Champion Homes Inc (SKY) 2020 Q3 法說會逐字稿

Good morning. Welcome to Skyline Champion Corporation's Third Quarter Fiscal Year 2020 Earnings Call. The company issued an earnings press release yesterday after close. I would now like to introduce your host for today's call, Sarah Janowicz, the company's Director of Investor Relations and External Reporting. Sarah, you may begin.

Good morning and thank you for participating in our earnings call to discuss our third quarter results. Joining me on today's call is Mark Yost, President and CEO; and Laurie Hough, EVP and CFO.

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 our expectations and projections. Such risks and uncertainties include the factors set forth in our earnings release and in our filings with the Securities and Exchange Commission.

Additionally, during today's call, we will discuss non-GAAP measures, which we believe can be useful in evaluating our performance. A reconciliation of these measures can be found in the earnings release. I would now like to turn the call over to Mark.

Sarah, thank you. Good morning, everyone. I'm pleased to report strong gross margin and operating income improvements this quarter compared to the same period a year ago. As we look at industry demand trends, we have seen HUD industry shipments rebound favorably over the last few months and anticipate that trend will continue throughout the calendar year.

With revenue down 3.5% to $342 million this quarter, we were able to deliver strong operating leverage with a year-over-year increase of nearly 50% in operating income. Adjusted EBITDA grew by 13% year-over-year reaching $29.7 million for the quarter. Adjusted EBITDA margin in the quarter was 8.7%, a 130 basis point improvement compared to a year ago. We saw strong gross profit improvement across all of our reporting segments, driven by merger synergies, standardization and operational improvements as we saw material inflation start to rise during the quarter. I'm particularly proud of the fact that we were able to deliver these results without the benefit of top line growth in the quarter.

During the quarter, we saw our Canadian and Star Fleet revenues down due to economic and housing conditions in Western Canada, along with softer RV market in the U.S. We anticipate that those markets will remain soft in the short term. In the U.S., we experienced marginal unit volume increases with a shift to single section product, resulting in lower average selling prices during the quarter.

Focusing on the market, there are ample opportunities for continued growth, driven by favorable demographic and economic factors. HUD industry volume for the 3 months ended November increased by approximately 6.7% year-over-year with strong growth in the South Central region of the country, offset by declines in California and parts of the Midwest. We are seeing strong demand for affordable housing and expect HUD industry's year-over-year volumes to continue at this mid- single-digit growth rate for the remainder of the calendar year with California rebounding towards the end of our fourth fiscal quarter and the Midwest expected to return late spring after the customer consolidation is finalized. The broader housing market is also showing signs of strong growth, especially at the affordable missing middle price point. This will translate into higher levels of demand for the industry later in the year due to the lag between single-family starts and HUD shipments. Additionally, we believe that manufactured and modular homes will play an increasingly significant role in filling the gap for new single-family homes at more affordable price points compared to other housing options. We are seeing evidence of this increasing role from recent events on the financing, regulatory and builder fronts. On the financing front, while we are still waiting for the GSEs to roll out their secondary market for Chattel loans outlined in their duty to serve, we are encouraged by the private placements that occurred late in 2019. Financing terms are starting to become more competitive as a result, which should translate into demand later this year. Zoning changes are additionally starting to happen throughout the country to help solve the housing shortage. We are seeing increased demand for alternative dwelling units, or ADUs, in states like California, which have lifted zoning restrictions to address the need for affordable living spaces in urban areas. The feedback from customers for our ADUs from the International Builders' Show in Las Vegas last week was very positive. The product provides a simple solution for affordable housing in those markets. Additionally, in Las Vegas at the International Builders' Show, we showcased our Genesis home series, an affordable housing solution for builder developers. The feedback from builders on the quality and features of those homes at that price point exceeded our expectations. They were surprised at the speed to market and labor solutions that these products provide. One supplementary benefit was that these products have lower financing costs due to the support from the GSEs. In addition to the interest we received at the IBS show, we have started to experience traction in this past quarter with a handful of models ordered for delivery to subdivisions. We are very excited about the long-term potential of this new class of homes.

I will now turn the call over to Laurie to discuss our quarterly financials in more detail.

Thanks, Mark. Net sales decreased to $342 million in the current quarter from $355 million in the year ago quarter. We saw revenue declines of $4.7 million in the U.S. factory-built housing segment, as well as declines in our Canadian factory-built housing segment and transportation business revenue of $7.7 million. The number of homes sold in the U.S. increased slightly versus the same quarter last year while the decline in the U.S. factory-built revenue was driven by a reduction in average selling price per U.S. home sold of 2% to $60,600.

The decline in average selling price was due to a shift in product mix as we sold a larger percentage of single section homes this third quarter versus the December quarter last year.

Canadian revenue decreased by 16% to $23 million, with corresponding decreases in the number of homes sold in the quarter. The number of Canadian units sold decreased to 276 homes compared to 329 homes in the prior year period.

Average home selling prices were stable at $82,600. We expect similar Canadian year-over-year volume shortfalls for the remainder of the fiscal 2020 compared to the same period in fiscal 2019, consistent with the broader housing market in Western Canada. Consolidated gross profit increased to $69 million, up 6% versus the prior year quarter. Our U.S. housing segment gross margins were 20.1% of segment net sales, up from 18.5% last year. Sequentially, from the September 2019 quarter, U.S. factory-built housing segment gross margins were down 80 basis points from 20.9%, driven by the impact of normal seasonal shutdowns as many of our facilities reduced or ceased production during the holiday season.

SG&A in the third quarter decreased to $45 million versus $49 million in the same period last year. The decrease was primarily due to a reduction in noncash equity-based compensation expense and integration costs.

Net income for the third quarter was $17 million or $0.30 per share compared to net income of $10.5 million or earnings per share of $0.19 during the same period in the prior year, driven by an increase in profitability from higher operating income, a reduction in equity compensation and other expenses and lower net interest expense.

On an adjusted basis, we generated $0.32 of net income per diluted share compared to $0.27 in the year ago quarter. The company's effective tax rate for the 3 months ended December 28, 2019, was 27% versus an effective tax rate of 29.7% for the fiscal 2019 third quarter. The change in the effective rate was primarily due to higher nondeductible share-based compensation expense incurred in the prior year.

Adjusted EBITDA for the quarter was $29.7 million, an increase of 13% over the same period a year ago. The adjusted EBITDA margin expanded 130 basis points to 8.7%, largely due to continued margin capture from synergies related to last year's combination reaching their run rate levels earlier this fiscal year and execution and identified operational improvements.

At the end of December, our consolidated backlog was $133 million compared to backlog last December of $181 million. Although backlog varies significantly by plant, our average U.S. plant backlog stood at 5 weeks of production at the end of the quarter. Backlog remains within our optimal range of 4 to 6 weeks, which allows us to effectively schedule production and manage the supply chain with our vendors. We believe backlogs have returned to more normal levels compared to the elevated levels experienced over the last year. We are focused on continuing to execute on our operational improvements and product rationalization initiatives, while bringing more value to our customers by continuing to elevate opportunities to refine and strengthen our costing and pricing strategies on our products, as well as prioritizing efforts on operational improvements and efficiencies, leveraging our knowledgeable and capable team members. We feel that these self-help initiatives will allow us to achieve a 10% adjusted EBITDA margin target at our current volume levels. We are on track to achieve this target in the next 18 to 24 months.

As of December 28, 2019, we had $171 million of cash and cash equivalents. Cash generated from operations during the third quarter of fiscal 2020 decreased slightly to $21 million compared to $23 million in the same period last year as cash flow generated by increased profitability was offset by cash utilization for working capital purposes. During the quarter, we used excess cash to pay down $5 million of our revolving credit facility. As a result, the company had $44 million of unused borrowing capacity under our $100 million revolving credit facility as of December 28, 2019.

We have a strong cash position with added liquidity from our credit facility that provides ample flexibility to invest in our core business and our strategic initiatives. We continue to be focused on identifying areas to utilize our strong free cash flow and opportunistic growth, which could include potential acquisitions or further organic capacity expansions. I'll now turn it back to Mark for some closing remarks.

Laurie, thank you. As you can see from our results, we continue to achieve solid financial and operational performance. We are pleased with our continued track record of progress as we continue to achieve incremental improvements along our path to reaching our medium and long-term goals. We are encouraged by the feedback from our retail and community partners on the product and services we're providing them as well as the future opportunities to expand our off-site construction model offerings with an evolving customer channel like builder developers. As we look forward, we expect our markets to remain healthy, driven by the increased demand across the country for affordable housing. Our optimism is supported by the improvements that we've seen in the financing environment and the attention by regulators to suggest changes that are -- ultimately benefit our end customer. With favorable long-term demand fundamentals, we continue to invest and evaluate opportunities to position Skyline Champion as a sustainable solution for the future of our customers and their families. And with that, operator, you may now open the lines for Q&A.

(Operator Instructions) Our first question is from Daniel Moore with CJS Securities.

Starting with, I guess, backlog's obviously now back down to, as you described, a more normalized level of 5 weeks. You certainly laid out a scenario where shipments likely start to increase. So just maybe talk about underlying demand trends, traffic at the dealer level, expectations for backlog as we look into fiscal Q4. Do you expect that to stay flat for the next quarter or 2? Start to build again? How should we kind of think about all that over the next, say, 90 to 180 days?

Very good. Thanks, Dan. I think we see good traffic at the dealership level. Overall, the industry and activity across the board, it's very good, very healthy. So I think everything is very positive. We've seen strong growth as we mentioned in South Central Atlantic region recently. The past few months is -- 77% of the increase in the industry has been in that kind of Alabama through the Carolinas, Mississippi type region. So we've seen that rebound first, which was hardest hit last year by the weather. So we're seeing other markets start to kind of come back right now across the board, which is very good. Backlog should build into the first -- or into the fourth quarter -- end of the fourth quarter here, and then continue into, obviously, the June time period. So very confident in that. We have a normal seasonal backlog dip normally, especially with our Northeastern footprint. So this is very normal. Our backlogs actually were very good for this point in time of the year.

Very helpful. And then just in terms of mix and modest decline in ASPs, do you expect that to continue as far as the U.S. product is concerned in Q4? And any -- obviously, you can't necessarily predict the impact of raw materials going out further, but what are your thoughts for trends as we get into fiscal '21?

No, I would expect multi wides to pick up as we go through the season kind of into the June time period. Most of the dealers, as we talked about on the last earnings -- probably last 2 earnings calls, dealers have low inventory levels and I think this quarter particularly what they focused on is they had their sites ready for Single Wides. So they were able to take that product quickly because it's easier to set up a Single Wide product in the field for some of the community customers and some of the retails because of the -- there's less site work involved in setting those up. So during the winter period, keeping inventories lean, they probably tend towards those products first. But I think as the fall happens and things warm up, you'll see a more -- a larger trend to multi wides as the season picks up throughout the year. So you'll see a general uptick, a gradual uptick, as the year goes on in ASPs into the June, July, August time period.

Perfect. Lastly for me. A subject I know you don't mind talking about, maybe just elaborate on Genesis and the builder developer channel. You mentioned a couple of specific orders that you've seen. Any more specific tangible evidence of progress and detail that you can provide for us would be helpful.

Yes. Thanks, Dan. I think Genesis was well received at the International Builders' Show this past week. We've seen a tremendous amount of inquiry and activity from that. As we've mentioned earlier, we have seen a handful of orders start to be produced for subdivision to get in the ground with subdivisions. So they're actually in production now, being produced. So that's very encouraging that those are -- those levels of activity have happened. We've already produced MH Advantage in the field, but this is kind of a main forage in going into subdivision builder developer channel and it's actually starting. So we're encouraged by that.

Our next question is from Rohit Seth with SunTrust.

I just wanted to ask, what are the kind of trends you're seeing in January?

Trends, Rohit, in just the overall HUD market? Or what are you?

The HUD market on volumes.

Yes. I think January trends and orders are good. So I think year-over-year order activity is increased. So general trend is probably consistent with what we mentioned on the call. We're seeing good year-over-year growth.

Good. And then just curious if you maybe can compare and contrast like the entry-level stick-built builders are seeing very good order progression. Just curious, why do you think there's such a big delta between maybe manufactured housing and the stick-built builders are seeing the entry-level housing demand really surge right now?

Yes. I think we'll see that type of pickup in demand, but there's a natural lag in all of that activity for manufactured housing or the HUD market. So generally speaking, as an example, a lot of the site-built demand has been fueled by interest rate drops. If you think of our customer base, generally, what will happen during a period of time where interest rates drop, the retailer partners will reach back out to their customer base and let them know there was interest rate drop. Once that customer determines they want to buy a home, they then have to find a piece of property to place that home upon, which takes a lead time of, let's say, 4 to 6 months or something like that. So really, when you think of the site-built market and interest rate drop, because it's a land home typical deal, can be acted upon immediately, whereas a traditional MH product through a retail distribution will not be as immediate, because of the -- land is not tied with the home readily, number one. Number two is, typically, there's less of a benefit for an interest rate drop for some of our customers. An average customer for manufactured housing or a HUD code product due to a lower price point will save -- if it's -- interest rates have dropped about 1% in the quarter over the past year or so, and that will save a Chattel loans customer about $600 a year, whereas a site -- traditional site builder will save about $2,700 or maybe $3,000 a year. So there's more impetus to fuel that. So it's just a timing lag, we'll see that, but it takes time to work itself through the channel because of the land piece.

Understood. And then maybe could you talk about the M&A pipeline? You got substantial cash on the balance sheet and, I believe you said, you would be willing to take your net debt-to-EBITDA to about 3x. So maybe just talk about what you're seeing out there? Are there any opportunities to do some deals in the near term? Or is that more of a longer-term fix story?

No, I think we're always actively looking at the M&A pipeline. So I think there's a pipeline of potential -- always potential near-term and long-term M&A activity.

Our next question is from Greg Palm with Craig-Hallum.

I guess just maybe a little bit more color on kind of what you're seeing near term. Mark, you gave some kind of qualitative, I don't want to call it guidance, but you gave some qualitative commentary the last quarter and kind of how you thought December and March would shake out, and I'm just wondering if you could just sort of give us an update on kind of how you're thinking about the near term. It sounds like kind of a mixed bag out there.

Yes. And you're talking in terms of just outlook on revenue, Greg?

Yes, exactly.

Yes, yes. I think we'll continue, as we mentioned, to see softness in the RV market and which drives a lot of our trucking business revenues. Canada, we continue to see single-family starts in Canada were down as you guys -- in British Columbia, single-family starts were down 28% year-over-year during the quarter, Saskatchewan was down 18% year-over-year for the quarter in single-family starts in Canada. So we only dropped 16%. So I'm glad we're gaining share in Canada in the overall housing market with our volumes. But I anticipate, with the weakness in single-family and the economy in Canada, our Canadian revenues to be soften -- soft in the next quarter or so just due to tying that to single-family starts and that lag that's in there. In the U.S., I think we're going to see good growth in the U.S. in most of the country. I think there will be timing lags in parts of California that will take time to develop, and California is picking up and -- but it's a land timing and zoning-permitting timing issue that we're seeing in California. So we expect that to rebound but it will take probably until the first quarter to do that. And then in parts of the Midwest, there's been customer consolidation primarily on the community front where there's been merger and integration activity happening at multiple sites and multiple parks. And the result of that is until those transactions close, I think there's going to be a pause in buying in parts of the Midwest. So you'll see a downturn in parts of the Midwest for probably until, I would guess, April, May time period when some of those transactions close is the anticipation.

So other than that, I think you're going to continue to see strong growth in the South Central region. Texas is starting to pick back up. Texas is down about 12% in the last 3 months, but we'll see that rebound. So I think, overall, kind of neutral for the quarter, net-net, including Canada.

Got you. And what's -- I mean, if we're talking specifically U.S. HUD code, what is your expectation for calendar year '20 industry growth and, I guess, do you see yourselves as outperforming the industry in this calendar year, underperforming, neutral? How are you seeing things as of -- as we sit today?

Yes. And you're talking HUD market, right, Greg?

Yes. Correct.

Okay. Yes. So I think HUD growth, as I mentioned, is going to be kind of that similar to where we've seen the last few months rebound. So mid-single, upper-single-digit growth kind of like areas for this year for the HUD industry. I think our HUD growth will be similar to the industry. We'll have our normal seasonality for the winter and summer. So we'll probably outpace that during the summertime and then underpace it in the wintertime. But net-net, we'll be neutral to that growth. I think we will see probably more activity in non-growth HUD market. So the ADU market and some of those park model markets, we should see that. So we might have different channels that we might tend to that will change our growth trajectory with HUD a little bit. But other than that, it's really just a trade-off on what product mix we choose to produce.

Yes. Makes sense. Shifting gears a little bit to builder developer, which obviously seems like a very, very big opportunity. I'm hoping you can just give us some more color here on kind of who your typical end customer might be? And maybe use sort of the feedback that you got from the Vegas show. But in general, is there a certain number of homes that folks are looking for? And probably more importantly, how long does a typical sales cycle like this take to play out in your mind?

Yes. And that's a great question, Greg. I think we -- the International Builder Show, we saw builders from -- that typically did anywhere between 25 houses to maybe 500 to 700 houses a year. So the customers that went through the builder show were kind of in that range. So we've seen a tremendous amount of activity in discussions with that group of customers in that channel. We've also seen land developers who are not necessarily builders but land developers, who are interested in expanding into but they don't want to, get into homebuilding but they wouldn't mind partnering or working with a company to add value to their land and work with that company. So I think those are the 2 key demographics right now that we've seen. The channel is really site dependent. We have some builders that are in the pipeline that really have the zoning done, the permitting done, the infrastructure in place, and those are the handful of homes that we've started to produce and put into place. There's other developers who have the land zoned and permitted are in the stages of putting in the infrastructure. So that will take a little longer since that infrastructure could take 3 to 6 months to put in place. At which time the houses can be delivered. And then there's a handful of builders as well that you would look to that -- if they don't have the permitting and zoning. So it's really building the entire pipeline and filling the sales funnel with all of these different opportunities, and some of them have started to strike, and we anticipate having a handful of subdivisions going by later on this year in the June to September kind of time frame. But really, it's all about filling that sales pipeline and taking advantage of this long-term opportunity.

Okay, great. Last one for me. I guess, maybe a question for Laurie. Given her commentary around margins, I thought it was interesting, I think what you said was the ability to achieve 10% EBITDA margins on this level of revenue. I'm assuming you're not thinking that revenue will be flat, call it, 18 months from now, but even if it was, I guess, what are the key levers and going from, call it, a mid-8s EBITDA margin to 10%? I mean, is that gross margin expansion? Is it operating leverage? So something to do with the cost structure. Can you just kind of walk us through how you're thinking about that?

Sure. Thanks for the question. Yes, it's definitely in the gross margin line. And it goes back to, Greg, all those things that we've been talking about related to our operational improvements that we're focusing on, standardization of product offerings, rationalization of base metals and options as well as material usage, product value, engineering the product, operational excellence, things like that.

Our next question is from Matthew Bouley with Barclays.

I wanted to ask kind of any additional insights on that divergence between the U.S. HUD shipments for you guys versus the industry. Is that -- I think in the past, you had talked about perhaps passing up on some lower-margin business. And I think, Mark, it just sounded like you were referring to some of the geographic footprint as well with the Northeast as part of that. So, I guess, what gives you that confidence that, that SKY would be able to outperform the market in the summer months, as you just mentioned?

Thanks, Matt. I think 2 things. One is we normally -- it's very typical for us to see kind of a seasonality. We have more plants in the North sector of the country, the Northern part of the country, which is more affected by weather than most other participants. So we have a Northern demographic of our plants. So we will typically see a market share ebb and flow throughout the calendar year. It's very typical for us, just given our geographic footprint. Overall, though, I would say that if you look at the markets that were most impacted last year, that declined, the decline happened fastest and hardest in that kind of South Central region. Alabama, Mississippi, Tennessee, South Carolina, all of those states, really when you look at the declines last year that we saw that started kind of in that October through December time frame last year and went into the spring time of last year, we saw most of that in that rain affected area where crews could not set units and that was the hardest impacted area in year-over-year declines. So I think it's -- what we've seen thus far is that area has rebounded fastest with good weather conditions this year as we expected. But we've seen strong interest in our orders and everything else. So that's what really fuels the view that we have of -- as we go through the season. So we see the orders picking up. We see the pipelines building. We see the activity. We just had our show in Louisville with our retailers. Activity was very, very good. Orders were very good. Activity was very good. So I think it's just everyone's getting ready to order for the spring. And so we'll see that normal seasonal pickup.

Okay, that's perfect. And then secondly, just on the gross margins side. Two parter, number one, just -- was there any offset in there from Leesville? I know you guys had signaled there could be some temporary pressure as that ramps up. And then secondly, just given you've seen that modest uptick in lumber prices. How are you guys thinking about the ability to kind of push price a little bit going forward to offset that?

Matt, yes, I think there definitely was a bit of offset from Leesville in the numbers. And we'll probably continue for the next couple of quarters as we continue to ramp the plant. We have about 12 more months of ramp at that plant. So the next couple of quarters, for sure, we'll see some pressure from that. As far as ASPs in lumber, we did see lumber kind of even out this quarter versus the same time last year. We expect lumber pricing to go up a bit just based on general housing trends and what we're seeing in the market. So I do believe that we'll be able to match that in price.

(Operator Instructions) Our next question is from Mike Dahl with RBC Capital Markets.

First question, I wanted to start with the margins. And, Laurie, you mentioned a number of things going into the success in terms of margins for the quarter and then your expectations going forward. But I wanted to ask for a few more details there. And so a couple of things that I'm curious about on the synergy side. Have you identified incremental opportunities for synergies? And can you give us an update on where you're running versus the target? And then secondly, I think one of the bigger buckets was on the SKU rationalization or standardization. So maybe just a little more color on where you are in that process? And how much incremental progress you expect over the next 6 to 12 months?

Sure. So I would say that the margin improvement is really coming from our operational initiatives that we've talked about more than deal synergies. We -- just as a reminder, we reached the deal synergy run rate targets in the June quarter. So year-over-year, the synergies are certainly helping us. But I would say, sequential quarters, we had some movement in the margin, but definitely saw some improvement from operational synergies, the rationalization and standardization of the product offerings. Simplifying the products to get them through the plant more quickly, helping production efficiencies. We're going to see kind of a steady increase in those over the next couple of quarters. I think the March quarter is going to be just generally overall more similar that to this quarter in -- from a margin perspective. We're going to see some pressure in Canada. We're going to see, as I mentioned before, lumber costs increasing, which will hopefully be able to offset with price. We have seen some labor inflation. So all of that inflation is getting offset either with price or our operational improvements, depending on the geographic locations of the plants.

Okay. That's helpful. My second question, just shifting back to Genesis. I guess, 2 questions on Genesis. The first one, in terms of -- I think the question was asked on a type of builder that you've been hearing from or working with. And aside from size of builder, I was curious if there's been any notable trend in terms of whether the builders are actually planning to put these on land as for sale homes or if these are going into build-to-rent communities. So any dynamics there? And then second part, just a little more color on the ADUs and whether post the California laws and other things you've already seen, an uptick in placements there?

Yes. Thanks, Mike. I think as we look at Genesis, we're actually seeing activity from builder developers and land developers both, frankly, in the for rent market and for the for sale market. So in the pipeline and in the sales funnel, if you will, we have seen both customer types show interest. So it's really dependent on that site and what that customer's interest is. I would say just as rule of thumb, it's probably 80%-20%, 80% for sale and 20% for rent, but that really changes based on geography. As far as the ADU market, obviously, we've seen a tremendous amount of activity in California, and we expect that to continue. Recently after the California laws were passed, we saw a -- like, for instance, the city of Los Angeles saw a 28x increase in the number of ADUs permits that were issued. So they saw a strong growth in ADU permits. Oregon now has passed a statewide legislation on ADUs along with Washington. We've seen recent developments in the cities of Austin, Minneapolis, Philadelphia and Atlanta passing zoning changes for that. And then right now, we've seen Virginia, Maryland, Massachusetts and Colorado, all have proposed legislation under review to change zoning, which could impact the ADU market as well. So I think there's a good amount of activity. It's just getting that through the pipeline, getting it into the field and getting builders and others comfortable with it. But I think if you really look at the studies in California, the growth increase of the number of permits in mainly those urban pockets, has been -- I think, right now, in Los Angeles, 18%, about 18% of the permits -- 18% to 20% of all the permits in the city of Los Angeles are all ADU permits. So it's now a major portion of all housing permits within the city.

Our next question is from Phil Ng with Jefferies.

Mark, your commentary generally has been pretty upbeat for a few quarters on the outlook. Appreciating there's a lag but when you kind of expect to see a more noticeable inflection in demand in your U.S. business? It sounds like there could still be some modest headwinds this spring. So to kind of deliver that mid-single-digit growth outlook for 2020 would imply a pretty sharp acceleration, whether it's the summer and fall. Are we thinking about that right? And are you set up properly to kind of meet that demand from a capacity and labor standpoint?

Yes. Thanks, Phil. And I think that statement is correct. I think we're going to see good growth in parts of the U.S., just with the exception of maybe 1 or 2 regions of the U.S. that will just lag either due to customer timing and/or just that state's growth trajectory in this period of time. So I think we're going to see activity pick up pro ratably throughout the year as we go during the summer and late fall periods. That's correct.

Got it. But you're still feeling pretty good about your ability to kind of hit that mid-single-digit trajectory in calendar 2020. Is that the right way to think about the U.S. business?

That's correct, that's correct.

Got it. And then I guess, when we think about medium to longer term, obviously, manufactured home market has lagged and there's a number of catalysts that could drive growth, whether it's Genesis and just better financing. Can you kind of remind us how you are set up from a capacity and labor standpoint? And what type of investments you need to scale up over time and relative to how you're like positioned versus your competitors? Because if I remember correctly, you may have a little more [mouthful of] capacity. So it'd be kind of helpful to kind of frame that up for us.

Yes. Thanks, Phil. I think this past quarter, we operated at 67% capacity utilization. So we definitely have some upward potential to increase our utilization and throughput. We've recently expanded some of our production lines, obviously, Leesville. We've expanded a park model ADU line in California. We've got one in our Pennsylvania operation that we've opened recently. So I think we're poised well to take advantage of that growth as it funnels through. I think we've got 14 plants that are producing ADU models. Right now, we've got 23 plants that are producing a Genesis series as well. So it's really building that funnel and pipeline. And then as that pipeline of business develops, we will look to open up additional capacity. And I think we've been investing in people. We've been investing in -- like, right now, we've got GM and training programs and other people, as an example, that -- so we've got a bunch of people who are currently actively traveling the country today, learning best practices, learning the operations, working side-by-side with their peers or their future peers, I should say, to have those people ready to go to fill vacancies in various management positions throughout the company as we need to expand.

Got it. That's helpful. And just one last one for me. From a cash flow standpoint, I mean, cash flow, obviously, is building nicely. It's encouraging. Laurie, that's a nice problem to have that you guys have kind of hinted at maybe taking a more proactive approach on M&A going forward but with these things, you can't time to. Kind of help us understand how you're thinking about capital deployment? And if there isn't anything in the next 12 to 18 months, would you consider returning more of that cash back to shareholders?

Something that we would definitely consider but really more focused on the growth of the company through M&A. That would definitely be our top priority.

Got it. And then can you help size how we should think about some of these potential opportunities in terms of magnitude? I assume it's probably not as big as Skyline but any color on that would be really helpful.

Again, specifically on the M&A front, Phil, you're talking about?

Yes. I mean, in terms of targets, you guys are potentially looking at? Just help us size how big any of these deals could be? Are they more bolt-on in nature? Or are they going to be a little more sizable in general?

I think there's a wide pipeline. We've got a active M&A focus. So we've got a pipeline of projects, frankly, that they range the gamut from something that scales as far as like $25 million in revenue upwards to things that would be more meaningful and blockbuster type.

We now have a follow-up question from Greg Palm with Craig-Hallum.

Just maybe a couple of minutes on financing trends. I guess, first, as it relates to the GSE programs, any update there on the Chattel pilot? And I guess, presumably on these subdivisions in Genesis, they will be utilizing the -- some of the new GSE programs there or the land home. So can you talk about sort of what the potential is there on that front, too?

Yes. Sure, Greg. I think as far as the GSEs, the GSEs have really not moved yet on the duty to serve Chattel program in the secondary market. So we are still waiting on that. We are not -- at least I'm not, just because there's been no movement, anticipating anything anytime soon. So I would say, best guess would be midyear this year to maybe fall time period for the GSEs, which is why I'm encouraged by -- we've seen recent activity in the secondary market for private placements. And that's really caused several lenders to start to move. Interest rates have dropped. They're buying deeper in the FICO scores, things like that, that haven't traditionally been there and available. So that's all encouraging. And we'll start -- that'll start to trickle out later this year. As I said, when there's like a FICO score change or industry change, it doesn't happen immediately because then what the retailers do is they will reach out to all the customers that were turned down because of their FICO score that came in in the past 3 months. They'll return those phone calls and say you can get qualified now as an example. If they were turned down, then that customer has to find land and then go through the buying and selling process. So even a change like that is not going to be overnighted. There's a little bit of a lag there.

As far as the MH Advantage, that's more immediately actionable. That's really dependent on the -- either the retail partners -- we're seeing a lot of retailers start to take inventory of MH Advantage and MH Choice product and then put it into subdivisions as kind of a one-off infill within the subdivision. So we're getting -- seeing an increasing amount of retailers to take that product and get that financing through. And it's also, obviously, for the builder developer and kind of Genesis series. But I'll say, Fannie and Freddie are 100% behind the MH Advantage. Actually, 100% is probably an understatement. They are very active, and the training has proceeded very well. I'd say there's still probably a lag in the appraisers process, but -- or the appraisal process. But besides that, very encouraging.

Yes. Okay. And my follow-up relates to how you answered that first question because one of my main takeaways from Louisville was probably an elevated amount of excitement around financing accessibilities. You had a couple of entities, announced some new programs, which you alluded to around the FICO score. So any qualitative commentary around how many folks out there get turned down because of FICO scores and how some of these new products that were just recently announced could benefit it? And I'm not sure if the way -- if you could characterize it in a level of importance in terms of the financing environment, what we've seen here in the last couple of months relative to the last 4, 5, 6, 7 years. Just trying to figure out how, from a magnitude standpoint, how important that could be?

That's -- it's hard to quantify, Greg. I would say that overall you're probably talking in the order of magnitude of a few percentage shipments, something in that nature, of our industry shipments, of the HUD shipments. It's probably -- if you're talking just lowering from 600 to 575, which is, I think, what you alluded to at Louisville, that drop in FICO score would probably add a few percent to the overall industry in terms of shipments. And this is what I would anticipate the lenders would say in terms of their magnitude or expected lending into that is what they've mentioned.

This concludes our question-and-answer session. I would like to turn the call back over to Mark for closing remarks.

Thank you very much. As we mentioned, it was a very good quarter. We see the strength of the industry, strengthening builder developer activity getting better and improving as we launched our Genesis brand and look forward to the future.

Thank you very much, and have a great day.

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