Skyline Champion Corporation (NYSE:SKY) Q3 2024 Earnings Call Transcript

Skyline Champion Corporation (NYSE:SKY) Q3 2024 Earnings Call Transcript February 6, 2024

Skyline Champion Corporation  isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, and welcome to Skyline Champion Corporation’s Third Quarter Fiscal 2024 Earnings Call. The company issued its earnings press release yesterday after the close. 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 in the earnings release and in the company’s filings with the Securities and Exchange Commission. Additionally, during today’s call, the company will discuss non-GAAP measures, which it believes can be useful for 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. Once again, I would now like to turn the call over to Mark Yost, Skyline Champion’s President and Chief Executive Officer. Please go ahead.

Mark Yost: Thank you for joining our earnings call and good morning, everyone. I am pleased to be joined on this call by Laurie Hough, EVP and CFO. Today, I will briefly talk about our second quarter highlights and then provide an update on activities so far in our third quarter and conclude with our thoughts on the balance of the year. We saw healthy demand from end consumers through our captive and independent retail channels during the quarter. The Community REIT channel continues to be slow and home sales in our builder developer and retail channels improved year-over-year, while activity from our Community REIT customers remained relatively muted, primarily reflecting seasonality and inventory destocking. The year-over-year results indicate a sustained trend in customer demand towards more affordable homes with fewer options and lower material surcharges.

This led to a decrease in average selling prices per home compared to previous year. Additionally, organic order volume grew by over 230% compared to the same quarter last year. This is in line with what our independent and captive retail partners are expressing on the positive demand outlook for attainable homes. Backlog as of December 30th was $290 million compared to $258 million at the end of September. With the sequential increase primarily attributed to the acquisition of Regional Homes. Average lead times remained stable at approximately eight weeks, consistent with our historical range of 4 to 12 weeks. Throughout the quarter, we successfully pursued our operational and strategic priorities, making significant headway in integrating Regional Homes and rolling out Champion Financing.

Regarding Regional Homes, we initiated cultural and management integration from day 1, facilitating the exchange of best practices across our production and retail divisions. We foresee opportunities for revenue growth by leveraging our expanded retail presence due to our scale and improved responsiveness to market demand. The realization of synergies is also well underway and we expect the identified synergies to start positively impacting our profitability in the fiscal fourth quarter. These synergies primarily revolve around purchasing, operational enhancements and other cost savings measures. We maintain our expectations of capturing $10 million to $15 million in synergies over the next two years. During the quarter, we successfully launched our new captive financing joint venture, Champion Financing, and we are making progress in utilizing our new capabilities to provide more comprehensive solutions to our partners and customers.

This is crucial for enhancing accessibility and affordability to our customers, while driving accelerated growth for our business. These investments are in line with our longer-term strategic vision providing digital configuration and enhanced selling options to homebuyers. As we expand Champion Financing, we anticipate the benefits to foster stronger connections with our dealers and end consumers. Furthermore, we expanded our capacity during the quarter with the opening of a new plant in Bartow, Florida to support our growing builder developer channel in the region. We are seeing more interest from builder developer channel and anticipate increased adoption not just because interest rates are at elevated levels, but also because of the reduced time to project completion.

We have had good traction at the International Builders’ Show historically and anticipate strong interest later this month in Las Vegas. These investments collectively present an exciting opportunity as we bolster our initiatives to generate long-term growth. Further establishing Skyline Champion as the preferred provider of attainable housing solutions. As we look to our fourth quarter and future outlook, we continue to experience healthy demand from both retailers and builder developers. The consistent order rates from these key stakeholders have been instrumental in driving our growth. Furthermore, as our community partners begin to reenter the market, we are prepared to increase capacity utilization our manufacturing facilities. Looking ahead, we expect our revenue to remain flat sequentially as our third quarter performance was better-than-anticipated and weather and pricing will be tailwinds in the fourth quarter.

Our long-term outlook remains positive. We are proud to share that, we have achieved six consecutive quarters of order growth, underscoring the sustained demand for our products and the need for smarter housing solutions. On a macro level, we continue to see healthy job and wage growth, particularly in sectors such as healthcare, manufacturing and retail. Key areas that form some of the foundations of our customer base. Additionally, trends in job growth and inflationary pressures will mean the Fed will continue to hold interest rates at higher levels for longer. These factors bode well for the stability of our future demand as growth in these income demographics combined with higher interest rates and the absence of attainable housing correlate with our price points and product offerings.

On a micro level, we heard some of these same factors at our industry show in Louisville, in mid-January. The attendance and tone of the show were positive. The community REITs were consistent in their view that, 2024 will be a better year than 2023. In addition to the favorable commentary on market conditions heard at the show, our launch of Champion Financing generated considerable excitement in the market and new future opportunities. I will now turn the call over to Laurie to discuss the financials in more detail.

Laurie Hough: Thanks, Mark, and good morning, everyone. I’ll begin by reviewing our financial results for the third quarter, followed by a discussion of our balance sheet and cash flows, I will also briefly discuss our near-term expectations. During the third quarter, net sales decreased 4% to $560 million compared to the same quarter last year. The decrease in net sales reflects a 2% year-over-year decline in average selling price, driven by a decrease in material surcharges and changes in product mix with consumers opting for less auctioned homes. During the quarter, we sold 5,643 homes in the U.S. compared to 5,749 homes in the prior year period, as we aligned production volumes and staffing levels with demand. On a sequential basis, the U.S. factory-built housing revenue increased 22% due to the regional acquisition, which contributed approximately $120 million to revenue during the quarter.

Excluding the Regional Homes acquisition, revenue was down approximately 5% sequentially, primarily due to normal seasonality. Our average selling price per home increased 4% sequentially from $88,400 to $92,300 due to the increase in homes sold through captive retail sales centers, as a percentage of the total. Excluding the Regional Homes acquisition, our average selling price per home decreased consistent with our expectations. Capacity utilization increased to 57%, compared to 53% in the sequential second quarter of fiscal 2024. Canadian revenue during the quarter was $31 million, reflecting a 9% decrease in home sold, partially offset by an 8% increase in the average home selling price. The average home selling price in Canada increased to $123,700 due to a change in product mix.

The decline in volume was caused by softer demand in certain markets. Compared to the prior year period, consolidated gross profit decreased 19% to $141 million in the third quarter and gross margins contracted by 460 basis points to 25.3%. The contraction in gross margin was primarily due to lower average selling prices in the U.S. and the shift in product mix to less optioned homes as well as the ramping of our previously idled facilities and the impact of the Regional Homes acquisition. Regional Homes core product margins are generally lower than the legacy Skyline Champion margins. In addition, consolidated margins were negatively impacted by the effect of purchase accounting increases to the carrying value of regional finished goods inventory, which had a negative 60 basis point impact on consolidated gross margins during the quarter.

We expect this purchase accounting impact to continue and potentially increase for the next few quarters. SG&A in the third quarter increased $13 million to $85 million primarily due to the Regional Homes acquisition, partially offset by lower variable compensation at existing operations. Net income for the third quarter decreased 43% to $47 million or $0.81 per diluted share, compared to net income of $83 million or earnings of $1.44 per diluted share during the same period last year. The decrease in EPS was driven by the decline in sales and gross profit. The company’s effective tax rate for the quarter was 21.4% versus an effective tax rate up 23.1% for the year ago period. The decrease in the effective tax rate was primarily due to tax benefits from tax credits.

Adjusted EBITDA for the quarter was $66 million compared to $109 million in the prior year period. Adjusted EBITDA margin was 11.8% compared to 18.7% in the prior year period, which reflects the return to more normal profitability levels. In the near-term, we expect a sequential decline in gross margins as homebuyers continue to move toward homes with fewer options and as we further ramp our new plant operations and sell off the finished goods inventory acquired with the Regional Homes retail sales centers. As we approach more normal profitability levels in the industry, we remain confident in our long-term structural margin targets supported by improvements in our operational capabilities and investments in the business. As of December 30, 2023, we had nearly $500 million of cash and cash equivalents and long-term borrowings of $25 million with no maturities until 2026.

We generated $89 million of operating cash flows for the quarter compared to $85 million for the prior year period. Operating cash flows were positively impacted by a reduction in finished goods inventory subsequent to the closing of the Regional Homes acquisition. During the quarter, we allocated $285 million of cash to purchase Regional Homes, net of cash acquired and assumed $88 million of debt primarily related to inventory floor plan liabilities. 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.

Mark Yost: The long-term future looks bright for our company with sustained demand from retailers and builder developers, the resurgence of our community partners and the enduring need for affordable housing, we are well-positioned for continued growth and success. Furthermore, our strategic expansions into digital and consumer retail along with financing are poised to further enhance our competitive edge and drive the value for our stakeholders. We remain steadfast in our commitment to deliver sustainable growth and value creation and we are excited about the opportunities that lie ahead. Before we move on to the Q&A session, I would like to express our gratitude to the entire Skyline Champion, Regional and ECN teams for their exceptional efforts, which have been instrumental in our consistently strong performance. And with that, operator, you may now open the lines for Q&A.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from Greg Palm from Craig-Hallum Capital Corp.

Greg Palm: Maybe start with giving us a view on kind of visibility into kind of those orders from the community channel, based on your discussions and maybe how that sort of relates to your view or opinion on how the year progresses?

Mark Yost: I think the communities are starting to resurge or starting to come back in their order patterns. I think it will kind of slowly evolve through this fourth fiscal quarter and then start to ramp into first, second quarters of next year. So I think overall, you’ll kind of see that spotty resurgence of communities kind of starting to return to market. So I think it will be in pockets, and then it will start to take off towards the tail end of that. But I think each community is in a different phase of that. Some have started to return to market and others are still spotty with their returns. So, I expect it to phasing gradually throughout the fiscal 2025 year.

Greg Palm: And how does that kind of impact your view on sort of sequential growth as we progress through, I guess, either this calendar year or through fiscal ’25, at least the first half?

Mark Yost: Yes. So, for our fourth quarter, I expect things to be relatively flat. For fiscal 2025, we are kind of thinking revenue in total, it’s going to be up somewhere in the 10% to 15% year-over-year. Really as the communities start to ramp back up, volume will increase year-over-year, but I expect due to pricing and mix that we have seen, the prices to come down. So you kind of have a tradeoff between price and mix happening into next year, which will kind of offset some of the volume growth will be offset by pricing declines due to mix.

Greg Palm: And then on builder developer, open up a new plant, can you just give us some sense on how, I guess, the order rates are flowing from that initial top 100 win? What your expectations are for sort of additional onboarding of customers. Yes, let’s start with that.

Mark Yost: Yes. Builder developer this quarter was in percentage terms our strongest growing segment. Builder developer was the fastest-growing segment for us this quarter. Very pleased to see that progress, and part of that is due to this top 100 builder that we mentioned they’re starting to place orders, and so we’ve seen good growth. We’re starting to land more builder developer opportunities. We’re getting some in the Midwest. We’re starting to move in different sectors. I think it really comes down to the timing of their development deals and whether that’s going to hit early or late into some of the fiscal 2025 timelines. It really depends on permitting and land development timing for some of those. But I think the activity for builder developer has been excellent. We will be attending the IBS, International Builders’ Show here in just a few weeks and expect more opportunities to arise out of that as well.

Greg Palm: Looking forward to, seeing some of those homes and seeing what interest levels are. Just to clarify, that 10% to 15% comment for fiscal ’25, is that inclusive of Regional? How much of that is organic?

Mark Yost: Yes. That’s just total year-over-year. Yes, inclusive of everything consolidated.

Greg Palm: I will leave it there. Thanks.

Operator: Our next question comes from Daniel Moore from CJS Securities.

Daniel Moore: Quick housekeeping and then a couple. I think you said Regional contributed $120 million during the quarter. Just give us a sense of what their pro forma growth or decline was on a year-over-year basis and do you anticipate similar contribution this quarter?

Laurie Hough: Yes. Dan, we’re not disclosing the quarter over quarter, specifically for Regional. You can look at the pro forma information that we filed in the 8-K at the end of December, just to get a feel that, that’s all we’re disclosing at this point.

Daniel Moore: Appreciate the color on the community developers. On the REIT channel, Mark, what are you hearing there in terms of you expect it sounds like gradual pickup, as we get past this quarter. Are you hearing about demand building potentially from that key end market as we look out to the balance of calendar ’24?

Mark Yost: Yes. I think it just depends on which community player starts to return. They’re all kind of phasing in a different time stamp. As they phase in and come together, I would expect them to gradually ramp. Some are kind of returning, I don’t want to say, full steam, but nearly back to normal. Where we’re seeing others that are slowly trickling in. I think it will culminate in the next few quarters with them starting to return to market, but it will take a little bit of time for them to get there.

Daniel Moore: One more. Just talk about the progress you’re making in terms of standing up the Triad JV, as expected from a timing perspective. Any sense of what contribution from Triad? It might look like over the next one to two quarters on the P&L? And longer-term, ECN had put out some financial targets in the time the deal was announced. Just wondering if you have any comment on how achievable those look from your perspective?

Mark Yost: It’s pretty early. We’ve launched the Champion Financing JV at the Louisville show just recently a few weeks ago. So we’re getting some early signs. I think it’s a little early for us to comment on the exact trajectory of that or how quickly it will ramp. It’s been very successful in its launch, but how quickly those things come together, I don’t think we are giving guidance on at this point.

Operator: Our next question comes from Phil Ng from Jefferies.