Champion Homes, Inc.

Good morning and welcome to Skyline Champion Corporation's second quarter fiscal 2024 earnings call. The company issued an 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 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 am pleased to be joined on this call by Lori Huff, 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, including with thoughts on the balance of the year. We saw healthy demand from end consumers through our captive and independent retail channels. Community REIT channel softness continued as expected through the September quarter as our REIT partners worked through their backlog of existing new home inventory before placing new orders. This pause in the community ordering combined with the absence of FEMA-related sales that were in the second quarter of last year drove our year-over-year declines in both production and revenue. Backlog as of September 30th was $258 million compared to $260 million at the end of the June quarter as sequential quarterly unit increases were offset by decreases in price. Average lead times of eight weeks have normalized within our historical range of four to 12 weeks and are consistent with lead times at the end of the first quarter. Order volume during the quarter increased again sequentially, and we are seeing the expected decrease in home prices as consumers shift to smaller homes or homes with fewer features and options given the current interest rate environment. Shifting to some of our strategic actions we have taken recently. On September 26th, we closed our investment in ECN Capital and the establishment of our new and financing. We believe that the formation of a captive finance company will unlock home volume growth and bring value for our key stakeholders by providing broader and more attractive financing options and services to our customers. It will enable us to provide a comprehensive home buying solution while becoming more deeply connected with our channel partner customers and the end consumers who purchase our homes. The investment aligns with our longer-term strategic view on offering digital configuration and selling to homebuyers. As we continue to ramp up champion financing, we believe the benefits will create a deeper connection with our dealers and end consumers. As we drive more volume to ECN, 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 Regional Homes, the fourth largest HUD manufacturer in the United States, the largest independent retailer, and the company we have long admired. We are confident that the addition of Regional Homes to the Skyline Champion platform will allow us to accelerate profitable growth through the expansion of our retail and manufacturing distribution across the southeastern United States. Regional Homes has a customer-centric selling approach and is dedicated to providing an exceptional home buying experience to its customers, which directly aligns with Skyline Champion's core values and our strategic initiative to enhance customer buying experience. In coordination with the closing of the acquisition, I'm excited to welcome Heath Jenkins to the Skyline Champion leadership team, as he will serve as president of our captive retail operations. Heath brings years of industry retail experience and strong leadership capabilities, but most importantly, exhibits an unwavering commitment to put the customer first. Altogether, these investments represent an exciting opportunity as we strengthen our efforts to support the long-term growth and solidify Skyline Champion's market positioning as a leading provider of attainable housing solutions, for which the market is in tremendous need of today. Moving to the third quarter outlook, we continue to see stronger order rates from our retail and builder-developer channels. And while some customers have returned to the market, as others are continuing to destock as we move into our normally seasonally slower period. We expect the third quarter revenue to be up mid to high single digits as a result. We have seen orders strengthen five quarters in a row by the growing need from consumers for affordable housing. We anticipate this need for housing to be longer in duration than we initially anticipated due to recent indications from the Federal Reserve. Additionally, this need is driving more regulatory tailwinds for our products that give us increasing confidence in the long-term growth potential of our housing solutions. With our long-term strategic investments into retail, financing, digital, and automation, we are adding value and enhancing the buying experience for the end consumer and our channel partners. 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 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 decreased 42% to $464 million compared to the same quarter last year, in which we recognized $118 million in FEMA unit sales. The decrease in net sales reflects a 15% year-over-year decline in average selling price for U.S. homes due to FEMA unit sales last year, which vary a higher ASP than our core product due to the complexity of build. In addition, our core product ASP declined due to product mix and the decrease in material surcharges. During the quarter, we sold 4,842 homes in the U.S. compared to 7,274 homes in the prior year period. U.S. home volume was down year over year due to the absence of FEMA-related sales and reduced production schedules to align with order rates. On a sequential basis, U.S. factory-built housing revenue was in line 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 per home as core customers opt for smaller and less optioned homes in an effort to maintain affordable monthly payments in the current interest rate environment. Capacity utilization decreased to 53% compared to 56% in the sequential first quarter of fiscal 2024. Capacity utilization is being adversely impacted by newly opened plants and a right sizing of production rates at certain plants that serve end markets in which current order trends remain softer. Canadian revenue decreased 25% to 29 million compared to the second quarter last year, primarily due to a 23% decline in the number of homes sold driven by swelling demand. The average home selling price in Canada decreased to $126,100 compared to $129,400 in the prior year period, primarily due to the fluctuation in the translation of the Canadian dollar to the U.S. dollar 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 versus the prior year quarter. On a sequential basis, we saw gross margins decline 280 basis points. Our U.S. housing segment gross margins were 24.5% of segment net sales, down 950 basis points from the same quarter last year, primarily due to higher margin steaming unit sales in the prior year quarter, as well as lower core product sales volume and a mixed shift to homes with less features and options, allowing the homeowner to hit their monthly payment price point given higher interest rates. Gross margins were also negatively impacted by lower production rates as we are choosing to operate plants at lower run rates in order to be prepared to quickly ramp upon the return to normal order volume. SG&A in the second quarter decreased $19 million to $64 million, primarily due to lower incentive compensation expense on reduced 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 was driven by the decline in sales and reduced operating leverage on lower volume. Diluted EPS for this quarter includes approximately $0.03 of transaction-related costs incurred for the acquisition of regional homes. The company's 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. Adjusted EBITDA margin of 12.7% compared to 24.4% in the prior year period reflects a return to more normal profitability levels. In the near term, we remain focused on maintaining efficient production lines as channel conditions improve and order activity returns to a more regular cadence. The structural improvements and investments made in our business have strengthened our operational capabilities, protecting profitability in periods of lower output. That said, we reiterate our expectation that the mixed shift by customers looking to maintain affordable monthly payments in the current interest rate environment will continue for the remainder of fiscal 2024. We expect margins to compress further in the sequential third and fourth quarters due to product mix shifts, newly added production capacity continuing to ramp, and the purchase accounting implications of the regional homes acquisition. As of September 30, 2023, we had $701 million of cash and cash equivalents. and long-term borrowings of $12 million with no maturities until 2029. We 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 net income and the working capital impact of producing FEMA units in the prior year. During the quarter, we allocated $143 million of our capital for the strategic purchase of common and preferred shares of ECN capital. Subsequent to quarter end, we used $318 million of cash to purchase regional homes. In addition, we assumed $93 million of debt primarily related to inventory floor plan liabilities. We remain focused on executing on our operational initiatives and given our favorable liquidity positions, plan to utilize our cash to reinvest in the business and for opportunities that support strategic long-term growth. Since closing on the ECN investment, we've been working to develop the business plan for the strategic partnership with Triad Financial Services, including the rollout of Champion Financing branded floor plan programs for our retail and community channel partners, as well as tailored retail loan programs for our retail network. We are targeting launching these programs in January 2024. As a reminder, the partnership is an asset-like structure leveraging Triad's existing origination and servicing infrastructure and ECN's funding capabilities, which include relationships with community banks and leading institutional investors with no loan risk on the Skyline Champion balance sheet. We will be reporting the impact of the ECN common stock investment and the results of the captive financing partnership on a quarterly way. We began the integration of regional homes upon closing of the transaction in mid-October. The teams have been meeting to share best practices and to begin to capture synergies. As a reminder, we anticipate synergy capture of 10 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 production and sales. The regional balance sheet, including retail finished goods inventory, will be revalued to its fair value and will negatively impact the company's consolidated gross margin in the next several quarters as those homes are retail sold. In addition, SG&A will increase for the amortization of intangible assets generated from the acquisition. I'll now turn the call back to Mark for some closing remarks.