Champion Homes, Inc.

quarter and full year fiscal 2024 earnings conference call. The company issued its earnings press release yesterday after the close. I'd 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 risk 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 financial measures which it believes can be useful in evaluating its performance. A definition and reconciliation of these measures can be found in the earnings release. I would now like to turn the call over to your host, Mr. Mark Yost, Skyline Champions President and Chief Executive Officer. Please go ahead.

Thank you for joining our earnings call and good morning all. I am pleased to have Lori Huff, our EVP and CFO with me today. On this call, I will briefly cover the highlights from the full year and the fourth quarter. I will also update you on our progress in the first quarter of fiscal 2025 and share some insights on our expectations for the remainder of the year. In fiscal 2024, Skyline Champion made significant strides in executing our strategic vision through investments in integrated turnkey solutions for retail, financial services, and home completion. These efforts not only broaden our geographical reach, and enhanced our market approach, but also upgraded our digital lead management systems, improving service to customers, and expanding the market for our products. In line with our investment priorities, we also approved a share repurchase program for up to $100 million of our common stock. This decision reflects our strong balance sheet, robust cash generation while returning excess capital to shareholders, after investing in strategic and growth priorities. For the year, we were able to provide 21,845 customers and families with a place to call home and reported over $2 billion in top-line revenue. The year-over-year decrease in unit volume was driven by the community and government channels as builder-developer and retail unit volumes grew year-over-year. based upon the strength of demand for affordable housing. From a market perspective, consumer demand remains healthy in the face of housing shortages and a growing base of potential homeowners. The challenges posed by higher interest rates further highlight the need for accessible housing options. Our strategic efforts to enhance the home buying experience has significantly increased the visibility of our solutions in this competitive economic environment. Demand this quarter was reinforced by a 16% sequential increase in orders and a 118% organic rise in year-over-year, reflecting sustained demand for affordable housing and the growth in emerging channels like builder-developer sector, which was our fastest growing segment. Despite these gains, the quarter presented challenges, including adverse weather conditions and longer cycle times for our regional acquisition, which temporarily reduced net sales and led to higher levels of finished good inventory. Our U.S. home sales in the quarter increased year-over-year by 15% to 5,652 units. This growth was supported by our strategic acquisition and enhanced manufacturing capabilities. though our process was tempered by inclement weather, which disrupted the shipping and setting of our homes. Additionally, weaker demand in Canada contributed to sales figures that did not meet our expectations. Nonetheless, the positive trends in organic net order volume growth at our manufacturing plants are driving the future outlook. During the fourth quarter, we recorded $34.5 million reserve for estimated remediation costs related to a water intrusion issue. This issue was isolated, involving materials that did not perform in accordance with the manufacturer's contractual obligations and was limited to homes constructed at one of our manufacturing facilities. We discontinued the use of this material in our production process in March of 2021. We are actively seeking recoveries from various parties, including the supplier their insurance provider, and our own insurance provider. Laurie will elaborate on this shortly. Our gross profit margin adjusted for the water intrusion remediation costs indicate sustainable profitability as we continue to navigate shifts in product mix driven by consumer affordability. As operations at our new plants ramp up, we expect some margin impact but the increased volumes should help us maintain our backlog lead times within the usual four to 12 week range. Our year end backlog stood at 316 million, marking a 9% sequential increase with current lead times averaging nine weeks. The integration of our recent investments is a top priority. We are focusing on capturing synergies and aligning cultures and systems capabilities. We have made significant progress in achieving operational and purchasing efficiencies at the regional manufacturing facilities and are on track to achieve the upper end of our original synergy target of 10 to 15 million by the end of fiscal 2025 ahead of schedule. This quarter, we also expanded our financial services through our partnership with Triad introducing new programs that include floor plan financing for our independent dealers and consumer financing for selected national products. Although these initiatives are in the early stages, they have been well received in the market and show great potential in attracting new home customers and meeting the comprehensive needs of home buyers. These strategic actions, supported by our order growth, affirm our commitment to strengthening our market position and delivering on our promise of accessible, comprehensive housing solutions. Moving into our first fiscal quarter, we are seeing healthy demand from both retailers and builder developers. Their consistent ordering patterns are key drivers of our growth. Additionally, with a year-over-year increase in orders from our community partners, we are starting to ramp production in our manufacturing facilities. Looking ahead, we anticipate low double-digit sequential revenue growth. This will be driven by the order growth we have seen, partially tempered by a growing backlog, and as we balance between increasing production while maintaining our high standards of quality. On the macroeconomic front, job and wage growth remain strong, especially in critical sectors like healthcare, manufacturing, and retail, which are foundational to our customer base. Given recent inflationary pressures and robust employment data, we anticipate the Federal Reserve will maintain higher interest rates for an extended period. These dynamics support the stability of future demand for our products. Higher income levels coupled with sustained high interest rates and a shortage of affordable housing align well with our pricing and product offerings. As we continue to integrate our acquisitions and enhance our integrated turnkey solutions across retail, financial services, and home completion, we are not only broadening our geographical reach, but also reinvesting and reinventing our approach to the market. A pivotal aspect of this progress is strengthening our digital lead management system. This enhanced platform is now more robust better introducing our customers to our products and expanding our total market presence. The successful integration of these turnkey solutions has increased our capture rate of both channel partners and end consumers. The positive reception at recent industry events coupled with the launch and early capture rates of Champion Financing highlights the effectiveness of our strategies. These achievements have ignited considerable market interest, opened new paths for growth, and further expanded our opportunities in the housing market. I will now hand the call over to Lori, who will provide more detail and insights into our quarterly financial performance.

Thanks, Mark, and good morning, everyone. I'll begin by reviewing our financial results for the fourth quarter, followed by a discussion of our balance sheet and cash flows. I will also briefly discuss our near-term expectations. During the fourth quarter, net sales increased 9% to $536 million compared to the same quarter last year, with U.S. factory-built housing revenue increasing 12%. The number of homes sold increased 15% to 5,652 homes in the U.S., compared to 4,900 homes in the prior year period. U.S. home volume during the quarter was supported by additional retail and manufacturing capacity resulting from the regional homes acquisition that contributed approximately $108 million to net sales during the quarter, as well as the opening of our Bartow, Florida and Decatur, Indiana facilities earlier this year. The average selling price per U.S. home sold decreased by 3% to $89,800, due to changes in product mix and reduced material surcharges compared to the prior year. On a sequential basis, U.S. factory-built housing revenue decreased 3% in the fourth quarter compared to the third quarter of fiscal 2024. Interest rates continue to have an impact on our core product ASPs as consumers are focused on maintaining affordable monthly payments. On a sequential basis, the average selling price per home decreased 3%, and going forward, we expect revenue and ASPs to continue to be impacted by a mix of lower option homes. Capacity utilization was 57%, which was flat compared to the sequential third quarter of fiscal 2024. Current utilization rates primarily reflect the increased capacity brought online through acquisitions and newly opened plants. Canadian revenue during the quarter was $23 million, representing a 23% decline in the number of homes sold, which was partially mitigated by a 4% increase in the average home selling price. The average home selling price in Canada increased to $121,200 due to a shift in product mix. The reduction in sales volume can be attributed to a combination of factors, including higher interest rates that have tempered buyer enthusiasm. In addition, economic uncertainties driven by the current drought in the prairies and western Canada are causing rural homebuyers to delay their purchases. These conditions are anticipated to continue to impact the housing market dynamics in these regions in the near term. Consolidated gross profit decreased 30% to $98 million in the fourth quarter, and our gross margin contracted by 1,040 basis points from 28.7% in the prior year period. The change in gross profit and gross margin reflects the impact of the estimated liability of $34.5 million recorded in the fourth quarter of fiscal 2024 related to the remediation costs for water intrusion issues in homes produced at one of our plants from 2016 to early 2021. We've developed a remediation plan that calls for inspection and repair or mitigation of affected homes. We estimated the charges by establishing a range of total expected costs using an actuarial analysis. The analysis resulted in a range of losses between $34.5 million and $85 million. We were not able to determine a value in the range that was more likely than any other value, and as prescribed by accounting guidance, recorded the charge based on the low end of the range. We will monitor the results of the inspection and repair activities and may revise the amounts of the estimated liability, which could result in an increase or decrease in the estimated liability in future periods. As Mark mentioned, we're pursuing recoveries from the manufacturer, the distributor, and the related insurance companies, but cannot estimate or record those potential recoveries in this period. Adjusted gross profit decreased by 6% to $133 million, an adjusted gross margin with 24.8% of net sales, a 390 basis point contraction compared to the prior year period. The contraction in adjusted 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 idle facilities and the impact of the regional homes acquisition. Regional homes' core product gross margins are generally lower than the legacy Skyline Champion margins. In addition, consolidated margins were impacted by the effect of purchase accounting increases to the carrying value of regional finished goods inventory, which had a negative 80 basis point impact on consolidated gross margins during the quarter. We expect this purchase accounting impact to continue in the near term as we sell off the finished goods inventory acquired. SG&A in the fourth quarter increased $18 million to $91 million, primarily due to the regional homes acquisition, partially offset by lower variable compensation at existing operations. Net income for the fourth quarter decreased 95% to $3 million, or 5 cents per diluted share, compared to net income of $58 million, or earnings of $1 per share, during the same period last year. The decrease in EPS was driven by the decline in sales and gross profit, including the impact of the estimated remediation costs for the water intrusion issue. Adjusted net income per diluted share was $0.62, excluding the estimated remediation costs for the water intrusion liability. and the company's share of ECN's calendar fourth quarter loss of $7 million. As a reminder, we record the impact of our equity investment in ECN's common shares on a one-quarter lag. The company's effective tax rate for the quarter was 19.2% versus an effective tax rate of 24.5% for the year-ago period. The decrease in the effective tax rate is primarily due to equity compensation and tax credits. Adjusted EBITDA for the quarter was $53 million compared to $76 million in the prior year period. Adjusted EBITDA margin was 9.9% compared to 15.5% in the prior year period, which was impacted by lower gross margins and higher SG&A. As we've noted in previous quarters, we expect a continued decline in our gross margin in the near term. This trend is influenced by homebuyers increasingly selecting homes with fewer options, driven by inflationary pressures and persistently high interest rates. Additionally, the ramp up of our new plant operations and the sale of finished goods inventory from the acquisition of regional homes retail sale centers contribute to this outlook. Collectively, these dynamics are likely to push our gross margins down in the short term 100 to 150 basis points versus the sequential fourth quarter. Despite these headwinds, we remain confident in reaching our long-term structural margin targets, bolstered by ongoing enhancements in our operational capabilities and strategic investments in the business. As of March 30, 2024, we had nearly $500 million of cash and cash equivalents and long-term borrowings of $25 million with no maturities until 2026. We generated $4 million of operating cash flows for the quarter compared to $52 million for the prior year period. Operating cash flows were adversely impacted by the growth in our captive retail inventory balances and growth in our independent dealer floor plan receivables. On May 16, 2024, our Board of Directors approved a share repurchase program for up to $100 million of our common stock. The share repurchase program may be amended, suspended, or terminated by the Board of Directors at any time. We plan to fund the program from existing cash on hand in future cash generation. This program represents a logical evolution of our capital allocation strategy as our strong balance sheet and cash generation allows us to maintain a balanced approach to returning capital to shareholders, reinvestment, and growth initiatives. I'll now turn the call back to Mark for some closing remarks.

Thanks, Lori. The long-term outlook looks bright for our company. With demand from retailers and builder developers, the return of more normal ordering volumes from 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 value for our stakeholders. We remain steadfast in our commitment to deliver sustainable growth and value creation. and we're excited about the opportunities that lie ahead. Before we move on to the Q&A section, I would like to express our gratitude to the entire Skyline Champion team for their exceptional efforts this year as we drive for long-term success. And with that, operator, you may now open the lines for Q&A.

Thank you. At this time, we'll be conducting a question-and-answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

One moment please while we poll for questions. Our first question comes from Phil Ng with Jefferies.

Please proceed with your question.

Hey, guys. Appreciate the color that, Mark, you provided. Perhaps that weighed on results from a top-line perspective, weather and stuff of that nature. And the low double-edged sequential growth is actually quite strong, but, you know, given some of the noise you saw in the fourth quarter, is the spring selling season kind of shaping up as you thought? And the elongated cycle time you called out, dynamic you called out this past quarter, is that largely fleshed out at this point?

Yeah, Phil, thank you, and good morning. I think the spring selling season and demand-wise is shaping up as we thought, very healthy demand overall. The tie-up with weather and other things is really just a timing issue. So if you look at our inventory balances on the balance sheet, you'll see an increase sequentially, quarter over quarter. That was largely driven by just timing of retail inventory getting delivered and not yet set and finished. So that cycle time is a little longer than we expected. I expect that this quarter we'll work through some of that. But I think demand at retail is very strong, so it'll probably be rather balanced through the quarter.

Okay. And then you talked about the REIT channel perhaps activity picking up a little bit, Mark. It's been lots of hits and goes in that channel. Can you provide a little more color what you're seeing on that front and, you know, how your customers are reacting? Have you started seeing them kind of step up order activity and how they're managing that business?

Yeah, so I think the REIT customers are starting to return to market in a decent way. Actually, some of our plants, you'll see backlogs probably grow this quarter in addition to the sequential growth in revenue, just because those customers are starting to return this quarter, kind of in the March-April time period. forward. Not everybody has returned, but I would say most of them have started to return to ordering and so I would expect that volume to ramp up into our second, you know, first and second quarters. It'll ramp through. Interest rates are not really impacting them to a great deal, most of them. I think it's really the ones that are focused on rentals are very strong and actually given the Champion Financing, partnership with Triad, and some of the other turnkey services we're offering. We've actually signed up some new communities that are now approaching us because of those additional offerings.

Gotcha. And on that note, Mark, how are you set up on Triad? I know early on as you kind of integrated, you were kind of working through that. How are you set up now? perhaps now as you kind of head to a very busy time of the year and appreciate any color in terms of opportunities and wins you've seen with this acquisition you guys made, or partnership you've made, obviously.

Yeah, it's been, you know, I think that the system integration or kind of setup is behind us. That's done. Their team at Triad has done a great job on that. I think we've rolled out some new programs. Those have been very well received. early endings on that, but the traction has been exceptional. And actually, I think one of the key surprises, or maybe not surprises, but good conclusions coming from that is given that we have this partnership, we're getting kind of customers that we couldn't attract previously are now looking to do business with us or more business with us because of those relationships.

Okay. Appreciate all the color, guys. Thank you.

Thank you. Our next question comes from Mike Dahl with RBC Capital Markets. Please proceed with your question.

It's actually Chris on for Mike. Maybe just going back to the volume outlook this quarter, results this quarter, I think the industry kind of came up low double digits. You guys, it looks like on an organic basis, saw volumes down mid-single digits. So could you just help us bridge the The gap in the weather was an issue, but just maybe put some quantification around the relative underperformance versus the industry.

Yeah, I think if you take a look at our top line and if you just adjust it for the finished good inventory bill during the quarter, you'll see that we're right on par. So it's really just a timing issue with its cycle time through the inventory channel and through the retail channel. They really created that.

Got it. Got it. So does that imply that next quarter you're assuming to outperform the market just given that timing dynamic?

Yeah, I think if you take a look, it depends on the timing and backlog as well on that, Chris. But yes, I think if you look at kind of how we're talking sequential growth, I think you'll see some of that freed up demand coming through how we're thinking about this upcoming quarter.

I appreciate that. And then just on the water intrusion remediation costs, I know you guys said you're expecting some recoveries to cover that. And just given the wide range of outcomes, I know it's still early on, but is your base case expectation today that the recoveries you'll get from suppliers will kind of cover the potential range of outcomes on the liability side? Or is it just some help on understanding the the ultimate cash flow impacts to expect from you guys.

Hi, Chris. Yeah, so we're really in the early stages of development of understanding what the total impact is going to be and what the recoveries are. So at this point, we're, you know, we just want to see how the repairs and communications develop.

And I guess timing of that clarity, just give a sense of kind of when you'll have a better sense of

Yeah, so the first step was our communication to HUD, and that happened recently. And so they need to come back to us and give us approval on our plan for remediation. And then the next step after that will be communication to the customers of the homes. And then we need to understand what reply rate we get. And from there, we'll go out and inspect the homes and do whatever the appropriate level of mitigation is.

Understood. I appreciate the call. Our next question is from Daniel Moore with CJS Securities.

Please proceed with your question.

Yes. Thanks, Mark. Thanks, Lori. Good morning. Touched on it, obviously, but maybe just drill down into the cadence of kind of retail traffic and demand through the quarter. as well as, you know, overall orders including community business and how that's trended thus far in April and May, you know, as we get more into the spring selling season as they continue to kind of tick higher sequentially. What are you seeing there at the ground level?

Yeah, the ground level, and good morning, Dan. The ground level has been good and healthy. I would say that through the first calendar quarter, our fourth fiscal quarter, We saw demand kind of steadily increasing in the quarter, as you would normally see during kind of the spring ramp. I will say January was a little slower than expectations, mainly driven by the weather, which kind of created a backlog of kind of some activity, you know, flowing through our retail orders. But, you know, as far as demand activity, retail is very healthy. Builder is very healthy. very good. Communities, like I said earlier, are starting to ramp. So I think we'll see not only the sequential revenue growth that I mentioned earlier, but we'll see an increase in backlog as well. So I think the order rates are fairly healthy.

Okay. And I know this is a little bit crystal ball and early, but in the past you've sort of given a little bit of a maybe a one or two quarter look. Are you given current trends? Would you expect to continue to ramp production through at least kind of the September quarter at this stage or TBD?

No, I think that's a fair depiction of how we would do it. We're slow and steady in our ramping and production. I think we're very focused on quality, especially with the Traction we've made in our branding processes and our social media followings now up to 1.5 million. So I think across our brand. So we're really getting that end consumer buyer who's not our traditional customer. So we want to make sure to really emphasize, you know, slow and steady ramp and keep our backlogs in that, you know, four to 12 week range.

Very good. And then obviously you're excited about, you know, I feel like you've got your DTC initiatives in a better position at this point. Any metrics that you can share or even anecdotes of how that's starting to drive, you know, demand from clients that you would not have necessarily reached otherwise directly to your company on retail, but as well as your kind of retail partners. Thanks again.

Yeah, thanks, Dan. I don't have specific necessarily metrics. I will say, you know, certain indicators such as phone call return time and other things like that or contact return time, email contact return time has, you know, improved drastically, 30-plus percent from our independent retailers and captives as we've driven these leads to them, and it's turning into higher conversion rates. So I think those kind of signs are really healthy, and I think some of the things we're implementing in terms of our call centers and other things are really impacting the customers to take away the confusion of how to buy our homes and help hand them off to a retailer who can drive that customer home.

All right, I'll jump back. Thank you. Our next question is from Matthew Boulay with Barclays.

Please proceed with your question.

Good morning. You have Elizabeth Langan on for a mat today. Thank you for taking the questions. I was wondering if you could just kind of speak to how you're thinking about industry volumes, you know, as we head into fiscal 25.

Yeah, I think industry volumes as a whole, you know, I think should pick up. really driven by the community channel and healthy retail activity. So the community channel was off significantly in fiscal 2024 and calendar last year. So they were down significantly in volume, which is really the whole driver of the industry's year-over-year decreases in absolute volume that we saw. So I think as they return, you know, you'll see kind of the industry get back to where it was in probably gradually, so maybe not on a full year basis, but gradually towards, you know, the late half of the year. We should get back to kind of a normal cadence in terms of demand activity versus what we saw last year.

And then the builder developer channel, Have you kind of seen anything, you know, I know that you mentioned that the demand has been good so far this year. Have you won any, like, incremental business? I know you have won business from, like, a top 100 builder previously. Is there anything, you know, kind of in the works or any momentum around, you know, any more wins like that coming forward?

Yeah, there is. I think, you know, this quarter... We won awards from several builders in several subdivision developments, so I think even that momentum is starting to increase. It takes a little bit of time for those orders to process through. They're not as quick as one might think just because of the cycle time of land development and other things, but we're starting to gain traction and actually conversion with our builder channel.

Thank you very much.

Thank you, Elizabeth.

Our next question is from Greg Palm with Craig Hallam Capital Group. Please proceed with your question.

Hi, this is Danny Egerich on for Greg today. Thanks for taking the questions. Was hoping to kind of dig in on now that we have more regional inclusion, maybe just how the strategy shifts a little bit more towards pushing homes through company-owned stores. Just any kind of progress update on that and how you think about that moving forward and how, if anything, it kind of shifts the strategy in the business.

Thanks, Dan. I don't know that it shifts the strategy of the business. You know, we have excellent independent retail partners throughout the country. I think in the parts of the country, I'll call it Mississippi, Alabama, that region, we had a very small presence, generally speaking, so having retail in that area or that distribution area is critically important. I do think over time we will see expansion of our captive retail, there's several or retail, independent retailers who will look in the next few years to retire and maybe exit the business. So we want to have a strategy to make sure to capture those. And given the success and traction we've had with our digital lead management, the conversion rates with our captive versus independence being, you know, higher conversion at a captive store with that digital channel, I think it bears some fruit for us. and really drives that synergy between them. But, you know, we're seeing the independents really adapt to the digital strategy as well. So I think it's a win-win.

Got it. That's helpful. And I think last quarter you'd kind of mentioned maybe expectation for fiscal year 25 of maybe 10% to 15% revenue growth. Anything over the last year? couple months that that has kind of changed that outlook or you still feel confident in that kind of growth this year yeah I think general industry growth should be in that range and we should be in line with that kind of industry range as well okay great and then maybe one last one in terms of kind of SG&A another step up in the quarter I know you mentioned is Is that kind of the new level to go off of or was there anything in there that kind of makes it one-timey or how should we think about that as we move throughout the year?

Tammy, so sequentially we did see SG&A pick up because we had an additional couple of weeks for the full impact of regional given the timing of the close in mid-October. And then in addition to that, in the March quarter, we also have our two large industry shows, Louisville in January and Biloxi in March. So that's something that occurs annually, but sequentially was an add for the quarter. But barring those couple of items, this is closer to the new normal. We are going to see a slight reduction in fixed SG&A. We did do some headcount reductions for overlap related to the regional acquisition at the end of the March quarter that we will see benefit of coming into subsequent quarters.

Okay, very helpful. Thank you.

Our next question comes from Jay McCandless with Wedbush Securities. Please proceed with your question.

Hey, good morning, everyone. So I wanted to ask with the community business potentially coming back, excuse me, but at the same time, it sounds like in the retail channel, you're selling maybe homes with less options, less thrills on them. What does that gross margin differential look like now between the retail channel and the community channel?

Not significantly different, Jay.

Okay. And I guess, Mark, could you quantify how much community orders are up? I mean, we're talking low single-digit gains. What are we talking about here? Because I'd say this is probably second or third quarter where people think the communities are coming back, and it turns out to be a head fake. So what type of numbers are we seeing?

Um, you know, I, I don't have, I'm not going to give, you know, specific numbers, Jay, but I think if you just look at the, the combination of our revenue during the quarter, our backlog growth, and combine that with the finished good inventory growth that we see on the balance sheet, kind of add those few numbers up and understand that, you know, um, a good portion of that or a decent portion of that is driven by the community value. And that gives us a lot of confidence that they're returning. But, yeah, I would say it's been strong growth in orders for communities on a year-over-year basis.

Great. And then could you tell us where chattel rates are sitting right now? And also, is the manufactured housing industry starting to see any type of interest rate buydowns? like we've seen from the stick builders?

I'd say rates right now for a good healthy customer is about 8.5% today. We really have not seen industry rate buy-downs. I will tell you that we have some national products that we've launched very selectively with our partnership with Triad that we are doing a a test pilot rate buy down just to see the difference in traction between you know does that really draw that consumer in versus doesn't it so we're kind of getting some data from a test pilot program to do that but as a whole the industry really has not done that in any meaningful way i think the price point that we have as an industry is really helping the consumer in getting that step-down buyer who's kind of disenfranchised with, say, built homes, rent, or other price points.

With that trial with Triad, are you writing only pristine customers, or are you trying to maybe write across the FICO spectrum to see what kind of results you get? What customers are you targeting with that trial?

Now, it's really just, it's no different in the FICA scores than Triad's normal customer base. We're really just doing test pilots to say, you know, with these products, we're going to do a small buy down with these, we're not, and just see the incremental difference between those trajectories. It's really not a, Triad sells or passes their loans through to Blackstone, Community Banks, Carlyle, others, so they already have a defined risk matrix and FICA score matrix. So we're just fitting in with that matrix box and just doing test pilots in conjunction with them to see how that goes.

Gotcha. And then, Laurie, could you remind me what you said in terms of the gross margin in the first quarter? Did you say down 100 to 150 basis points sequentially?

Yeah, over the next couple of quarters, Jay, we're going to see some declines in gross margin. And, you know, we've got to continue to work through the regional inventory that we purchased as part of the acquisition that was marked to fair value. So we're going to continue to see that. But also we're seeing more, a larger decrease in options as interest rates remain higher. So that's the primary impact. So we expect the fees to come down a bit.

as well as gross margins okay and then the last one i have um just thinking about the the input cost um osb looks like it's it's rolled over a little bit um could you maybe talk about what you're seeing on the lumber front as well some of the other major inputs and if those could be a tailwind or headwind to that gross margin over the next couple quarters

Yeah, no, we're really expecting pretty modest inflation, you know, in the 2% range when we feel, you know, that we can pass that on as it comes in. So not big movers from an inflation perspective on inputs.

That's all I have. Thank you. Thanks, Jay.

Our next question is from Daniel Moore with CJS Securities. Please proceed with your question.

Thanks again, quick follow-up or two, just housekeeping on the remediation. How many homes are we talking about between 2016 and 2021? And I assume whatever the net cash impact is, net of recoveries, fair to assume that'll be over several years rather than several quarters.

So we're not disclosing the homes at this point, Dan, and the recoveries, yes, several years.

Okay. And then just capital allocation, are you still looking at M&A right now or more focused on ramping capacity utilization as demand returns at their existing footprint? And then just how you're thinking about deploying the buyback, is that kind of a one-year timeframe in your mind or more open-ended? Thank you again.

Yeah, Dan, thank you. I think, you know, our M&A pipeline is still healthy and robust. I think, you know, we still have good cash generation. happening and probably, as you're noting, kind of an increased outlook going forward. So I think those factors play into it, as well as the success with our integration with regional and champion financing. So I think M&A's definitely always on the table. And then as far as the share buyback, it's open-ended as far as the timing of that.

Thanks again. Thank you.

We have reached the end of the question and answer session. I'd now like to turn the call back over to Mark Yost for closing comments.

I want to thank everyone today for your attention, and we look forward to updating you on our progress on our first fiscal quarter earnings call. Thank you, and have a great day.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.