Champion Homes, Inc.

Good morning and welcome to Skyline Champions Corporation's second 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 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 in evaluating its performance. A reconciliation of these measures can be found in the earnings release. I would now like to turn the call over to Mark Yost, Skyline Champions President and Chief Executive Officer. Please go ahead.

Thank you for joining our earnings call, and good morning, everyone. I'm pleased to be joined on this call by Lori Huff, EVP and CFO. Today, I will briefly talk about our second quarter highlights then provide an update on activities so far in our third quarter and wrap up with thoughts about the balance of the year. I'm pleased to share that our team once again delivered strong profitability metrics this quarter, including new highs for home closings, gross margin, and earnings per share. We achieved these results despite supply chain challenges as well as the short-term impacts from Hurricane Ian. Thankfully, our team members and plant came through the storm safely, and we are thinking of all those impacted. During the second quarter, we grew net sales by 54% and EBITDA by 170%, expanding margins by more than 1,000 basis points. Our strong performance continues to be driven by initiatives focused on enhancing the customer's buying experience and improving operating efficiencies to protect our margins. The team's hard work and operational efficiency in completing the FEMA disaster relief housing order also contributed to this quarter's overperformance. Production volumes were up on a year-over-year basis as our focus on product rationalization led to increased output. In total, we delivered 7,577 homes, an improvement of 21% from the prior year, and up 6% sequentially. Our capacity expansions, including the production ramp at our Navasota, Texas, plant, the Manus Homes acquisition in Warrenburg, North Carolina, and the expansion of our retail footprint through the acquisition of 12 Altacima retail locations also contributed to our year-over-year increase in home sales volumes. As a result of stronger production levels, dealer right-sizing of inventory, and customer supply chain challenges, The backlog at the end of the quarter was down 555 million to 814 million compared to the June quarter. Lead times improved during the quarter to 19 weeks compared to 28 weeks at the end of June. Normalizing production to reduce backlogs to pre-pandemic levels of four to 12 weeks helps the home buyer lock in pricing and financing and benefits our direct sales channels to better meet the needs of their customers. As expected, we saw retailers right-sizing inventory levels during the quarter as they destocked existing inventory, resulting in the cancellations of orders in our backlog, as well as selling homes out of their existing inventory ahead of placing new orders. With interest rates continuing to rise and consumer confidence waning, we do expect retailer inventory destocking and selling out of existing stock to continue through the remainder of fiscal 2023. We estimate that the industry is currently over-individuated by approximately 7,000 units. With the destocking, we expect our third quarter top line to be flat prior year and fourth quarter to be down year over year. We also saw during the quarter community and builder customers put their orders on hold due to supply chain issues in their new developments, primarily related to the availability of concrete and transformers. Despite the near-term right-sizing of dealer inventory and the supply chain dynamics impacting new developments, we see healthy demand in the medium term. While retailer walk-in traffic is down, the economic conditions and digital leads are driving good credit quality consumers with higher closing rates. As a result, we see year-over-year increases in the number of deposits at many retailers, and quote activity remains healthy. Additionally, REIT and tiny home demand remains good, and we are seeing increased engagement from builders and manufacturer to rent channels. To increase awareness of our homes, we attended the Build for Rent Conference in Las Vegas in September, where our Genesis home was well-received. We will also be displaying a home at the National League of Cities Conference to increase city officials' awareness of our products as an affordable housing solution. In the near term, we continue to focus on streamlining our production as we have seen significant benefits from these efforts. Most recently, we have been working to tool and staff one of our idle manufacturing facilities in North Carolina. This facility is scheduled to begin ramping later this year and will further streamline production in the Carolinas and the surrounding states. Additionally, we are starting to invest in the opening of our Bartow, Florida plant to support growing builder developer demand and additional short and long-term housing needs from the impact of Hurricane Ian. As we look forward, homebuyers are facing rising interest rates and inflation. As a result, we're seeing our traditional site-built homebuyers moving into our more value-oriented factory-built home solutions. Our confidence in the long-term growth potential is further strengthened by the growing upside from the built-to-rent channel, expanded penetration into our traditional community re-channel, and growing interest from mid-sized builders and developers. While these growth drivers will take time to mature, we are excited by the progress we've made so far and encouraged by the longer-term impact on our results and the overall housing accessibility. In this environment, we need to double down on innovation and introduce more offerings that connect with the growing number of consumers who need affordable housing given the continued economic uncertainty. We are accelerating our investments into production automation and the customer experience so we can help consumers have a great place to call home. I will now turn the call over to Lori to discuss our quarterly financials in more detail.

Thanks, Mark, and good morning, everyone. I will 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 our near-term expectations. During the second quarter, net sales increased by 54% to $807 million compared to the same quarter last year. We saw revenue growth of $283 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 the number of homes sold was 23%, or 1,372 units, for a total of 7,274 homes compared to the same quarter last year. U.S. volume growth is being driven by increased capacity. Year-over-year capacity expansions were driven by the continued ramp of our Navasota, Texas plant and the acquisitions of Mainus Homes and the Factory Expo retail locations, in addition to our continued efforts in streamlining our core product offerings across our existing manufacturing footprint. During the quarter, we finished producing and shipping the remaining FEMA disaster relief homes, bringing FEMA unit sales during the quarter to $117 million and $200 million year-to-date. The average selling price per U.S. home sold increased by 30% to $103,700 due to product mix, including higher-priced FEMA units and year-over-year price increases on our core products to offset higher input costs, including labor and transportation. As a reminder, FEMI units have more specifications than our core product, thus driving ASPs higher. On a sequential basis, revenue in the U.S. factory-built segment increased 14% in the second quarter of fiscal 2023 compared to the first quarter of fiscal 2023. This increase was driven by a 7% increase in both the average selling price per home and the number of homes sold. The sequential increase in price was driven by a change in product mix and low single-digit price increases. Volume growth during the quarter was primarily driven by a decrease in finished goods inventory as capacity utilization remained flat sequentially at 72%. Canadian revenue increased 2% to $39 million compared to the second quarter of last year, driven by a 20% increase in the average home selling price, partially offset by a 15% decline in the number of homes sold. The higher average home selling price in Canada of $129,400 was driven by a continued shift in mix to a larger multi-section home and price increases to combat ongoing inflationary pressures on our input costs. The decline in volume was caused by the shift in product mix and a softening of demand in certain Canadian markets. Consolidated gross profit increased to $274 million in the second quarter, up 112% versus the prior year quarter due to higher volumes and average selling prices. Our U.S. housing segment gross margins were 34% of segment net sales, up 930 basis points from the second quarter last year. The improved operating efficiencies and higher prices on FEMA sales helped to increase gross margin this quarter in addition to core product pricing, lower forest product costs, and continued product standardization which all led to increased leverage of fixed costs. SG&A in the second quarter increased to $84 million from $61 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 to expand our capacity and footprint. Net income for the second quarter was $144 million or $2.51 per diluted share compared to net income of $51 million or earnings of $0.89 per diluted share during the same period last year. The increase in EPS was driven by higher sales and improved gross margin resulting in improved profitability. The company's effective tax rate for the quarter was 25% versus an effective tax rate of 24.4% for the year-ago quarter. Adjusted EBITDA for the quarter was $197 million, an increase of 170% over the same period a year ago. The adjusted EBITDA margin expanded by more than 1,000 basis points to 24.4%, due to gross margin improvement and leverage of fixed costs. The structural improvements in our business over the last few years has strengthened our operational capabilities, leading to increased output and profitability. These improvements also enhance our ability to navigate periods of economic uncertainty while continuing to service our customers and protect our margin profile. As we move into the second half of fiscal 2023, we continue to expect a normalizing of margins back to fiscal 2022 levels. Now that the impact of FEMA unit sales have been fully realized and as we anticipate headwinds to our product mix with consumers moving to homes with less options to maintain more affordable monthly payments. As of October 1st, 2022, we had $677 million of cash and cash equivalents and long-term borrowings of $12 million with no maturities until 2029. We generated $231 million of operating cash flows for the quarter, an increase of $174 million compared to the prior year period. The increase in operating cash flows is primarily due to the increase in net income coupled with the higher receivables and inventory balances at the end of the first quarter, converting into cash during the second 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.