Q2 2024 Skyline Champion Corporation Earnings Call
Good morning, and welcome to Scotland Champion Corporation second quarter of fiscal 2024 earnings call.
The company issued an earnings press release yesterday after the close I.
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.
These statements are subject to risks and uncertainties that could cause actual results to differ materially from the company's expectations and projections.
Such risks and uncertainties include the factors set forth any earnings release in in the company's filings with the Securities and Exchange Commission.
Additionally, during today's call the company will discuss Noncomp measures, which it believes can be useful in evaluating its performance. A reconciliation of these measures can be found in the earnings release.
Thank you for joining us.
Good morning, everyone.
Please.
Please call by Lollipop D V P C F.
Today I will briefly talk about our second quarter of my life and then provide.
Provide the update connectivity so far in our third quarter.
Food was spot on the balance of the year.
We saw healthy been banned from and consumers through our captive in independent retail channels.
You've reached channel soft, yes continued as expected through the September quarter.
<unk> work through their backlog.
Home inventory before placing new orders.
This pause in the community ordering combined with the absence.
Related to sales.
A quarter of last year.
A year over year declines in both production and roughly.
Backlog as of September 30th $258 million compared to 260 million.
The end of the June quarter as sequential quarterly increases were offset by decreases in price.
Average lead times of eight weeks Abnormalize within our historical range.
Weeks.
Consistent with lead times at the end of the first quarter.
Order volume during the quarter increased again sequentially and we are seeing.
The decrease in home prices.
Consumer shift too small homes or homes with fewer features and options.
The current interest rate environment.
Some of our strategic action, we have taken recently on September 26th we closed our investment in D. C N capital and the establishment of our new Captain Finance company financing.
We believe that the formation of a captive finance companies unlock home volume growth.
Value for our key stakeholders by providing water and more attractive financing options and services to our customers.
It will enable us to provide a comprehensive home buying solution.
Coming more deeply connected with our channel Parker customers.
And consumers purchase our homes.
The investment of lines with our longer term strategic.
And offering digital configuration and selling the home buyers.
As we continue to ramp up champion financing, we believe the benefits will create a deeper connection with our dealers.
Consumers.
As we drive more volume.
Which will help to increase the diversity of capital sources that will accelerate the growth of the industry overall.
Additionally in October we closed on the acquisition of retail homes.
Largest hugged manufacturer in the United States.
Independent retailer and the company, we have long admired.
We are confident that the addition original homes to the Skyline champion platform.
Allow us to accelerate profitable growth through the.
[noise] expansion of a retail and manufacturing distribution.
The southeastern United States.
Regional homes has a customer centric selling approach.
Dedicated to providing an exceptional home buying experience with customers wished.
Directly of lines Skyline champion core value in our strategic initiatives to enhance customer experience.
In coordination with the closing of the acquisition I'm excited to welcome Heath drinking to the Skyline champion leadership team.
He will serve as president of our captive retail operations.
The springs years of industry retail experience.
Leadership capabilities, but most importantly exhibit.
Bring commitment with customer first.
Altogether these investments represent an exciting opportunity as we strengthen our efforts to support the longterm growth.
Solidify skyline champions market positioning.
[noise] provider of a table houses solutions.
Which the market is a tremendous need of today.
Moving to the third quarter outlook, we continue to see stronger order rates from a retail developer channels.
While some.
We move into our normally seasonally slower period.
We expect a third quarter revenue to be outbid the high single digits as a result.
We have seen order strengthen five quarters in a row.
We need some consumer.
Portable houses.
We anticipate this need for housing to be longer in duration initially anticipated due to recent indications from the federal reserve.
Additionally, this need is driving more regulatory tailwinds for our products that could give us increasing confidence.
The long term growth potential of our houses solution.
With our long term strategic investments into retail financing digital and automation, we are adding value enhancing the buying experience.
And consumer and our channel partners.
Now turn the call over to Lloyds quarterly.
Quarterly financials and mortgage.
Thanks, Mark and good morning, everyone I'll begin by reviewing our financial results for the second quarter, followed by a discussion of our balance sheet and cash flows.
I will also briefly discuss.
Expectation.
During the second quarter that sales decreased 42% to 464 million compared to the same quarter last year in which we recognize 118 million and feeling unit sales.
Decreased and that sales reflects a 15% year over year decline an average selling price for you at home.
Seeming unit sales last year, which carry a higher S. P that our core product due to the complexity itself.
In addition, our core product ASCII declined due to product mix and the decrease in material surcharges.
During the quarter, we saw 4842 home within the U S compared to 7274 homes in the prior year period.
Home volume was down year over year due to the absence of female related sales and reduced production schedules to align with the order right.
I'm a sequential basis you ask the factory built housing revenue wasn't lying with the first quarter consistent with expectations that demand would remain relatively flat.
An increase in the number of homes sold was partially offset by a decrease in the average selling price for homes.
<unk> asks for smaller and less absent homes in an effort to maintain affordable monthly payments and the current interest rate environment.
Capacity utilization decrease the 53 per cent compared to 56%.
<unk> first quarter of fiscal 2024.
Capacity utilization is being adversely impacted by newly opened plant.
Sizing of production rates at certain plants that serve and markets and which current order trends remain softer.
Canadian revenue decreased 25 per cent to $29 million compared to the second quarter last year, primarily due to a 23% decline in the number of homes stalled driven by swelling demand.
The average home selling price in Canada, a decrease to $126100 compared to $129400 in the prior year period, primarily due to the fluctuation in the translation of the Canadian dollar to the U S dollars for the year over year period.
Consolidated gross profit decreased 58% to 116 million in the second quarter and gross margins contracted by 890 basis points the versus the prior year quarter.
In a sequential basis, we saw gross margin declined 280 basis points.
R. U S housing segment gross margins or 24.5% a segment not sales down 950 basis points from the same quarter last year, primarily due to higher margins gaming unit sales in the prior year quarter as well as lower product sales volume.
The homes with less features and options, allowing the homeowner to hit their monthly payment price point, given higher interest rate.
Gross margins are also negatively impacted by lower production right. As we are choosing to operate plants at lower run rates in order to be prepared to quickly ramp upon their return to normal order valium.
S C N a and the second quarter decreased 19 million to $64 million, primarily due to lower incentive compensation expense and reduce sales activity.
Net income for the second quarter decreased 68% to 46 million or 79 cents per diluted share compared to net income of 144 million or earnings of $2.51 per diluted share during the same period last year.
The decrease in EPS, plus driven by the decline in sales and reduced operating leverage on lower volume.
Diluted EPS.
For this quarter includes approximately three cents of transaction related costs incurred for the acquisition of regional homes.
The company is effective tax rate for the quarter was 24.5% versus an effective tax rate of 25.0% for the year ago period.
Adjusted EBITDA for the quarter was $59 million compared to $197 million in the prior year period.
Ah just to disarm origin of 12.7 per cent compared to 24.4% in the prior year period.
The return to more normal profitability levels.
In the near term.
Main focus on maintaining efficient production lines channel conditions improve and order activity returned to a more regular cadence.
The structural improvements and investments made in our business have strengthened our operational capabilities protecting profitability and periods of lower output.
That said, we reiterate our expectation that the next step by customers looking to maintain affordable monthly payments and the current interest rate environment.
Continue for the remainder of fiscal 2024.
We expect Margaret margins to compress further.
Essential third and fourth quarters due to product Smith.
Newly added production capacity continuing to ramp and the purchase accounting implications of the regional homes acquisition.
As of September 30th 2023, we had $701 million of cash and cash equivalents.
And long term borrowings of $12 million with no maturity until 2029th.
Generated 54 million of operating cash flows for the quarter compared to $231 million for the prior year period.
The decrease in operating cash flows is primarily due to lower than that income and the working capital impact of producing seeming units in the prior year.
During the quarter, we allocated $143 million of our capital for the strategic purchase of common and preferred shares a V C out of the capital.
Subsequent to quarter, and we used $318 million of cash to purchase the regional home.
In addition, we assumed $93 million of that primarily related to inventory for a plan liabilities.
We remain focus and executing on our operational initiatives and get some that are favorable liquidity positions plan to utilize our cash to reinvest in the business and for opportunities that support strategic longterm growth.
Since closing down the E C N investment we've been working to develop a business plan for the strategic partnership with Triad financial services, including the rollout of champion financing branded for plan programs for a retail and community channel partners as well as tailored retail loan program.
For a retail network.
As a reminder of the partnership is an asset like structure, leveraging triads existing origination and servicing infrastructure and E. C. M funding capabilities, which include relationships with community banks and leading institutional investors with no loan risks on the Skyline champion Dallas.
She.
The way.
We began the integration of regional homes upon closing up the transaction in mid October.
The teams have been needing to share best practices and to begin to capture synergies.
As a reminder, we anticipate cinergy calf, sir of $10 million to $15 million over the next two years, including manufacturing procurement synergies leveraging our national footprint and operational improvements from sharing of best practices across the production and sale.
The regional balance sheet, including a retail finished goods inventory will be reevaluated to its fair value and will negatively impact the company. It's consolidated gross margin in the next several quarters as those homes are retail soul.
In addition, SG&A will increase for the amortization of intangible assets generated from the acquisition.
I will now turn the call back to Mark for some closing remarks.
Thanks Lori.
Marriage through to rebalance channels, we believe skyline champion as well positioned due to our affordable price point.
<unk> <unk> issues.
The longterm outlook for demand is supported by the channel opportunities with Covid or do you read.
<unk> and <unk>.
For growth.
Well as helping our retail partners.
And consumer demographics.
The need for affordable housing continues to grow each and every day and we believe that the elevated cost of homes, where you will drive more traditional.
To our homes.
Before we open the lines for Q&A I wanted to take a moment to think or people.
Entire Scoreline champion T.
Consistently strong performance as a result of the amazing things for each and every day.
So with that operator now open the lines for cute.
Thank you we will now be conducting our question and answer session. If you would like to ask a question. Please press star one on your telephone keypad. The confirmation tunnel indicate that you're lying isn't the question Kim.
You May press start you if you would like to remove your question from the queue for participants using speak our equipment and may be necessary to pick up your handset before pressing the star keys.
Our first question is coming from Greg Palm with Craig Hallum Capital Group. Please proceed with your question.
<unk>, thanks for taking my questions.
I wanted to start with you know gross margin it it it sounds like in the corner you know maybe the weaker than expected result was more of a function of somebody's plant operating cost you know versus maybe increased competition or discount and so I just wanted to make sure that was right and it just sort of go.
Forward. It is the thought process that you're maybe keeping more employees on are keeping more shifts in preparation for that recruit Turner of of of demand is is that why you know one of the reasons why I gross margin is gonna maybe stay at a little bit you know subdued here in the near term.
Yeah cause like I think that sums it up pretty well you know we we are definitely seen in addition to the things that you mentioned a product that product next shift that that we were anticipating but to a greater degree as well so yeah.
Yeah.
And it just in terms of may be quantified in a little bit more relative to you know just previous quarter.
What what kind of compression should we expect you know over the next quarter or two.
Yeah for the next few quarters were definitely you know it's gonna be there's a lot of moving parts. So we're going to continue to see that product next shift with the consumer trying to reach immortal more affordable monthly payment with interest rates, where they are today.
And as well as the ramping plants and then the impact of the regional purchase accounting to on gross margin. So we're expecting it you know probably around 200 basis points.
And the the purchase accounting there was kind of 40 to 60 basis points.
Yeah, I did mentioned that last quarter, we're still working through all the numbers based on the closing balance sheet Yep.
Okay.
And then I I don't know if you can maybe talk a little bit more about champion financing and what that looks like over the next you know one or two years I know you see and the partner here they've publicly stated the expectation of that JV contributed.
40 million of pre tax income per partner and and calendar twenty-five I think maybe they said at least 40.
And if I remember right is that something you want a blast as well and if that's the case just kind of curious you know what what that ramp might look like over the next couple of years.
Yeah, Gregg I think I think the ramp you know is out there I think <unk> mentioned 12 to 24 further 50 per cent. So I think that's where you're looking at the.
That piece for that you know the the Jv's, obviously in a great position, we're very excited about that especially.
The banking conditions that we're seeing today.
I think the fact that Ah E C. N has capital flow partners from Black Sterling Carlo.
There is tremendous in today's market, we've already seen two or three banks start to regional and community banks start to exit out of the blending space for our customers.
And it has you know there's further pressure and we anticipate some further pressure on regional and community banks.
Making sure our customers have access to liquidity is very important for our dealers and obviously our community partners handover developers as a matter of fact.
So I think I think having that partnership with D. C. M. As he was quite old, especially with the strong relationships. They have a blackstone carwile, who committed an additional $1.3 billion for the capital so confusing liquidity into the market when community original bank. So that that really is a strong.
Like forward to us so that was already mentioned were getting things set up right now.
We anticipate will have the system. Some other things ready to go by January time period.
And so we're really start to ramp up yearly calendar year of 24, and so I think everything is on track for that.
The teams are working very well together.
Yep.
To be clear I I was talking calendar twenty-five I think they mentioned 12 to 24 and calendar 24 is that right.
Yeah, that's cool.
Yeah, Okay. That's okay I will leave it there thanks.
Thanks, Greg.
Thank you. Our next question is coming from Daniel more with C. J S. Securities. Please proceed with your question.
Yes, Thanks, Good morning, Mark Martin Laurie.
First off just wanted to clarify comments Mark I I think you said two.
Two three revenue up mid to high single digits sequentially is that correct and if so is that organically or inclusive of regional.
You know, that's that's inclusive of regional scam and that and that number yeah, we expect somewhere at least in that range mid to high single digits at least for the quarter.
Sequentially.
Got it and it sounds like some communities returning some still destocking are there any discernible differences be regional or other that you can sort of identify or is it more community versus community by community.
It it's really more community by community, we've seen actually a handful of communities returns they've been starting to order and and you know get back on a mammal cadence others are still in that Destocking process. So it's you know I don't Wanna say, it's 50 50, <unk>, but it's definitely there's there's a split between the commune.
Cities that are starting to move and others are still kind of in that pause mode.
Got it and what can you say just in terms of kind of longer term progress to Genesis solutions, making.
You know we focus on those top 100 builders, but even beyond that in terms of sort of converting to your solution I recognize it takes.
Here's not quarters, but what's the sort of.
Mentum or cadence of those those dialogues.
<unk> is.
It's phenomenal actually I think you know now that the interest rates have stayed up a little bit and they are forecasted to stay up a little longer.
According to the fed.
It's really causing builders to take a look at.
It worked at outlook is.
Right now a majority of builders are buying downloads to really drive their volumes you know I I look at our and I look at our quarter.
We had ordered growth of 20% sequentially and orders year over year grew by 250 per cent.
And that's with no buydowns no real incentives to drive volumes. So I think the affordable price points there in with their cost of capital for small to mid tier builders kind of ranging in that 14% range for development.
That really can drive.
That's a huge incentive for them to switch to our solutions to where we can save them. You know nine to 12 months of cost of capital time. So it's tremendous so I'd say the momentum is.
Definitely picking up, especially now that people are looking out.
The fact that Buydowns can't last forever.
And the feds extending longer I think that really is a motivation for builders to.
What can an alternative because we can't do it otherwise.
Got it helpful and last for me just circling back to the gross margin appreciate the the color commentary you know 200 pips come back down to the 23 per cent range, maybe maybe a little conservative will see it.
Talk worry about you know when we get through the purchase accounting and get to maybe back to 60, 65% utilization, where you see margins leveling off even at this new let's.
Let's see if it's a new norm for a longer period of time in terms of lower price points mix et cetera.
Where you sort of see us leveling off over the next four to eight quarters. Thanks.
Yeah, Dan. Thanks for the question you know, we still think that our long term structural margin targets are you know in that mid 20 per cent range. So I do believe that we're gonna get back to you know the the terrorists that we talked about historically, it's just gonna be bumping for the next few quarters.
Alright, very helpful jump back when they follow ups next.
Thank you. Our next question is coming from the line of selling with Jeffries. Please proceed with your question.
Hey, Mark [noise], you sound very excited about this direct to build a channel.
Certainly you have some excess capacity right now with a softer demand backdrop, what's your ability to kinda vivid to serve that channel a little more Fuller is there anything you gotta deal on the labour fun or the facilities.
No. Thanks for the question so no the part of the reason we're running this quarter, we ran at 53 per cent capacity utilization.
Part of the reason, we're choosing to run out kind of less than optimal capacity utilization.
Is is really to make sure we have that available capacity to enter that channel.
You know right now is that pressure point and I think a lotta builders have been buying dominates doing that.
In view that it would be a short term they just need to do it for a few quarters.
To get through to keep Theirselves up I think now that it's more of a a marathon less than a sprint.
Right by now I think they're starting to reconsider so I think.
We've got this infrastructure in place to move into that channel very quickly.
Which is why I think the pipeline is shaping up the way it is for us.
Okay. That's helpful. And then how do you see this you see an integration rolling out and progressive call in the next six to 12 months any big mile March you want to achieve a head of spring selling season, and then you call that how having this partnership now gives you better access to liquidity, especially in an environment, where credit is a little tougher.
Does it help on the right side of things as well do you consumers get a more competitive right now versus when you didn't have this partnership previously.
Yeah. So we we haven't done anything to to drive rates in a different way. There are some benefits I think to our partners in terms of rate that we can look at especially you know with our turnkey solutions that we're offering so I think you know if they're using if there by.
I am from us if they're using their construction services, they're using you know our floor plan and other things you know I think overall, we can look at it from a D V D or a volume discount basis that will definitely help them in some ways.
I really think the the benefit for them is going to be a few fold one gets access to liquidity.
Two is the.
The speed that we're going to deliver so we're working hand in hand with D. C. M. In the champion financing program really to deliver a great customer experience faster turnaround times better offerings in terms of what we can deliver it to them and.
And then I think the third pieces really just like I said, a suite of services to where they have one partner they can deal with for for multiple needs and.
Obviously.
Competitive rates to the consumer.
Really what it's all about.
Super just one last one for me how do you kind of see your sales Canadians kind of wrapping up the fourth quarter you cause you talked about three Q.
Kind of a noisy year, so it'd be helpful to kind of get your perspective and how.
The shape of year wraps up and and do you expect price pricing and Mexicana stabilize here or there could be celebrated et at a greater degradation and tobacco.
Yeah, I think I think there's gonna be a little bit of noise right. I mean, we're gonna have some choppiness as we integrate regional they have a different price point and other things that will have to bring in here, but you know I I would see I would see revenue up sequentially and then continue to grow into spring.
As as the market ramps. Some you know some of the community customers continue to come back.
I I really think it's a physician very well asp's are going to be a little bit noisy to be honest just because.
With the mix of retail versus manufacturing, you're gonna see kind of.
Volatility in in rates just in terms of all a bit of noise, which is not really price deterioration or increases it'll be more.
Mix oriented as Lori mentioned earlier.
And then regional mixes down or up or you want to make sure. He made some comment about integrated region I just want to make sure that afflicted.
Yeah. So original is seen the next shift to that we're seeing more broadly across all of the plants fell so where last year. They had higher prices of their prices are coming down as well just due to the next shift and and the monthly payment price points at the customer's Friday.
So we do expect Asp's that come down you know just generally sequentially from the second quarter to the third quarter and probably say you know in that range for the next few quarters as we work through that that leveling of.
Oh next.
Okay.
Okay.
Mhm. Thank you.
Thank you. Our next question is coming from my style with RBC capital. Please proceed with your question.
It's actually <unk> out for Mike just to follow up on the regional.
<unk> now that the deals clothes is there any more specifics you can provide on terms of expected.
Contribution in next corner and then to.
Four Q just given the additional color you have now.
Yeah, we don't Chris. Thank you for the question, we don't breakout regional separately in terms of the guidance I think they're wrapped up in their overall state who knows.
You know, how we see the third quarter shaping up.
Understood and then just a shifting on shifting.
Shifting towards the many changes in the.
<unk>.
Core customer dynamics following the the move up higher than rates and have you seen a change in order trends in the last.
A month or two how is.
The financing environment shifted in response to the move higher like our spreads have spreads expanded in any color you can provide on on the health of the core image consumer today.
Relative to a few weeks back in the financing changes.
Yeah. Thank you, Chris I think you know I'm actually fairly fairly confident in the consumer right now.
You know directly is is the fact that we're our our unit volumes in our order rates have picked up 20 per cent sequentially.
And like I said earlier, I think 250 year over year per cent.
And that's without incentives. So I think that we're seeing that drive to affordability seeing customers look for a better alternative than we don't really have to drive huge financial incentives to capture that customer base. So I think that outlook.
Is it is shaping up very well for us in terms of that our customers right now are seeing probably we're seeing rates probably the best rates, we're seeing right now for channel or about 8.5%.
I would say the average is probably closer to eight.
Eight 9% you know if they're poor credit during the 10 11, 11.5%.
So you know, but it's a great spread right now in some cases you know.
Just the 100 basis points, we're seeing for channels, which is very competitive in.
In the marketplace today so it's.
It's a great value for consumers.
<unk> questions.
Thank you we do have a follow up question coming from the line of Greg Palm with Craig Hallum Capital Group. Please proceed with your question.
Yeah. Thanks for taking the the follow up can apart from me you know are excluding this purchase accounting you know, we'll regionals gross margins be accretive or are they kind of you know in line with kind of that mid twenties gross margin I I forget whether you've talked about that before but maybe you can remind us.
Yeah, they're a little bit lower so we've got to work on bringing in lesson urgent capture over the next couple of years.
Oh.
Okay got it so maybe that's part of the the the make shift as well and then just you know thinking thinking you know longer term I know, Laura you mentioned kind of getting back to the mid 20th but but why wouldn't it be you know.
Hi, or whether it's in that kind of 26 to 27 per cent range that that you were talking about previously or even somewhere in the the the the higher 20th is just you know under more normal capacity utilization levels, you mentioned the cinergy capture it it just.
It feels like but I just wanted to maybe.
Flush that out a little bit more if I could.
Yeah.
The 26 27 seven per cent, so certainly doable at normal capacity levels, and obviously as volumes increase.
Upside potential there too. So you know we see it in that range 25 27 whatever.
Yeah, Okay. So it doesn't sound like anything sort of change you you know it.
Getting back to that level or longterm versus what we were thinking last quarter.
From a long term perspective now.
Yep, Okay, alright understood. Thanks for taking the follow us yeah.
Yep. Thank.
Thank you and it appears we have no further questions at this time, so I'd like to pacify back over to Mister you asked for an additional closing remarks.
I'd like to thank everyone 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 third quarter call. Thank you and have a great day.
Thank you ladies and gentlemen does does include today's teleconference. Once again, we thank you for your participation and you may disconnect your lines at this time.
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