Champion Homes, Inc.

Good morning and welcome to Skyline Champion Corporation's first quarter fiscal 2023 earnings call. The company issued an earnings 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 Treasury Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to depart materially from the company's expectations and projections. Such risks and uncertainties include the factors set forth in the earnings relief and in the company's silence with the Securities and Exchange Commission. Additionally, during today's calls, the company will discuss non-GAAP measures, which it believes can be useful in evaluating its performance. A reconciliation All of these measures can be found in the earnings release. I would now like to turn the call over to Mark Yost, Highline's Champions President and Chief Executive Officer. Please go ahead.

Thank you for joining our earnings call, and good morning, everyone. Joining me on the call is Lori Huff, EVP and CFO. Today, I will briefly talk about our first quarter highlights, then provide an update on activities so far in our second quarter and wrap up with thoughts about the balance of the year. Following a very strong fourth quarter and an excellent year, we are pleased to report that fiscal 2023 is off to a strong start. During the first quarter, we grew net sales by 42% and adjusted EBITDA by 159%, expanding margins by more than 1,000 basis points. Our solid performance continues to be driven by initiatives focused on increasing production levels through improved operations, added capacity to satisfy the demand for our products. During the quarter, we continued our progress with these efforts in addition to the production of disaster relief housing for FEMA, pricing tailwinds, and a disciplined cost management. Production volumes were up again on a year-over-year basis, as our focus on product rationalization is leading to increased output, which allowed us to reduce backlogs on a sequential basis. The team's ability to produce more quality homes during the quarter was also due to the production ramp of our Navasota, Texas plant. We expect output at this plant to increase for the remainder of the year as it reaches optimal run rates. The operations team far surpassed expectations in the production of FEMA disaster relief units this quarter. During this quarter, we produced almost 90% of the $200 million order, which was more efficient than we had anticipated. Many of these units were in finished goods at the end of June, awaiting shipment or acceptance by FEMA. As a result, during the quarter we recorded approximately $83 million worth of revenue from the disaster relief units. Nearly all the remaining balance is expected to be recognized in the September quarter. In total, we delivered 6,813 homes in the U.S., an improvement of 7% from the prior year and up 4% sequentially. With the inclusion of our recent maintenance acquisition into our capacity calculation, our capacity utilization remained at 72% for the quarter, compared to 72% in the sequential March quarter, as higher production levels were offset by FEMA product mix and the inclusion of the EIDL facility in Laurenburg, North Carolina. Speaking of the maintenance acquisition, we closed on the asset purchase of Mainus Custom Builders in mid-May, and the integration activities are well underway. This investment in a two-plant manufacturing campus and one retail sales center in North Carolina allows us to expand our manufacturing footprint and build upon our efforts to streamline our product offerings in the southeast of the U.S., a region that's seeing strong growth as a result of key secular trends in demographics and home buying in that region. We saw stable gross order rates during the quarter, with sequential orders remaining flat after adjusting for the FEMA units. We saw orders moderate at our independent retailers during the quarter, but see healthy demand across other key sales channels, specifically the community REITs, the Build Direct channel, and increasing builder developers. In terms of cancellations, we saw minimal activity at the end consumer level as the need for affordable housing is only growing stronger, especially as apartment rental rates continue to rise. And we continue to convert more traditional site-built buyers to our more affordable housing solutions, a trend that should continue in this economic climate. As we anticipated in our last call, we did see dealers starting to right-size the number of display models at their sales center to control floor plan financing interest expense as interest rates rise. We expect this to continue through the end of the September quarter. Customer traffic and quoting activity in the first quarter was down about 20% year-over-year at retailers, but the quality of buyers remained strong and pull-through order rates at retailers are up versus last year. Backlog at the end of June was down $264 million to $1.4 billion compared to the March quarter, while the year-over-year increase in backlog was the result of home orders at higher pricing levels. Our improved production capabilities, the production of almost 90% of the FEMA disaster relief housing, and our enhanced footprint led to a sequential decline in lead times. which at the end of June was 28 weeks compared to 35 weeks at the end of the March quarter. We are confident that we will continue to see increases in production levels with the goal of reducing backlogs to pre-pandemic levels of four to 12 weeks. Getting lead times back to our historical levels helps the home buyer lock in pricing and financing, as well as benefits our direct sales channels to better meet the needs of our end customers. From an industry standpoint, demand remains healthy as rising rental rates, higher interest rates, and inflationary pressures are intensifying the need for affordable housing. The current environment has increased the awareness of our housing solutions, and our investments in enhancing the buyer experience has allowed us to convert more traditional site-built buyers and expand our market share. To further increase awareness, in June, we brought two homes to the Innovative Housing Showcase in Washington, D.C. to promote the value of factory-built housing to policymakers, the media, and homebuyers. Our homes were very well received. Interactions like this allow us to more efficiently promote the needs for expanded zoning access and financing for our housing solutions. During the quarter, we saw improvement in the supply chain and labor availability. These signs of improvement are encouraging indicators of our production levels and our ability to deliver additional output. In the near term, we continue to expect headwinds in pending supply chain disruptions emerging around Labor Day and ongoing transportation challenges with the availability of drivers. As we look forward, market conditions remain healthy with the historically low affordable housing supply favorable demographics, and population migration. With rising interest rates and inflation, we are seeing traditional site-built homebuyers moving into our more value-oriented factory-built home solutions. Focusing on the longer term, it is becoming more evident every day that the antiquated system of traditional homebuilding is not sufficient to meet the needs of today's customers. Due to the early successes we have seen in both manufacturing technology and consumer digital access, we will be ramping up our investments in these areas to make homes more affordable and attainable for our customers. A focal point of these investments in 2023 and into 2024 will be enhancing the customer buying experience. In June, we entered into agreement with Altacima and acquired 12 of its factory expo home centers located at our manufacturing facilities across the country. This acquisition emphasizes our commitment to elevating the customer experience directly with those consumers as Altacima derives the majority of its leads through a variety of digital marketing campaigns. In summary, we remain optimistic with the opportunities in the current environment that presents itself, and we are increasingly confident in the runway for long-term growth as our strategic initiatives and operational improvements continue to enhance Skyline Champions' product offering and ability to gain share. I will now turn the call over to Lori 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 expectations. During the first quarter, net sales increased by 42% to $726 million compared to the same quarter last year. We saw revenue growth of $204 million in the U.S. factory-built housing segment during the quarter, which was driven by an increase in the number of homes sold and an increase in average selling price. The increase in number of homes sold was 7%, or 441 units, for a total of 6,813 homes compared to the same quarter last year. U.S. volume increases were attributable to shipments from the Navasota, Texas plant and streamlining of our core product offerings. FEMA unit sales during the quarter totaled $83 million. We produced almost 90% of the $200 million delivery disaster relief order during the quarter and will recognize the majority of this revenue in the September quarter as the units are shipped and accepted by FEMA. The average selling price per U.S. home sold increased by 35% to $97,000 due to price increases to offset inflation brought on by rising material labor and transportation costs. In addition to price increases, FEMA sales this quarter drove about a third of the ASP increases as these units have more specifications than our typical homes. On a sequential basis, revenue in the U.S. factory built segment increased 14% in the first quarter of fiscal 2023 compared to the fourth quarter of fiscal 2022. This increase was driven by an 11% increase in average selling price per home and a 4% increase in the number of homes sold. The sequential volume growth during the quarter was driven by an increase in production levels, and as Mark mentioned earlier in the call, would have been higher had we seen more favorable timing of shipments as our finished goods inventory increased by $54 million. We expect this to even out in the September quarter as SEMA units produced are shipped and recognized as revenue. Canadian revenue increased 19% to $45 million compared to the first quarter of last year, driven by a 30% increase in the average home selling price, partially offset by a 9% decline in the number of homes sold. The higher average home selling price in Canada of $128,000 was driven by price increases and acted in response to inflationary pressures on our input costs. The decline in volume was caused by the timing of home shipments reflected in increased finished goods. Production volumes at our Canadian plants were consistent with prior year levels. During the quarter, we saw a shift in our product mix in Canada to more multi-section products, which led to a sequential decline in unit solds. Consolidated gross profit increased to $229 million in the first quarter, up 106% versus the prior year quarter due to higher volumes in average selling prices, while also benefiting from the higher priced FEMI units and lower lumber costs. Performance during the quarter also reflects our ability to maintain the structural margin profile across our core products on a sequential basis. reflecting the returns on our investment in operations and footprint. Our U.S. housing segment gross margins were 31.7% of segment net sales, up 1,010 basis points from the first quarter last year. The improved operating efficiencies and higher prices on FEMA unit sales helped to increase gross margin this quarter, in addition to strong demand and pricing and continued product standardization, which all led to increased production and leverage of fixed costs. SG&A in the first quarter increased to $72 million from $54 million in the same period last year, primarily due to higher variable compensation driven by higher revenue and profitability. The increase in SG&A also reflects additional investment in capacity and ongoing investments to enhance the customer buying experience. The online customer buying experience remains a key initiative, and we expect incremental investments to continue through fiscal 2023 and into 2024. Net income for the first quarter was $117 million, or $2.04 per diluted share, compared to net income of $43 million, or earnings of $0.75 per diluted share, during the same period last year. The increase in EPS was driven by higher sales and improved operating efficiencies, resulting in improved profitability. The company's effective tax rate for the quarter was 25.7% versus an effective tax rate of 24.6% for the year-ago quarter. Adjusted EBITDA for the quarter was $163 million, an increase of 159% over the same period a year ago. The adjusted EBITDA margin expanded by more than 1,000 basis points to 22.4% due to gross margin improvement and leverage of fixed costs. In the near term, we continue to be confident in our ability to navigate the current economic environment because of the structural improvements we've made to our operations and our product offerings, as well as our ability to pull on cost levers such as price adjustments and raw material substitutions. As we move through fiscal 2023, we do believe that margins will normalize back to fiscal 2022 levels after the one-time effect of FEMA subsides. In addition to anticipated headwinds to our product mix and margin, as consumers seeking relief on rising monthly payments will move to homes with less options. As of July 2nd, 2022, we had $464 million of cash and cash equivalents and long-term borrowings of $12 million with no maturities until 2029. We generated $47 million of operating cash flows for the quarter, an increase of $16 million compared to the prior year period. The increase in operating cash flows is primarily due to the increase in net income which was partially offset by an increase in inventory, accounts receivable, and capitalized cloud computing costs. We expect the inventory and accounts receivable increases to normalize somewhat by the end of the September quarter. We remain focused on executing on our operational initiatives, and given our favorable liquidity position, plan to utilize our cash to reinvest in the business to support strategic long-term growth. I'll now turn the call back to Mark for some closing remarks.