Q1 2024 Skyline Champion Corporation Earnings Call
Good morning, and welcome to Skyline Champion Corporation's first quarter fiscal 'twenty 'twenty four earnings call.
The company issued an earnings press release this morning.
I would like to remind everyone that today's press release and statements made during this call include forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
Such 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 the today's call the company will discuss non-GAAP measures.
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 Mike Yep.
Caroline Chinchillas, 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 Laurie Hough EVP and CFO .
Today I will briefly talk about our first quarter highlights and then provide an update on activity. So far in our second quarter and conclude with our thoughts on the balance of the year.
For the quarter, we delivered more than 5000 homes as we saw healthy demand from end consumers and a return to growth in our retail sales channel.
Despite good retail order intake, we are still seeing a pause in the community REIT channel as they continue to finish their backlog of existing new home inventory.
We expect this to continue through the end of our fiscal second quarter.
This short term pause in community ordering combined with the absence of FEMA related sales that were in our first quarter of last year drove year over year declines in both production and revenue.
In the current environment, we are aligning our plant production with order rates by channel.
As a result of reduced volume leverage margins continued to normalize to fiscal 2022 levels.
I'm encouraged that our focus and our investment in enhancing the customer experience.
Streamlining our product offerings.
In transforming the way homes are built and bought has led to a healthy margin profile, even at lower production levels.
Additionally, the current demand environment has driven average lead times within the historically normal range of four to 12 weeks.
Normal backlog levels help homebuyers walk in both pricing and financing and benefit benefits, our direct sales channels to better meet the needs of their customers.
Backlog as of July 1st was $260 million compared to $308 million at the end of March.
The sequential decrease in backlog was primarily driven by the continued pause in the community orders and order cancellations in California.
Sales orders in our first fiscal quarter were up 28% year over year, and quotes which are a leading indicator of future orders were up 44%.
We also saw growth in deposits at our captive retail locations.
Given by a 22% year over year increase in elites.
Sequentially manufacturing quotes were up 17% and orders were up 50% from fourth quarter levels.
Good trends given the pause in the community channel.
During the quarter, we began production at our new manufacturing facility indicator, Indiana.
This facility is a key investment in our broader efforts to innovate and streamline the production of our homes.
In addition to traditional production at this location, we are ramping our R&D efforts in automating key production processes.
And we believe this positions us to demonstrate the full benefits of modular construction, specifically, providing developers a turnkey solution at a price point quality and speed for today's market.
Also in an effort to support our channel partners, we began offering floor plan financing to select channel partners with the intent of growing this portfolio throughout the remainder of fiscal 2024.
This investment will ensure ample credit to those retailers and timely delivery of orders to the end consumer.
Moving to the second quarter outlook, we expect the community reach pause in ordering to continue through September as they catch up on setting existing inventory.
Accordingly, we are going to pull back production at our community focused plans to better align the timing of the community channel needs.
As a result, we anticipate second quarter revenue to be relatively flat to slightly down sequentially versus our first quarter.
Mid term strong end consumer demand for affordable housing positive REIT channel outlook and stable retail placements support our confidence in continuing to invest in the ramping of new capacity in Bartow, Florida, Decatur, Indiana, and Pembroke North Carolina.
This additional capacity will help us serve the upcoming needs from the impacts of hurricane in and the growing growing builder developer pipeline.
We are continuing to focus on our strategic initiatives by enhancing our digital tools, including our online customer experience and production automation investments.
These long term investments into our digital will not only be a better experience for the end consumer.
It will drive greater efficiency in our operations.
And make us the preferred channel partner as we drive more engaged homebuyers to our customers.
I will now turn the call over to Laurie to 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 expectation.
During the first quarter net sales decreased 36% to $465 million compared to the same quarter last year, and which we recognized 63 million and FEMA in unit sales.
The decrease in net sales reflects a lower number of units sold and a lower average selling price per home.
We sold 4817 homes in the U S. During the quarter compared to 6813 homes in the prior year period.
You asked home volume was down year over year due to the absence of FEMA related sales and reduced production schedules to align with order rates.
The average selling price per U S homes sold decreased 8% to $89000 due to product mix and the decrease in material surcharges.
FEMA disaster relief units sold last year carry a higher ASP than our core product due to the complexity of belt.
On a sequential basis U S factory built housing revenue decreased 6% quarter over quarter, consistent with expectations that production rates would moderate to align with shifts in order activity from our community rate customers.
The number of homes sold declined by 2% and the average selling price for homes decreased by 4% as core customers elect to maintain affordable monthly payments in the current interest rate environment acting for smaller and less optioned homes.
Capacity utilization decreased to 56% compared to 59% in the sequential fourth quarter of fiscal 2023.
Capacity utilization has been adversely impacted by newly opened plants, notably our Pembroke North Carolina facility, which opened in January and our facility in Decatur, Indiana, which started production this quarter.
Our teams at these plants are prioritizing training employees, while tailoring production to current demand levels.
This additional capacity will enhance our ability to service key channels, such as our builder developer channel. We also look forward to ramping up production in our Bartow, Florida facility later this year.
Canadian revenue decreased 42% to 26 million compared to the first quarter last year, driven by a 37% decline in the number of homes sold.
The average home selling price in Canada decreased to $118200 compared to $128000 in the prior year period, primarily due to price reductions in response to changes in demand.
Consolidated gross profit decreased 44% to 130 million in the first quarter and gross margins contracted by 370 basis points versus the prior year quarter.
On a sequential basis, we saw gross margin declined 80 basis points.
Our U S housing segment gross margins were 27, 6% of segment net sales down 410 basis points from the first quarter last year, primarily due to higher margin that FEMA unit sales in the prior year quarter as well as lower core product sales volume and the mix shift.
Two homes with less features and options, allowing the homeowner to hit their monthly payment price point, given higher interest rates.
SG&A in the first quarter decreased to $70 million from $72 million in the same period last year due to lower incentive compensation expense and reduced sales activity, partially offset by additional SG&A costs from plant start ups and acquisitions club.
In fiscal 2023.
Net income for the first quarter decreased 56% to $51 million or 89 cents per diluted share compared to net income of $117 million or earnings of $2.04 per diluted share during the same period last year.
The decrease in EPS was driven by the decline in sales and reduced operating leverage on lower volume.
The company's effective tax rate for the quarter was 25, 2% versus an effective tax rate of 25, 7% for the year ago period.
Adjusted EBITDA for the quarter was 67 million compared to 163 million in the prior year period.
Adjusted EBITDA margin of 14, 4% compared to 22, 4% in the prior year period reflects a return to more normal profitability level.
In the near term, we remain focused on maintaining efficient production lines S channel conditions improve and order activity returns to a more regular cadence the structural improvements and investments made in our business have strengthened our operational capabilities protecting <unk>.
<unk> ability in periods of lower output.
That said, we reiterate our expectation that the mix shift by customers looking to maintain affordable monthly payments in the current interest rate environment will continue for the remainder of fiscal 2024.
Our expectations for margins landing near fiscal 2022 levels are driven by additional margin compression from the ramp of our three manufacturing facilities in North Carolina, Indiana and Florida.
As of July one 2023, we had $798 million of cash and cash equivalents and long term borrowings of $12 million with no maturities until 2029.
We generated $75 million of operating cash flows for the quarter compared to 47 million for the prior year period.
The increase in operating cash flows is primarily due to the working capital impact of producing FEMA units in the prior year.
We remain focused on executing on our operational initiatives and given our favorable liquidity position plan to utilize our cash to reinvest in the business and for opportunities that support strategic long term growth I'll now turn the call back to Mark for some closing remarks.
Thanks, Laurie as we manage through the rebalancing of our channels. We believe skyline champion is well positioned due to our affordable price points strategic positioning and our core initiatives.
The long term outlook for demand is supported by the channel opportunities with community rights manufacturer to rent and builder developer growth as well as helping our retail partners adapt to the changing 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 wanted to take a moment to thank our people.
The entire skyline champion T. As our consistently strong performance is a result of the amazing things they make happen each and every day.
And with that operator, you may now open the lines for Q&A.
Thank you well now be conduct a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad equaled 70 sunstone moving to change your line is in the question queue.
You May press the site you if you would like to remove your question from the queue.
For participants using speaker equipment it.
It's made necessary to pick up your handset before pressing the star Keith.
One moment, please while we poll for questions.
Yeah.
And our first question comes from Dan Moore with CJS Securities. Please go ahead.
Hey, good morning, it's actually Christopher Dan.
Thanks for taking a couple of questions. So maybe maybe we just get a little bit more specifics so in terms of expectations for.
For unit shipments as well as Asps.
For Q2 versus units.
Versus Q1 could you give.
Help us out a little bit more directionally.
Sure, Chris and good morning.
I think directionally, we see two two Q relatively flat to slightly down in terms of unit shipments and I think asps slightly down as lorie has been mentioning just really due to a change.
Changing mix to hit an affordable price point, so I think flattish to slightly down is where we're thinking primarily due to the community rights and pullback in production those plants specifically.
Until they return to ordering in the September timeframe.
Got you help very helpful and from a gross margin perspective, obviously, you had kind of talked about Q1 going to be down.
Q looking at you know kind of Directionally for the next few quarters from a gross margin perspective.
That that same.
Got it makes sense or could you.
Maybe just talk about margins a little bit further.
Oh, Hi, Chris Yeah, I expect gross margins to come down sequentially in the second quarter and kind of get into that range.
You know 26 per cent range 'twenty six 'twenty seven first time, probably closer to the lower end of the range as we.
As we bring on the new plant.
Got it very helpful. I'll leave it there I appreciate it.
Thank you Chris.
Our next question comes from not so Bally with Barclays. Please go ahead.
Good morning, you ever lizabeth weighing in on for Matt today.
And so just kind of starting off do you would you mind talking a little bit more about what you are seeing in the community order level, obviously said that things will be slower through September but do you have any visibility or any metrics that you look at that what kind of.
How are you when I read Sen, you know communities might start to reengage or is it more of a supply chain issue.
Yeah, Good morning, Elizabeth and thank you.
The community rights are still setting and finishing.
The current inventory that they've got so it's it's a little bit of a supply chain issue in terms of being able to get those units that finished and trimmed out at the community level.
Obviously, we're having conversations with many other community rights.
Who were talking about timing, but even if you look at the.
Earnings releases.
Releases of some of the public Reits, They mentioned where their inventory levels are and how quickly they are going through those inventory levels and their timing anticipation is generally you know targeting that.
September timeframe is when theyre going to kind of start to return to orders. So I think it's they're.
Our sales pace is phenomenal. So the end consumer demand is excellent at many of the Reits. So it's not a and consumer demand issue because the traffic is strong there and demand for affordable housing is very strong. It really is just a they don't want to take on more inventory.
Until they can get the units that they already have set finished and people living in them otherwise, they're just doubling down on.
Finished good inventory and timing of cash.
Okay. Thank you that makes a lot of sense.
And then.
At the dealer level and would.
Would you mind talking a little bit about what you're seeing them you know with their inventories and kind of how if there's any destocking or if it looks like there might be restocking.
The dealer channel is through their Destocking I think our we've seen our order pace pick up 28% year over year really driven by the retail channel because in that 28% is a decline in community orders.
So the retail traffic is actually quite strong.
They're not building up inventory, there keeping things lean because of the higher carrying cost of inventory right now, but the end consumer demand at the retail level is quite good we've seen our own captive retail deposit activity.
Increase year over year, so deposits are up.
So I'd say, it's it's very encouraging in terms of what the retail.
Channel is sitting today.
Okay. Thank you very much I appreciate it.
Thank you.
Our next question comes from Phil <unk> with Jefferies. Please go ahead.
Hey, guys Mark appreciate some color on the timing of orders coming back from your recast stores call. It September but help us think through what that actually means for your volumes right and give us a little more color how to think about the shape of the year.
Particularly in the back half as it relates to revenue and potentially margins as well as you kind of ramp ups of that capacity.
Yeah, Thanks, Phil and good morning.
You know I think the REIT channel will start to come back as I mentioned in September with orders off so that means really it won't turn into production until let's say October November . So I think I think you'll see relatively flattish revenue levels, you know into the third quarter, because you get into the holiday season.
In December so I don't think we'll be able to fully ramp into that and then revenues and volumes strengthening as we go into the first calendar quarter of next year, our fourth fiscal quarter. So I think it'll be relatively flat in the second and third and then kind of Ah.
Picking up in the in our fourth fiscal quarter of this year as those community orders really start to pick up to fill the backlogs and allow us to produce into those orders.
And then on the margin side of things how should we think about.
How that kind of boost throughout through the back out there.
Yeah. So I think margins are going to come down sequentially and then remain at that level.
Through the end of the year.
Okay.
And you said Lori <unk> gross margins are going to be closer to potentially to the 26% level and the lower at about 26 27 range. So in the back half of good kind of breakthrough that 26 level is there a good way to think about a floor for you guys.
You know I think that's probably the floor you know.
And bottom of that range it might fluctuate you know a few basis points.
Not substantially.
That's that's that's in process youre managing through that pretty well and then Mark I was intrigued by your comment earlier about how.
You're offering some floor plan lending and which lines up with a question I actually had I believe a pretty large manufacturer home lender is being put on strategic review is something is that something that you would consider taking a look at two of your larger competitors do have a lending arm is that avoid and your business does that.
That puts you in any disadvantages from a how you compete and go to market.
So I think obviously, we look at many things strategically really it comes down to the customer and the consumer and their experience.
So many of our customers and said they wanted a deeper relationship with us and a closer tie with us in terms of.
If we are a preferred manufacture for them and we offer them that they want a full suite of services, whether it's our set and finishing services we offer floorplan tie in.
I think that the more turnkey you can make the relationship with the dealers.
And so all of our community and frankly the.
Growing builder developer channel what we're hearing from many of them is what can you do to be a full turnkey provider to us because the experience is easier to do business with we make one phone call. So I think those alternatives are always on the table, but I think it's it really comes down to our.
Real dedicated focus on the consumer and what they need and so providing those financial services to them and its benefit to them.
And creates a better experience I think that will.
Definitely focusing on that.
Okay. That's helpful color I appreciate it mark.
Thank you Phil.
Our next question comes from Mike Dahl with RBC capital markets.
Go ahead.
Okay.
Hi, This is actually Chris kalata on for Mike. Thanks for taking my questions for I was hoping you can maybe dial in on the SG&A outlook for this year Laurie I think you last quarter. You said you were expecting kind of a fixed portion of SG&A to be.
Relatively flat, but I think the <unk> numbers imply some.
The year over year increases on the fixed portion. So just hoping maybe you could dial in kind of the expectation for SG&A dollars for for this year.
Yeah, Chris this.
This quarter really had to deal with the ramping of the new plants.
Just relative as a percent of sales.
And then we also have our investments and our customer experience and the.
The backend systems to support that so that's running a lot of that long term investment is running through SG&A as well. So I would expect SG&A going forward to remain at the levels that we saw in the second quarter and then obviously fluctuate.
As revenue picks up in the March quarter, possibly on a dollar basis revenue going up.
For the second and third quarter I would expect that to remain relatively similar to what we saw.
In the first quarter.
Got it that's helpful.
And then I just want to follow up on the large builder.
Customer orders that were supposed to that were delayed last quarter any update there or is it still a supply chain.
Delays that you're seeing or are you have you started placing orders through there.
No actually first I think we're we're we mentioned on the last call. We expected those orders in August and September and still anticipate those orders coming in in August .
Or maybe early September by Labor day, we expect those orders to come in so everything's on track Everything's on pace. So we expect those orders I mean anytime now.
Got it.
Oh, that's great to hear.
I can take that question Mike.
Our next question comes from Greg Palm with Craig Hallum Capital Group. Please go ahead.
Yeah. Good morning, Thanks for taking the questions I wanted to maybe dig into various channels a little bit more so maybe we can just.
With what Youre seeing at the retailer or dealer in terms of you know maybe go on a little bit more about traffic and order rates, but but more importantly, you know are we completely used through the inventory destocking or are there still you know regions, where there are certain issues, maybe you can give us a little bit of sense on what's going on geographically.
Yeah, Good morning, Greg and thank you.
I think the retail channel.
Are there a handful of places where there is destocking happening sure is it impacting it in a global sense no. It's we're through the Destocking of the retail channel order and order pace at retailers is off.
We've seen we've seen kind of continued growth.
Sequentially orders are up 50% quarter over quarter.
And that's really driven primarily by the retail channel as community.
The community channel, which is 35% to 40% of our businesses is flat. So we've seen really good traction in our retailers I would say it's pretty consistent.
Across.
The board there's no.
Obviously slight variations in where retail stronger than others, but I would say generally speaking retail traffic across the entire U S and U K.
Canada is a little slower in terms of retail, but that's more economically driven.
But I would say, it's pretty dispersed communities is really where the clauses.
Yeah, and maybe that segways into my question on the routes I mean, as you sort of look around did you get the sense that you know the pause if you want to call. It that is driven by more supply chain setting crews I mean, how does cost of capital.
Contribute to all of this I mean, you know.
I guess I'll leave it there and I'll ask a follow up.
Yeah, I don't think cost of capital drives.
A significant portion of it Greg because many of the Reits are I mean, they're changing their price point that they're targeting for the end consumer.
They're still able to hit a very good return hurdle for most of them, especially the.
I'll call it the heritage or legacy REIT who've been in the business for a long time.
You know I think they've done a very good job at managing their capital stack and going through those processes to to maintain that.
Demand on the communities. If you follow you know some of the public communities or even talk to some of the others.
They're having record sales periods. So in consumer demand is very good.
They're at their speed.
Right now there they really are just trying to manage through getting through everything.
Everything certain finished working through certain supply chain challenges, mainly with electrical transformers at new Greenfield operations.
But we're starting to see the opening of certain new Greenfield stuff's coming online very encouraging.
The address on the community front, they just need to dig out of their inventory today.
And just lastly in terms of you know visibility.
Anything that makes you believe that you know it is September and you know not October or November I mean is that what they're telling you directly or is that just your best sense, given what you know today in terms of order resumption.
It's a combination Greg so we're seeing the pace at which they're moving through their inventories.
In many situations, we've got our business development team is in kind of weekly communication with them and so it's been fairly consistent in terms of the messaging.
I would also say that many of the Reits separate and distinct from one another are all targeting that time period. So it sounds like you know, it's it's consistent through the industry.
In talking to and working with the different partners that we.
Worked with.
Understood, Okay I'll leave it there thanks.
Thanks, Greg.
Okay.
Yeah, I know photos questions at this time I would like to turn the floor back over to Mark Yes for closing comments. Please go ahead.
Thank you for participating in today's call. We appreciate the time and your continued interest we look forward to updating you on our progress on our second quarter call.
Take care.
Okay.
This concludes today's conference call you may disconnect. Your lines at this time and to perfect. The basin and have a good day.
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