Champion Homes Inc (SKY) 2022 Q4 法說會逐字稿

Good morning, and welcome to Skyline Champion Corporation Fourth Quarter and Full Year Fiscal 2022 Earnings Call. The company issued an earnings press release yesterday after close. I would like to remind everyone that yesterday's press release and statements made during this call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These statements are subject to risks and uncertainties that could cause actual results to differ materially from the company's expectations and projections. Such risks and uncertainties include the factors set forth in the earnings release and 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 Champion's President and Chief Executive Officer. Please go ahead.

Thank you for joining our earnings call, and good morning, everyone. Joining me on the call is Laurie Hough, EVP and CFO. Today, I will briefly talk about our full year and fourth quarter highlights, then provide an update on activity so far in our first quarter of fiscal 2023 and wrap up with thoughts about the balance of the year.

I'm pleased with the results Skyline Champion achieved in fiscal '22 as we continue to make progress delivering top line growth and expanding our profitability, while improving our capacity and capabilities to better serve our customers. For the year, we were able to provide 26,165 customers and families a place to call home, as we grew net sales by 55% and adjusted EBITDA by 163%, expanding margins by 650 basis points. Our results were driven by the rising demand for affordable housing and our ability to increase output at higher profitability levels despite ongoing supply chain headwinds and inflationary pressures. From an industry standpoint, demand remains strong as supply-side housing shortages, a growing base of homebuyers and higher interest rates and inflationary pressures are converging, greatly raising the need for affordable housing solutions.

The current environment has increased the awareness of our housing solutions and our investments in enhancing the buyer experience has allowed us to convert more traditional site buyers and expand our market share. We ended the year on a strong note with an excellent fourth quarter results driven by the demand for new housing and our improved operational capabilities. Our affordable price point during these inflationary times continue to generate healthy order demand with backlogs growing by $127 million during the fourth quarter to reach $1.6 billion.

Fortunately, we were able to increase production during the quarter allowing us to improve our delivery times to our customers to 35 weeks at the end of the quarter compared to 43 weeks at the end of the third quarter. As a result of the solid production increases, we delivered 6,980 homes, an improvement of 10% from the prior year and up 13% sequentially. We improved our U.S. manufacturing facilities capacity utilization to 72% for the quarter, an increase of 4 percentage points from the third quarter. Achieving these production gains despite facing operational challenges caused by supply chain disruptions across our manufacturing operations and the industry.

Our improved production efficiencies were helped by the continued progress streamlining our product offerings and allowed us to increase daily production rates. While we were able to add to our workforce, transportation cost availability remains a challenge to output with truck driver shortages across all regions of the country. Additionally, our Navasota, Texas plant completed its certification process in March and began shipping homes in April. We have built an incredible team that continues to impress by their pace and dedication in ramping that facility.

In February, we exhibited one of our Genesis Homes at the International Builder Show in Orlando, and again at the MHI Congress and Expo in March. This home design helps builders achieve a tremendous value to home buyers for far less than traditional site-built homes stretching the home buyers dollar in a rising interest rate environment. To that end, we recently signed a multiyear agreement with a top 100 builder to provide our Genesis Homes for their developments. So that they are able to profitably hit an affordable price point.

During the quarter, we also entered into a delivery disaster relief order for the production and delivery of FEMA units. The order totaled approximately $200 million and will be produced in the first and second quarters of fiscal 2023. FEMA units generally have more specifications that are typical homes and, therefore, drive a higher average selling price. We will be producing these units in batches at several of our factories across the U.S., which will help with production efficiencies as well as minimize the impact to our long-term primary customers.

We are also excited to announce that on May 16, we closed on the asset purchase of Manis Custom Homebuilders. With the addition of the 250,000 square foot campus in Laurinburg, North Carolina and its retail location in Eastern North Carolina, along with our existing North Carolina campuses. We are now better able to serve customers throughout the region with cost-effective streamlined product offerings that are greatly needed in this current economic environment.

We anticipate continuing to build out the approximately $15 million of existing backlog as we upgrade and retool portions of the plan. As we look forward, market conditions remain healthy with historically low availability of affordable housing supply, favorable demographics and also migratory factors. With rising interest rates and inflation, we are seeing traditional site-built homebuyers moving into our more value-oriented factory-built home solutions. Additionally, we see demand from communities and build for rent increasing as retail traffic tempers. Our orders in April and so far in May have kept pace with our increased production levels and cancellations due to rising interest rates or price increases have been minimal in most regions and slightly elevated in a few regions.

With the addition of our Navasota, Texas plant, our recent acquisition of Manis Homes and our continued efforts to streamline production at our existing facilities and FEMA production. We expect revenue to increase sequentially by mid-single digits in the first quarter of fiscal 2023. Despite our efforts of our team and our supply chain partners, we do expect availability of some raw material to become more scarce in the mid- to late summer time period. We are planning for this, and we'll continue to manage through these challenges, but it may impact our production during fiscal 2023.

This, along with the availability of drivers to transport our homes are some of the challenges we will face with increasing production. We are excited once again to be promoting factory-built affordable housing solutions during the innovative housing showcase in Washington, D.C. in early June. This event is hosted by the U.S. Department of Housing and Urban Development and will showcase the value of factory-built homes to policymakers the media and homebuyers. Focusing on the longer term, it's becoming more evident every day that the antiquated system of traditional homebuilding is not sufficient to meet the needs of customers. Due to the early successes we have seen both in manufacturing technology and digital offerings, we will be ramping up our investments in these areas to make homes more affordable and attainable for our customers.

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

Thanks, Mark, and good morning, everyone. I will 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 by 43% to $638 million compared to the same quarter last year. We saw revenue growth of $180 million in the U.S. factory-built housing segment during the quarter despite the prior year quarter having an extra fiscal week, which accounted for approximately $31 million of sales.

The increase in U.S. factory-built revenue was driven by an increase in the number of homes sold and an increase in average selling price. The increase in number of homes sold was 11% or 657 units for a total of 6,580 homes compared to the same quarter last year. The average selling price per U.S. home sold increased by 31% to $87,800 due to price increases to offset inflation brought on by rising material, labor and transportation costs. On a sequential basis, revenue in the U.S. factory-built segment increased 19% in the fourth quarter compared to the third quarter of fiscal 2022. This increase was driven by a 13% increase in homes sold and a 6% increase in average selling price per home.

Canadian revenue increased 30% to $46 million compared to the fourth quarter of last year, driven primarily by a 36% increase in the average home selling price partially offset by a 5% decline in the number of homes sold. The higher average home selling price in Canada of $114,700 was driven by price increases enacted in response to inflationary pressures. The decline in the number of homes sold during the quarter was a result of the prior year quarter having an extra fiscal week of production.

Consolidated gross profit increased to $191 million in the fourth quarter, up 93% versus the prior year quarter due to higher volumes, pricing and improved operations. Our U.S. housing segment gross margins were 29.6% of segment net sales, up more than 700 basis points from the fourth quarter last year. In addition to strong demand and pricing, continued product standardization and material rationalization helped to increase production, enabling us to leverage fixed costs. SG&A In the fourth quarter increased to $75 million from $52 million in the same period last year, primarily due to higher variable compensation, driven by the increase in sales volume and profitability.

The increase in SG&A also reflects our investments in additional capacity and initiatives focused on enhancing the customer buying experience. The online customer buying experience remains a key initiative and we expect incremental investments to continue through fiscal 2023.

Net income for the fourth quarter was $87 million or $1.51 per diluted share compared to net income of $35 million or earnings of $0.59 per diluted share during the same period last year. The increase in EPS was driven by higher sales and improved operating efficiencies, resulting in improved profitability. The company's effective tax rate for the quarter was 24.8% versus an effective tax rate of 24.5% for the year ago quarter. Adjusted EBITDA for the quarter was $121 million, an increase of 137% over the same period a year ago. The adjusted EBITDA margin expanded by 760 basis points to 19% due to higher sales growth, gross margin improvement and leverage of fixed costs.

Looking forward, we expect inflation on building products, labor and transportation costs to remain persistent through the first half of fiscal 2023. We utilize several levers in response to increasing costs, including price adjustments, product standardization, raw material substitutions and further operational improvements. Despite our efforts to continue to pass on inflation and make operational improvements, our production may be impacted by the availability and timeliness of raw materials as well as possible shifts in product mix caused by economic pressures driving home buyers to smaller, less optioned homes, which will soften margins. While we remain confident in our ability to execute in the current environment, the impact of an elongated inflationary environment does create a natural headwind on our margin progression.

As of April 2, 2022, we had $435 million of cash and cash equivalents and long-term borrowings of $12 million with no maturities until 2029. We generated $224 million of operating cash flows for the year, an increase of $71 million year-over-year. The increase in operating cash flows is primarily due to the increase in net income and customer deposits, which were partially offset by an increase in inventory balances, accounts receivable and capitalized cloud computing costs. We remain focused on executing on our operational initiatives, and given our favorable liquidity position plan to utilize our cash to reinvest in the business and to support strategic long-term growth.

I'll now turn the call back to Mark for some closing remarks.

Thanks, Laurie. The solid momentum we continue to see in our business is being driven by our focus on the customer and ability to execute, which has strengthened our position to satisfy the demand for affordable homes. Before we open up the lines for Q&A, I want to take a moment and thank the entire Skyline Champion team as our consistently strong performance is a result of our focus, hard work and ability to increase output for our customers in this very challenging environment. And with that, operator, you may now open the lines for Q&A.

(Operator Instructions) Our first question is from Greg Palm with Craig-Hallum Capital Group.

Congrats on the good execution in the quarter. Wanted to first dig into the demand environment a bit more given everyone is worried about the consumer these days. So it sounds like demand still remains fairly strong, even quarter-to-date. So curious what you attribute that to? Maybe just talk about the profile of some of the newer buyers that you are seeing compared to maybe a few years ago?

Yes. Thanks, Greg. Demand does remain strong. Our new orders, incoming orders are matching production right now in April and May. So they're actually higher than they were in the third quarter. So demand remains good overall. Really, it's -- we're seeing a few things in the buyer demographic. One, generally a better quality buyer with higher down payments. We're also seeing traditional homebuyers who can't afford a traditional site-built home or existing home move into a better value proposition in buying our homes.

A larger amount of cash buyers as well coming into the market. So I think we're definitely seeing a shift of what I'll call, what I would consider first-time homebuyers and better quality buyers come to the market for us.

Makes sense. And in terms of the opportunity within builder developer, I know there's several ongoing projects out there. I think maybe some of them have been completed already, but can you just talk about how those are going, what the feedback is? And then in terms of that win that you just with a top 100 builder. Can you give us some sense on potential volumes there? Are they shifting some of their production to off-site? Are they using you as an additional supplier? What's really going on behind the scenes?

Yes, Greg. I'm very excited about Genesis in that segment of the market. And part of the reason we diversified into that segment a little more is we've seen success with our Genesis subdivisions. Just recently, there's a subdivision, the first MH Advantage Subdivision in the state of Texas that we completed. That subdivision is for a small localized builder. But what I think is really important is that builder is selling comparable homes to some of the biggest builders in the country and is selling them for about 20% to 25% less when you take a look at what they're selling on Zillow.

So in that comparable, we're able to allow that builder to make a good margin at an affordable price point that's without having the economies of scale, like obviously, a large builder would have. So I think that really speaks to the value proposition for the builders. But I think what's also important there, and it goes back to the demand situation is -- just recently, we've seen that the average mortgage rate for a 30-year mortgage, I think, is now $29,000 a year according to Redfin. And so if we can save the customer 20% to 25% off of that amount, it equates to roughly $6,000 savings for that customer, which today, with inflation happening, the cost of food, gas, electricity, everything else is costing the average customer about $4,000. So if they can get into our Genesis product and save $6,000 they can offset all their other inflationary costs and put another $2,000 in their pocket, which I think is meaningful for today's average customer. So we're seeing more interest in that product and this builder developer that we signed a multiyear agreement with, it's a meaningful amount of product for us. It will definitely add to our builder development channel growth in the future. We're not disclosing the amount rate down. It's -- but it's definitely a good deal and we'll add a good portion of revenue for the company over the next 3 to 4 or 5 years.

And I guess just as a last one as a follow-up to that. Do you get a sense of whether -- backlogs start to come down from current levels. Do you get a sense for whether that builder developer opportunity starts to ramp up? I mean what's the biggest kind of pushback or constraint you get because it sounds like, at least initially, things are going pretty well in that space?

Yes. I think timing of subdivisions and getting builders comfortable with it. I think it's important in today's market to be diversified. So we signed the FEMA contract, that's the government channel. We're building up the Genesis, our ADU market is building the community channel is very strong. So I really see a little bit of, I'll call it, softness or tempering on the retail channel. In the short term, just with down payments and other things. So it's -- but we're seeing large increases in demand from the REITs significant increases from the REITs and then obviously, more built for rent and builder developer interest is out there.

Our next question is from Daniel Moore with CJS Securities.

Mark and Laurie again, congrats on really solid numbers. Maybe just FEMA, first we've heard from them in a while. Sometimes it comes in multiple tranches. So do you -- would you expect additional orders behind this or from what you gather -- is this likely would satisfy their needs at least in the short term?

We don't have any indications of future orders, Dan, but I will say we're heading into what is typically viewed as the hurricane season in the U.S., and I know inventories are low. So there could be some need for future housing, but there's really no indication of that currently.

Got it. And I appreciate the color from a margin perspective. You gave guidance mid-single-digit growth going in sequentially on the top line. How should we think about margins vis-a-vis your performance in Q4 over the next, say, quarter or 2? And then looking out midterm, Laurie, are we in the sort of mid- to high 20s? Is that more the sort of new normal for the near term, at least? If you could just put any more granularity around some of your commentary there from a gross margin perspective would be really helpful.

Dan. Yes, I expect gross margins to be relatively flat sequentially in the next couple of quarters and then start to compress somewhat later in the year to the range, as you mentioned, as smaller, less optioned homes move through the backlog.

Got it. And then maybe one more, and I'll pass it on. Biden, the current administration recently outlined the serious proposals to help close the gap between demand and supply for affordable housing. Are there specific proposals in there, be it Freddie Mac and Chattel loans or others that you think could move the needle a little bit more than maybe some of the duty to serve or some of the other proposals have in years past?

Yes. I mean, there's definitely some good long-term traction in what they've proposed. I don't think it will impact anything in the very near term. Some of the bond cap limits of 50% hurdle rates and other things, that could -- if that's done right, that could between new builds and existing refurbishment of stock could impact -- have a good impact. Chattel and their proposals on Chattel if that gains traction. But I think in the interim, it's really about getting that through Congress, getting things passed and see what they actually take action on. So it's a little too early in the cycle to rely upon for count. But it's definitely a great longer-term tailwind. And I think we're going to see more and more benefits and emphasis on regulatory relief because of the need for affordable housing. So there's definitely going to be things like the ADU zoning relief and things like that past at a more accelerated rate. So there's definitely longer-term opportunity, but it's not going to impact anything in the very, very near term.

Our next question is from Matthew Bouley with Barclays.

Congrats on the results. I have to ask the cancellation question because you daylighted at the top, Mark, that you said cancellations have become a little elevated in a few regions, although low in most places. Should we take that as a signal that cancellations could actually worsen here given what's going on with rates? And if that's the case, how does that kind of impact you guys from a financial and production efficiency standpoint?

Yes. Thanks, Matt. No, I think cancellations really are driven by rates. Really, there's 2 things happening both related to rates with cancellations. The first is with our retail inventory. Floor plan interest rates are also elevating not just end consumer rates. And so as floor plan interest rates increase, it becomes more costly for our retailers to carry stock units. So we will see some just destocking of the channel to kind of keep their largest expense at bay as interest rates tick up.

So you're going to see kind of what I would consider a onetime adjustment in terms of stock at our retail. Inventory across the country just because interest rates are going up and they're going to hold less. They're going to carry less on their lots as interest rates accelerate. And then the second piece is really about interest rate and inflation stabilization for the retail customer. So I think you're going to see a little bit of increased cancellations really due to the fact that when we change price due to inflation to the end customer, it can open up their loan, which allows kind of for another trigger, which is then the lender can increase the interest rates.

So I think we're going to see kind of a batch of cancellations. The magnitude of that is not material, though in the overall scheme of our backlog. So it's not a concern. I think it's just going to be a onetime cleanup as interest rates increase. Like I said, we're very laser-focused on new incoming orders because we somewhat expected as interest rates increases happen, the lower-end customer would have some cancellations because they might not qualify with both the inflation and interest rates. And 2, we expected some destocking to happen just because retailers are not going to have the carrying cost.

Got you. Okay. No, that's really helpful color there, Mark. And secondly, I wanted to follow-up on the discussion on the builder developer order because I think in the past few quarters, you had spoken to sort of turning away orders and really trying to focus on your long-term customers. But in a market where there could be either retail destocking or just otherwise consumer pressure, is there sort of sufficient demand from that builder developer channel or the build to rent and community channel? Just some of the sort of big onetime one-off orders that you had previously been turning away, is there room for some of those customers to now sort of absorb what might be then missing from the rest of the retail channel?

Yes, definitely. I think we're seeing a much larger interest from the community and REITs the builder developers. So I think that's meaningful and definitely has potential to more than offset the retail softness. I think geography, just to be transparent and honest, geography will play into that a little bit because some of the builder developer and REIT activity is very geographically focused. So we'll have to make sure to adjust production levels in the right regions to accommodate that over time.

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

Mark, Laurie, I want a follow-up on some of the demand questions. The first one, I was wondering if you could provide orders in terms of units and change year-on-year, both in your in your quarter and the comments you're making for April and May? Because just back of the envelope, if I back out the FEMA order, it does seem like orders in dollar terms were down year-on-year. Obviously, some tough comps, but down the units may be down quite a bit. So I'm trying to reconcile that with your comments about orders then matching supply in April and May? So any unit commentary year-on-year would be great.

Yes, Mike, we don't give order unit comps, but what I would say is that our order rates quarter-over-quarter increased by -- or our production and shipment rates increased quarter-over-quarter sequentially by 13%. So part of the backlog delta, I think you're seeing is the fact that we were able to very successfully and dramatically increase production quarter-over-quarter. So I think you have to take that into consideration as you're looking at those numbers. And I think the point is that the new orders that we're seeing today, new incoming orders are matching our higher elevated production rates that we're at today. So we're kind of running on par with production in orders.

Okay. All right. And the other follow-up I had, just on the cancellation topic. I think you had characterized it in your opening remarks as it being somewhat regional specific. So what regions are you seeing the most pronounced cancellations in right now?

Generally, I would say the mid-South region and that's predominantly because they generally sell a lower ASP or lower-end product. So the interest rates are going to have the most meaningful impact, one, on retailers' ability to stock those units. In other words, because of their generally lower ASP, lower margin profile, stocking more of those is more cost prohibitive as floor plan interest rates go up. And secondly, that customer base, that kind of lower end customer is probably the ones feeling the most inflationary pressure as well. So you're going to see higher retail cancellations as interest rates and inflation are passed on to that customer, you'll see probably a lower ability to qualify. So mid-south generally were lower end sales value.

That makes sense. Got it. Okay. One last question. Just the comments around mix, Laurie or Mark, I wasn't sure if we should take those comments on mix of kind of the lower end, less optioned models as being indicative of you're already seeing that in the incoming order rates, and it just takes a while to flow through backlog or that's just your expectation for how things will progress just given what's happening with prices and rates. So are you already seeing that or that's just kind of hedging a bit on future expectations?

Like mix is a bit geographic as well kind of to Mark's point earlier, but we are starting to see that in order. So that's a timing issue coming through backlog.

Our next question is from Daniel Moore with CJS Securities.

Maybe just one more modeling on SG&A. Just how should we think about that growth, I guess sequentially and obviously, you've been investing aggressively in technology, customer-facing platforms. Can you give us a sense of that the incremental spend in dollar terms that we saw in Q4? And whether that level of spend is likely to continue grow? Any commentary there would be really helpful.

Yes, Dan, I don't remember specifically what the number was in Q4. I think it's in the few million dollar range historically over the last few quarters running through operating expense. We do expect that to increase incrementally in fiscal '23.

Got it. And then one other real quick. We spoke to a number of dealers recently that kind of struck our ears. So that they expected to -- many were looking at adding additional locations, given the strength in demand that obviously sounds a little bit counter to some of the pressures that you described here. Is that something that you're seeing as well or are you seeing more sort of pulling back on inventory versus expansion?

Yes. No, I think it's more geographic in that sense. So I think dealers are looking to expand their locations really to be closer to the customer. I think as we mentioned, trucking is becoming slightly an issue, transportation costs are elevated because of gas prices. So I think what I would expect is there's a handful of dealers who are looking at what can we do to open up more locations but have maybe a more curated set of inventory on those locations. So that, one, the transportation of the customer coming to visit because more and more of their lead generation is coming online, so they might have customers who are 500 miles away because that's where the lead generation online is coming from. So the more distribution point some of the retailers can have, I think the closer to the customer, they can be making it more convenient. So there's kind of both things happening at the same time. They might have a sales center with 10 units on it, they might wean that down by a few units, but then open up another sales center and build inventory, but that will take time. So there's going to be kind of a short-term, long-term impact.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing comments.

Thank you for participating in today's call. We appreciate the time and your continued interest. We look forward to updating you on our progress on our next call. Take care and be safe.

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