you stay well stay amazing take care.
Ladies and gentlemen, this does conclude today's teleconference. Once again, we thank you for your participation and you may disconnect your lines at this time.
Okay.
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