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.

Thanks, Laurie. While the current economic environment has raised a level of caution with the consumer due to the sustained inflation, rising interest rates, and global uncertainty, we believe Skyline Champion can continue to outperform the broader housing industry due to our affordable price points, strategic positioning, and core initiatives. The outlook for demand is supported by the channel opportunities with Community Wreaths, Build to Rent, and the builder developers, as well as helping our retail partners adapt to different consumer demographic channels where we continue to make progress and remain excited about. 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 into our homes. Before we open the lines for Q&A, I want to take a moment to thank our entire Skyline Champion team. They're absolutely amazing, as our consistently strong performance is a result of our focus, hard work, and ability to increase output for our customers. And with that, operator, you may now open the lines for Q&A.

We will now begin the question and answer session.

To ask a question, you may press star, then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then 2.

At this time, we will pause momentarily to assemble our roaster. The first question comes from Greg Wall with Helium Capital Group, please go ahead.

Thanks, Tim, Mark, Hillary. Congrats on the good results here. Thanks, Greg. Good morning. I guess just starting with kind of overall demand, I'm curious if you can go into a little bit more detail on what you're seeing by channel and more importantly, you know, the strength in community built for rent. builder developer, what's your visibility into that demand continuing to stay at strong levels here?

Yeah, I think those channels, Greg, are actually considerably strong. The community REITs continue to want more and more product, and so really trying to find allocation for them is an important consideration here. The build-to-rent channel is something that's emerging. We're actually going to be in Vegas the second week of September and displaying a model at a build-to-rent conference, one of the largest build-to-rent conferences in Vegas, to let build-to-rent developers tour our homes. And builder-developer continues to escalate. I think a lot of the small to mid-tier builders continue to be under pressure in today's market. And so as we continue to get our speed to build down and other things, we become more and more appealing to those various channels as well. Retail demand is actually still very good as well. The The traffic at retail is down a little bit, I would say about 20%, but the people who are coming in are actually buyers. So actually the pull-through rate is actually up. So a lot of retailers are reporting sales traction that's equivalent to last year, maybe slightly down, but it's still very good demand at the retail level.

Okay, good. That's helpful. As it relates to FEMA, so you mentioned that you completed 90% of the $200 million, so that equates to $180 million worth, but you only recognized $83 million of that in the quarter. So does that mean you left $100 million on the table? Can you confirm that? And it sounds like that all shifts into the September quarter, but how should we be thinking about the September quarter?

sequentially just you know given that and given everything else going on yeah greg i i think that's exactly right so we the production team you know this this quarter was really about production um you know very efficient very effective production this quarter and the team did a great job in producing those FEMA units. We thought it would take two quarters to produce, and they got 90% of it done this quarter. So, yes, we've got roughly, you know, rounding $100 million, I would say 97 if we want to be specific, million of revenue that's been produced but needs to, that will, once it's accepted by FEMA, will be recognized into revenue at that point in time, which we expect a majority of that by the September quarter. You know, the way I look at the September quarter is we'll have that plus coming in. You know, this quarter had $83 million, so we'll have a little step up quarter over quarter in FEMA. But we also have our normalized July shutdown period. that takes a week out of our production for this quarter versus last. So, you know, net-net, I'm assuming we should be relatively flat top line quarter over quarter going into the September quarter.

Okay, great. All right, I'll hop back in the queue. Thanks and good luck. Thanks.

Thanks, Rick.

Our next question comes from Matthew Bowley, Lee's Barclays.

Please go ahead.

Hey, good morning, everyone. Congrats on the results. I wanted to ask about the ASPs. I know you mentioned that you said a third of it in the quarter was due to the FEMA mix, but just at a higher level, thinking about affordability pressures to customers here, and I think Laurie, you may have mentioned something along the lines of having levers like price adjustments. Can you just sort of provide some outlook on ASPs here? Is there room for ASPs to actually move lower in this type of environment? And how should we think about that over the next few quarters? Thanks.

Hi, Matt. Yeah, next quarter, because as Mark mentioned, we're going to still see some FEMA units coming through. We're going to probably see sequentially ASPs relatively flat in the second quarter versus the first quarter. And then I think we're going to see them revert back to more normal levels. As I mentioned on the call last quarter, I do think that we're going to see consumers choose fewer options on their homes, which also could impact mix and ASP. So generally, I feel that in the second half of the year, we're gonna see them revert back to more normal levels like we saw possibly in the fourth quarter of fiscal 22, and then potentially decrease slightly because of the mix option, if that makes sense.

It does, great. No, that's helpful. Thank you for that, Laurie. And second one on the backlog and cancellation side, I know you mentioned dealers continuing to maybe destock a little due to the floor plan financing issue. I think last quarter you said there's a second part of that too where you might have consumers actually failing to qualify as a result of the move in interest rates. I'm just looking for, I guess, Bit of an update on that and sort of how you're thinking about the stability of the backlog, you know, given this environment here.

Thank you. Yeah, thanks, Matt. The stability of the backlog is fairly good. You know, I think the consumer cancellations in the backlog have been minimal. I mean, I don't even receive detailed reports on it because it's minor. You know, the dealer cleanup, I think, will happen in a two-part sequence. Normally, when dealers are right-sizing their inventory, what they'll do first is cancel or pull back on the stock units that are in the backlog already. So the ones that are kind of the replacement units coming up, that's kind of usually the first wave. And I think we'll probably give or take two-thirds of the way through that There will be some minor cleanup, I think, going into the September quarter. And then, you know, the second wave of dealer cleanup is where they're going to actually reduce the models of inventory they have on their lots. And that will actually show up probably instead of selling a consumer-built home, they'll sell their spec unit on their inventory level. So we'll see kind of a cleanup of our orders, if you will, or slow down in orders in that second wave. So we see both of those, but the consumer demand has been very strong still. Quoting activity, you know, in the first part of the year was off 20%. You know, in July, quoting activities only down 10%. So I think, you know, the overall consumer is going to be there, but we will see that clean up, I think, between what we saw in the first quarter and what will happen in the second quarter.

Gotcha. All right. Thanks, Mark. Thanks, Lori. Thank you, Matt.

Our next question comes from Lysol with the RBC Capital Market. Please go ahead.

Morning. Thanks for taking my questions. Laurie, I wanted to follow up on Margin's two-part question. First, in the quarter, there were, it seems like, a few large drivers of the increase. I was wondering if you could help us ballpark the relative impacts of FEMA versus potentially some more favorable lumber purchasing dynamics and then just outright volume leverage. And then when you talk about normalizing down to 22 levels in the second half of the year, you know, 22 levels were still extremely elevated compared to your historical margins and even your prior long-term targets. So how do we think about what that means for, you know, what you're defining as normal and sustainability of that?

Hi, Mike. Thanks for the questions. So just addressing this quarter's margins, we aren't breaking out the impact by category. So all I can tell you is, you know, reiterate what Mark said, that FEMA production went through the plant much more efficiently than we were expecting. So that certainly helped with the consistency of product and, frankly, the production team's efforts to get the units through the production process more quickly. So that certainly helped gross margins. And then in the second half of the quarter, we started to see, because of the way we buy our lumber products, we did start to see some favorability from the decrease in forest product pricing. Some of that is offset by higher labor. and other material pricing. So it's kind of a give and take on some of that, but we did see some benefits certainly from lower forest product costs. And then to address your normalized margins going forward question, fiscal 22 margins I think were in the 26 and a half percent range for the full year. I do see, you know, as the consumer shifts to less optioned homes that we're going to continue to see some margin pressure because those options have higher margins generally. So as the mix between a base product and a base product plus options switches in order for the end consumer to still target an affordable price point and a target monthly payment, they're going to have to back off on some of those more expensive options that we generate higher margins on, if that makes sense.

It does. Thank you. And then, Mark, I guess I'm still not entirely clear on the moving pieces around orders. You kind of talked about down 20 in quoting activity at retail and then down 10 in July, the other channels holding steady. If I look at just I know this isn't perfect looking at the backlog math, but the backlog math would suggest that orders are actually down pretty meaningfully in dollar terms on a year-on-year basis. So can you just help us, and that's on a dollar basis, so implied units probably even lower. Can you give us a little bit more detailed walk on what order trends you've seen in aggregate across your business?

Sure, Mike. Let me start with the backlog math because I think the story on backlog math is really a production story, I think. To put it in context, if we go back to last year, I think everybody would say that last year was a good home building demand year. Last year, we sold $2.2 billion worth of sales, and we grew backlogs by $800 million. So all in all, we were running at a sales pace of $3 billion, which is a good sales pace. So on average, that's $750 million a quarter. This quarter, in production and sales, we actually sold $726 million And then we actually built the remainder of the FEMA units, as we mentioned, that had come out of the backlog, which is another roughly $100 million on top of that. So we built and produced about $830 million this quarter. So that even surpasses even the order rates from last year. So we would have eaten into the backlogs even at the phenomenal sales pace of last year. with the excellent production that the team demonstrated this quarter. So I think you've got to take into account in your backlog math the thought process that our sales plus the production of FEMA, which we have not recognized in the revenue, was really somewhere around, you know, $830 million, $840 million in rough math. of produced units during the quarter. So that's a significant accomplishment. Given that, and if you then do that math on the sales pace, you'll actually see that the sales pace are actually orders during this quarter, barring the one-time FEMA order, were on par with what we saw order rates in the fourth quarter of last year. So actually, our sales order rates have held flat sequentially, quarter over quarter, barring the one-time FEMA order, which is just that one-time adjustment. So I think if you do that math, you'll see that a majority of the backlog pullback was really just due to the fact that we had good production in the quarter.

That's helpful. Just if I could, two quick follow-ups there. When you're saying flat versus 4Q, is that still in dollar terms? And then to clarify, I think you said it seems like you implied that while you haven't shipped 100 million in remaining FEMA, that that is no longer reported in your 1.4 billion of backlog.

Is that correct? That's correct. So even though we have not realized the revenue for it, It's produced, so it's no longer a backlog. It is excluded from backlog. That is correct, once we produce it. So anything that goes into finished goods or is ready for production or shipment, then it's ready to go. And that's roughly $100 billion. And I'm sorry, Mike? The order pays flat versus 4Q. Is that in dollar terms or units?

That is in unit terms. Okay. Thank you both. Thank you both.

Our next question comes from Phil with Jeffrey.

Please go ahead.

Hey, guys. Congrats on a really strong quarter and great execution from the team. Mark, I guess orders are, you know, trending somewhat differently between your retail channel versus redirect-to-builder and built-to-rent. Are there any noticeable mixed differences, margin differences between the channels? And how easy is it for you to kind of pivot some of that production capacity to some of these different trends going forward?

Yeah, Phil, thank you. The pivot of product is... easier than the pivots of geography. So what I would say is, you know, what we're looking at today is that there's going to be a shift in where people buy and how people buy. Our traditional retail channel is selling more to traditional home buyers, which is a little bit different customer demographic. So we have to shift our product needs, shift our marketing materials and shift our digital footprint to help drive that traffic to our retailers on a better basis to help them be even more successful. In addition, the REITs and other channels have different product needs. The margins across our profile are generally flat, so what we try to do is do margins for our products on what we call a margin per minute or margin per hour basis. So if a product runs very slow through the production line versus one that runs twice as fast through the production line, we try to equally weight the margin of those products in that profile. So that's why the FEMA production this quarter was so beneficial is because we had an assumed production rate of those that was very slow, so it had a standard gross margin similar to other products, but we ran it much more efficiently, which gave much better margins. I think the product profile is meaningful. What we really need to look at is I think there's shifts in geographic profiles. So we'll have to kind of monitor the strong markets versus the markets that are slowing and balance our production facilities accordingly.

Got it. I mean, Mark, it sounds like your orders have held up quite well. Certainly a testament to maybe the value proposition on affordability with your product. But certainly investors are nervous about a potential slowdown in housing, certainly your retail side of things. Assuming if there is an air rocket call next calendar year, the trends that you're seeing and the backlog and orders you're seeing in the other channels, i.e., Direct-to-Builder and REIT. Do you think that's enough to kind of offset some of the potential weakness down the road, appreciating some of your mixed profile and how you're set up there?

You know, I do with the caveat of geographic, right? I think some of the build-for-rent and builder-developer opportunities and others are probably more developed in certain areas of the country and certain geographies. So we've got to balance that mix. But I think, you know, I hear people say that there's a softening of demand for housing. There's not a softening of demand for housing. There's a softening of demand for very expensive housing, which is what they are subject to today. And so I think the demand for affordable housing is actually quite strong. People have substitution options. Do they go to apartments? Do they go to build a house? Do they go to buy a used home? And those trade-offs are very difficult for people to manage in today's environment. So I don't know that there's a slowdown necessarily in demand Obviously, people have other financial impacts in their lives today, and they're getting squeezed on many fronts. But I think affordable housing will move through the cycle. And if anything, the slowdown in building activity is actually, I think, creating a longer, more durable runway, to be very candid, because the supply shortages exist. And if there's a slowdown in people producing to supply that supply shortage, then that means we'll extend the runway of kind of longer-term tail demand. So that's how I see them. Obviously, we have to manage the short term, and it's very volatile today. But I think the long-term outlook is quite good, and we've got a healthy backlog to help see us through as well.

Gotcha. That's great. And then just one last one, if I could sneak it in for Lori. You talked about how consumers may be taking less options, and there could be a mixed impact, and certainly that will have a drag on margins potentially. But when we think about price costs the last few years in a very inflationary backdrop, you guys have managed that exceptionally well and demonstrated really strong pricing power. In a potentially slowing backdrop, and I appreciate, Mark, you haven't seen the slowdown yet, but in a slower backdrop, demand backdrop, you know, your level of confidence to kind of get priced offset inflation, especially in that retail channel. Thanks a lot, guys.

Yeah, you know, Phil, we have made some structural changes to the, you know, to our products, which impact our production. So I think that's why, you know, primarily even in the down cycle, we'll be able to maintain margins similar to what we saw in fiscal 22. So the streamlining of our product offerings has helped establish margins even in a down environment. That being said, depending on the severity of a down market, the leverage of fixed costs will need to be managed closely.

Okay. Super. Thank you. Appreciate it.

Our next question says, comes from Dan Moore with CJS Securities.

Please go ahead.

Hi, good morning. It's Pete Lucas for Dan. You guys covered a lot. Just two quick ones for me. Last quarter, you inked an agreement with your first top 100 builder developer. Just wondering how other conversions are progressing, if there's anything you can add there.

Yeah, I mean, the pipeline for builder developer activity is quite good. The conversion rate of them obviously is timing dependent. But I would say overall builders in today's environment are probably more eager than they were three months ago or six months ago. And it's very helpful and very beneficial the more we can get our production up and our backlogs down. The closer we can tie our production to the timing of delivery for the build-to-rent channels, for the builder developer channel, for the REIT channel, and frankly for the end consumer so that they don't have as much interest rate risk and or inflationary risks and they know what they're getting within weeks, I think the more certainty and the higher conversion will be. So we're really focused on increasing output to help lower our backlog time so that we can deliver faster. And I think that'll help and aid in the conversion because if a builder knows We can supply them in weeks for their subdivision. That dramatically changes the economics and their return on invested capital for their projects.

Helpful. Thanks. And last one for me, just kind of a bigger picture question. In terms of state, local, and national codes and restrictions changing for MH, what are the most significant shifts or changes that you're currently seeing?

You know, I would say zoning regulatory barriers are coming down. The ADU market is starting to open up in many cities and locations across the country. The need for affordable housing is becoming more pronounced. So as a result, there's more and more focus on state and local regulators to free up zoning for affordable housing because they're their constituents want it, and it's needed, especially for good workforce housing. The state of Florida has done some great things recently, for instance, in lowering the sales tax on MH units and is launching a Homes for Hero program for workforce housing for citizens in their state. So I think you're going to see more and more initiatives like that that create incentives for workforce housing for kind of heroes, if you will, firefighters, police, medical professionals, teachers, child care workers. Those are the people that really need housing and also first-time homebuyers. So I think more state and local incentives we're seeing pop up along with deregulation.

Great, thank you. Thanks, Pete.

Our next question comes from Jay McCallers with Wedbush.

Please go ahead.

Hey, good morning. Thanks for taking my questions. So the first one I had with some of these new sales channels that you have, whether it's build around, et cetera, I mean, where now is retail sales or the retail channel as a percentage of total sales for you guys?

Retail sales is about 50%, give or take, of our total sales today.

And, I mean, do you expect that to go down over time, or where is that relative to historical numbers?

No, I mean, that's probably, it's probably gone down a little bit versus historical. I would say, you know, We were probably closer to two-thirds retail, one-third community REITs and other channels a few years ago. And I think it's come down a little bit in percent terms. But then again, Jay, we've grown so dramatically in scale that that's kind of misleading a little bit. So the retail channel hasn't shrunk by any means. It's grown considerably. It's just not growing at the pace of some of these other channels. So I think retail will still be very strong. I just foresee customers having a more difficult time coming up with a down payment to buy a home in the future with other inflationary challenges affecting their pocketbooks. And so I think your rental channels will become more prevalent. I think customers or people who can get people into homes for build for rent or or even builder developers who do kind of affordable housing units will really see a benefit in growth for those channels, along with ADUs are an untapped source for the future. So I think retail is very strong. I just think that given the down payment, it'll slow down a little bit.

Got it. And maybe if you could give us an update on where chattel rates have gone. I know they were down. For most of last year, just be interested to see where they are relative to traditional conforming mortgage rates.

Yeah, I mean, they have come down. I would say they're probably moving today in lockstep with traditional rates, but channel rates for a good credit score, good FICA score is probably about 6.5% for channel today. So I think the spread is quite good.

versus traditional home buyers and especially when you factor in the affordable price point that monthly payment is um quite a strong benefit for the end consumer gotcha um and then and i apologize i jumped on late when i jumped on mark you were talking about something in terms of logistics or having some some driver shortages post labor day could could you repeat those comments and and What are you guys seeing in terms of logistics, whether it's your own trucking fleet or suppliers bringing stuff to your plants?

I would say the supply chain for trucking generally in inbound transportation is actually improving a little bit. The outbound transportation, given the wide loads and other things that we have to transport, I think finding drivers for the heightened demand that we see you know, is really the crux of the matter, right? We've dramatically grown as an industry overall, and so I think, you know, the new influx of drivers that are needed for that type of transport, you know, needs to grow as well. So I think that is a little bit of a challenge that we've got to overcome. It's beneficial that we have our own trucking division, that we're able to manage that probably fairly effectively, or maybe better than others, I would assume. But it's definitely something the industry's faced with today overall. I think as far as supply chain, I still anticipate kind of post-Labor Day or starting to emerge around Labor Day, some HVAC shortages and other things starting to pop up due to supply chain constraints coming from China and some of the circuit boards and in control panels and other materials, mainly in HVAC around that coming into September, October, November.

And then just one other question. I know historically the REITs have liked to buy single-section homes. What are you seeing in terms of preference or home sizes from some of these newer build-to-rent and traditional builder channels? What type of products Are they asking for you guys to quote?

It probably depends on geography, but I would say not as many single sections. I would say double sections are probably more prevalent. I've noticed some of they're targeting a little bit different customer price point. They're targeting kind of a first-time homebuyer, very good FICA score, very good creditworthiness, someone that can actually afford to buy a site built, but they want something of value. So they're choosing something that is probably a better value proposition for them and their, you know, other alternative to spend their money on. And so I think it's a well, you know, maybe a larger house, you know, that can be afforded by a first-time homebuyer with a dual income or something like that. is what we're seeing kind of in some of those channels.

Okay, that's great. Thank you for taking my questions. Thanks, Jay.

Again, if you wish to ask a question, please press star one.

Our next question comes from Greg Palm with Greg Helium Capital Group. Please go ahead.

Thanks. Just a quick follow-up or two. Lori, in terms of the... streamlining of the product and some of the benefits that you've seen, the structural benefits that you've seen over the last 18, 24 months, are there still additional levers that you can pull there or is the majority of that sort of complete at this point?

Yeah, Greg, there definitely is still more to be done with that initiative.

Okay, so fair enough to say that there is still even some room for margin improvements that's specific to the streamlining of product ahead?

Yeah.

And then just on the builder-developer in terms of that top 100 win that you disclosed last quarter, have there been any orders to date, anything in backlog? And maybe just remind us in terms of the ramp-up period associated with that.

Yeah, no, those orders will probably start to enter backlog, I would say probably in the new calendar year. So that builder is getting their subdivisions ready. So I would anticipate. So there's nothing in backlog today. Those are pending orders that will flow in probably sometime early, you know, during the March quarter, I would assume. of next year.

Okay. Sounds good. All right. Thanks. I'll leave it there.

Thanks, Ray.

This concludes our question and answer session.

I would like to turn the conference back over to Mark Yost for any closing remarks. Please go ahead.

Thank you, Maria. Thanks, everyone, for participating in today's call. We appreciate the time and your continued interest in Skyline Champions. We look forward to updating you on our progress on our next call. Thank you, take care, and stay safe.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.