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Edited Transcript of SKY earnings conference call or presentation 31-Oct-19 12:00pm GMT

Q2 2020 Skyline Champion Corp Earnings Call

ELKHART Nov 16, 2019 (Thomson StreetEvents) -- Edited Transcript of Skyline Champion Corp earnings conference call or presentation Thursday, October 31, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Laurie M. Hough

Skyline Champion Corporation - Executive VP, CFO & Treasurer

* Mark J. Yost

Skyline Champion Corporation - President, CEO & Director

* Sarah Janowicz;Director of Investor Relations and External Reporting

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Conference Call Participants

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* Collin Andrew Verron

Jefferies LLC, Research Division - Equity Associate

* Daniel Joseph Moore

CJS Securities, Inc. - Director of Research

* Gregory William Palm

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* Matthew Adrien Bouley

Barclays Bank PLC, Research Division - VP

* Michael Glaser Dahl

RBC Capital Markets, Research Division - MD of U.S. Homebuilders & Building Products

* Rohit Seth

SunTrust Robinson Humphrey, Inc., Research Division - Associate

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Presentation

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Operator [1]

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Good morning and welcome to Skyline Champion Corporation's Second Quarter Fiscal year 2020 Earnings Call. The company issued an earnings press release yesterday after the 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.

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Sarah Janowicz;Director of Investor Relations and External Reporting, [2]

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Good morning and thank you for participating in our earnings call to discuss our second 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 the earnings release and in the company's 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'd now like to turn the call over to Mark.

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Mark J. Yost, Skyline Champion Corporation - President, CEO & Director [3]

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Sarah, thank you. Good morning, everyone. I'm pleased to report solid profit and cash flow generation in the quarter were the HUD industry shipments were soft and our consolidated quarterly revenue was flat compared to the prior year period. With revenue that was stable, we delivered 25% year-over-year increase in gross profit.

Adjusted EBITDA grew by 36% year-over-year, reaching $32.5 million for the quarter. Adjusted EBITDA margin for the quarter was 9.2%, a 250 basis point improvement compared to a year ago and a 60 basis point improvement from our sequential June quarter. The strong gross profit and adjusted EBITDA margin improvement was driven by our material costs from the merger in the market, improvements in our product rationalization and material usage in full run rate synergies from our merger.

Turning to the market, we remain positive on the outlook for manufactured and all slate housing industry, as we see the opportunity for continued growth, driven by both demographic and economic factors.

The underlying demand for homes offered an affordable price point is strong, while the supply is very limited. As expected, recent HUD industry shipments were soft, which normally happens when industry backlogs are at a lower level, but volume for the 3 months ended in August declined by approximately 2.6% year-over-year. Since the stocking we feel ended in June retailers are managing their order rates based on manufacture backlogs and delivering -- our delivery times are shorter, generally from last year's levels.

The primary driver of the industries decrease was concentrated in the State of Texas, which is the largest HUD market in the country. In the broader single-family housing market, we are seeing increased interest from traditional builders regarding offsite construction options, we are in the early stages of introducing and educating traditional site builders on these options and getting good responses on this long-term growth opportunity. We are seeing the demand for affordable housing continues to remain strong and expect the HUD industries year-over-year volumes to improve modestly during the remainder of the fiscal year.

We saw stability from our Canadian home sales volume, driven by small bulk buys during the second quarter, we expect that the oil-driven housing market in Western Canada, we will remain relatively weak for the short term. In the face of these conditions Canadian plants performed well and remained profitable due to our efforts, to effectively manage production run rates and reduce fixed expenses during the slower housing market cycle.

Overall, backlog for the company decreased 32% year-over-year. US retailers have worked to reduce their inventory levels by delivering in setting their onsite inventories and have normalized their ordering patterns, keep inventory at lower levels than seen over last year. At the end of September, our consolidated backlog was $172 million compared to backlog last September of $252 million driven by the destocking that occurred earlier this year.

Sequentially from June quarter, consolidated backlogs have grown 12%. Although backlog varies significantly by plant, our average US backlog stood at 7 weeks production at the end of the quarter. Our optimal backlog is 4 week to 6-week range, as it allows us to effectively scheduled production and manage the supply chain with our vendors. We typically see us buildup in backlog at the end of the second quarter and then expect our normal seasonal slowdown in the winter months and in our third and fourth fiscal quarters.

On the financing front, we saw recently completed securitization of a mature portfolio of manufactured housing home loans totaling about $0.5 billion that represent the first post-housing crisis transaction of its kind. The GSEs are still working towards the secondary market for shadow lending, which we expect will take longer to rollout than originally determined in the duty to serve program.

We continue to educate our customers on the benefits of the MH advantage in MH choice home programs that are part of the GSEs duty to serve. We are starting to see traction this quarter with the first home ships this quarter into our independent retail customers.

The education process related to this new class of homes continues with our current customers as well as with the expanded efforts in our builder developer channel. We're really excited about the long-term potential of this new class of homes as well as interest from builder developers to utilize these homes and their subdivisions.

We recently launched our genesis Home brand, which is dedicated to the new class of homes and is positioned to serve the needs of our retailers and build our developer partners at a national level. We will be exhibiting 2 homes in January at the International builder Show in Las Vegas, which is the largest show of its kind in the world. One of the models on display will be a Genesis home, which will be built to the specifications required for the financing program.

The other home will be an Accessory Dwelling Unit or ADU as they're call, which is an innovative, effective, affordable housing option, but the much-needed housing throughout the country, especially in urban areas. We are excited about the future benefits of our investment in this new class of homes.

As you know, we recently expanded our manufacturing footprint to include Louisiana with the opening of our Leesville facility in June. As expected, we are experiencing strong demand as a result of the opening. This plant is the only manufactured housing plant in the State of Louisiana and can also easily serve the distribution channels in East Texas.

During the second quarter, we made great progress on production ramp efforts as well as the plant certification process. In addition, we shipped our first homes to our growing retail customer base. We are about 3 months into the 18-month ramp cycle to full run rate capacity and profitability levels.

We are excited about the progress we're making on the technology initiatives that we piloted at this plant, which include automated floor and wall builds, and other automated tools. We are also evaluating lessons learned from these initiatives that can be utilized and applied to our other facilities as part of our longer-term strategy to incorporate technology and automation in our business.

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

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Laurie M. Hough, Skyline Champion Corporation - Executive VP, CFO & Treasurer [4]

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Thanks, Mark. As expected, net sales remained stable at $355 million in the current and year-ago quarter, despite some softness in the U.S. HUD industry shipments in our transportation business. Revenue growth of $7.2 million in the U.S. and Canadian factory built housing segment was offset by declines in our transportation business revenue. The factory built housing segment comprised 96% of our revenue during the quarter compared to 93% in the year-ago quarter, as the transportation business has become a smaller piece of the consolidated company's revenue base.

The number of homes sold in the U.S. was flat versus the same quarter of last year, while U.S. factory built segment revenue grew by 2%. The increase in U.S. factory built revenue was driven by an average selling price per U.S. homes sold increase of 2% to $62,200, primarily due to a shift in product mix.

Canadian revenue increased by 4% to $26 million, while the number of homes sold in the quarter remained stable at 311 homes, compared to 312 homes in the prior year period. Average home selling prices increased 4% to $84,900 due to product mix and pricing. Similar to the broader housing market in Western Canada, we expect a modest year-over-year volume and revenue shortfalls for the remainder of the fiscal 2020 year compared to the same period in fiscal '19.

Consolidated gross profit increased to $74 million, up 25% compared to $59 million in the prior year quarter. Our U.S. housing segment gross margins were 20.9% of segment net sales, up from 16.5% last year. Sequentially from the June 2019 quarter, U.S. factory built housing segment gross margins were up 30 basis points from 20.6%, driven by favorable material pricing and despite lower margins at our leasable Louisiana plant that is still working through the production ramp curve.

SG&A in the second quarter decreased to $48 million versus $128 million in the same period last year. The decrease was primarily due to non-cash equity-based compensation expense of $85.8 million recognized in the prior year and triggered by the secondary offerings, which closed during the second quarter of fiscal '19. When subtracting the $85.8 million of equity compensation expense from last year's SG&A, which provides a more comparable basis quarter-over-quarter, SG&A was up due to our investment in our leasable Louisiana facility and higher variable compensation expense.

Net income for the second quarter was $17.7 million or $0.31 per share compared to a net loss of $77 million or a loss of $1.42 per share 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 in lower net interest expense.

On an adjusted basis, we generated $0.34 of net income per diluted share compared to $0.20 in the year-ago quarter. The company's effective tax rate for the 3 months ended September 28, 2019, was 29.8% versus an effective tax rate of a negative 8.2% for the fiscal 2019 second quarter. The change in the effective tax rate was primarily due to non-deductible transaction-related expenses and stock compensation expense. Absent these non-deductible discrete items, the effective tax rate would have been 31.5% last year. The current quarter's effective tax rate is consistent with the company's ongoing expected tax rate.

Adjusted EBITDA for the quarter was $32.5 million, an increase of 36% over the same period a year ago. The adjusted EBITDA margin expanded by 250 basis points to 9.2%, largely due to continued margin capture from lower material costs, synergies related to last year's combination reaching their run rate levels earlier this fiscal year and execution on identified operational improvements.

As of September 28, 2019, we had $155 million of cash and cash equivalent. Cash generated from operations during the second quarter of fiscal 2020 remains steady at $25 million versus the same period last year, driven by lower transaction-related expenses and higher operating margins. During the quarter, we used excess cash to pay down $5 million of our revolving credit facility. As a result, the company has $39 million of unused borrowing capacity under our $100 million revolving credit facility as of September 28, 2019. We have a strong cash position with the 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 on opportunistic growth, including potential acquisitions or further organic capacity expansion.

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

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Mark J. Yost, Skyline Champion Corporation - President, CEO & Director [5]

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Thanks, Laurie. As you see from our results, we continue to improve our financial and operational performance. We're pleased with the sequential improvement in margins and more importantly, our continued track record of progress as we continue to achieve our incremental improvements along the path to reaching our long-term goals.

We're focused in the near term on internal opportunities to maintain and enhance our costing and pricing strategies, as well as investing in our people, our processes and our products. As we look forward, we expect the market to remain healthy, driven by increasing demand for affordable housing, supported by the favorable financing and regulatory environments. 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.

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Questions and Answers

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Mark J. Yost, Skyline Champion Corporation - President, CEO & Director [1]

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(Operator Instructions) Our first question comes from the line of Greg Palm with Craig-Hallum Capital Group.

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Gregory William Palm, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [2]

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Congrats on the continued execution here. Really impressive margins. Maybe starting with the demand environment a little bit. You alluded to a little bit -- being a little bit softer than I think what may be the earlier expectations were. I mean can you tell us maybe about some geographic areas that are outperforming? Sounds like Texas is still a drag. And then maybe any commentary on the demand environment for the land lease community channel.

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Mark J. Yost, Skyline Champion Corporation - President, CEO & Director [3]

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Yes. No, I think overall we're seeing kind of demand. Texas was an industry-driven thing. I think actually we saw Texas as fairly good during the quarter and continue to see that. Overall, Greg, as you saw in the industry, the HUD market was down 2.6% for the 3 months ended in August. Our shipments were flat. So we're kind of happy that we're outperforming a little bit there. And as mentioned last quarter, we expected kind of with the normalization of our inventory that we saw -- we saw that during this quarter and it built back up and we also saw the short-term pricing pressure that we expected as we mentioned last quarter, and view that as a shorter-term demand environment that we chose to focus on operating improvements in margin. So I think the margin aspect was really driven in part by that. So I think community channel very strong, underlying demand very strong. And I think we're seeing good demand overall. Right now, placements are up 7% through August across the country based on staff surveys data through August for the three-month period. So we see underlying consumer demand actually quite healthy across the country. So no real weakness anywhere in the country, per se. It's actually been strong right now. The only thing we see is retailers, as we mentioned, before, placing orders hand to mouth, so your wholesale shipments are going to lag a little bit to -- and consumer demand just because of the nature of how they're placing orders versus how they were a year ago, let's say, because they are more real-time. But community channel's strong, underlying demand very strong, no concerns there.

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Gregory William Palm, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [4]

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Yes. Okay, makes sense. That's helpful. And so you mentioned the realization -- saw some pricing pressure in the September quarter, yet your growth and I mean even EBITDA margins greatly outperformed expectations. I mean going forward, what are some of the biggest levers for continued improvement? Is it volume? Is it continued operational excellence? Standardization? I mean how big of an opportunity is still ahead?

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Mark J. Yost, Skyline Champion Corporation - President, CEO & Director [5]

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There's still definite opportunity there in -- we're at the early stages of all of that. We've made good progress. This quarter, we really focused on those operational improvements and margin enhancements as opposed to kind of chasing the market with pricing pressures. So I think we made good traction along that path this quarter and I think we'll continue to see that. But there is still long, tremendous way to go to; there is a lot of upside there.

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Gregory William Palm, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [6]

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Okay, great. And I guess just last one. It's interesting that several of the large public site builders are starting to talk about offsite construction in a much more favorable way. I guess what's your opinion on this? Would you be a potential partner? They do this in a JV, do you think they do it themselves? Any thoughts on some of that recent commentary and if you want to sort of include any commentary on the Genesis brand within that, that would be probably helpful for all of us.

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Mark J. Yost, Skyline Champion Corporation - President, CEO & Director [7]

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Yes, I think the launching of the Genesis brand is really targeted to builder developers and to create awareness of what offsite solutions are out there for builder developers. And I think it's -- that's why we're investing in the IDF show this upcoming quarter to take 2 products there, to demonstrate that product and help them understand the timeliness, the affordability and the ease of doing business with that it will generate for them overall. So I absolutely think you're going to see a shift in the offsite construction market from builder developers in time. And so that's why we're taking action to make that happen. I definitely think -- I don't know if it's JV partnerships, alliance, customers. It could be any form.

Obviously, it really depends on the builder, developer, themselves. It depends on the strategic partnership. It depends on all those factors. But I think, as the labor market tightens which it will, and it is going to continue to do, especially as we see an aging population that's going to require more and more labor to be utilized for repair and remodeling across the country, because our current housing stock doesn't allow for people to age in place as effectively as they need to. I think the labor costs are going to become extremely or extraordinarily tight in the upcoming year. So I think you're going to see a movement from builder developers to offsite. And we think we're going to be the partner for them to do that.

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Gregory William Palm, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [8]

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It sounds like an obvious opportunity. All right. That's it for me.

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Operator [9]

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Our next question comes from Matthew Bouley with Barclays.

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Matthew Adrien Bouley, Barclays Bank PLC, Research Division - VP [10]

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Congrats on the quarter as well. So just to follow up on that last point around Genesis, maybe some specifics there might be helpful. Do you actually have any kind of line of sight to orders with Genesis or is it something that can be kind of incremental in the next year or 2? And then just maybe some details around what you're doing to penetrate the builder-developer customer.

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Mark J. Yost, Skyline Champion Corporation - President, CEO & Director [11]

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Yes, Matt. I think overall, the Genesis product we have started to generate some product that is built to the MH Advantage and MH Choice specs, which is what the Genesis product is geared towards largely. It also has an ADU or Accessory Dwelling Unit component that we have done as well to that for mostly urban environments. The ADU product is for. But I think both of those really fit the builder-developer channel. We have shipped MH Advantage and MH Choice product to our retail customers in this past quarter. We've actually started shipping and generating that product so we have seen some incremental. Pickup of that might be very small, but it's happened this past quarter.

I think the Genesis brand, which we just launched a week ago is kind of our entrance into this and it will definitely generate incremental growth and opportunity in the builder-developer channel, especially coming out of the IBS show, as we get awareness and exposure to it out there, so I definitely think it's definitely a big way to bring awareness to the industry, to bring awareness for our retail customers and other partners, because I think, I mean this is the product of future. It's a way we can target the affordable price point and make it accessible. Especially in a recessionary environment or a potential recessionary environment, that may be out there, that people are thinking about. I think builder developers are concerned about their cost of capital and tying up land for a long period of time. And because we can turnaround a development much faster with our product advantage. I think their risk profile is advantageous as they hear the rumors of a potential recession, which we haven't seen any of that on our side as consumer demand is still very robust.

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Matthew Adrien Bouley, Barclays Bank PLC, Research Division - VP [12]

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Okay, got it. I think we'll look forward to seeing that product out in Vegas in January. Secondly, I guess the other thing you're hearing from the site builders, is that there is a bit of a push into the build to rent marketplace. Obviously, for you guys, it's really not too different than what you're already doing with your REIT customers. Can you just comment if you're hearing anything different or incremental opportunities there? I guess as built to rent kind of gains momentum out there.

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Mark J. Yost, Skyline Champion Corporation - President, CEO & Director [13]

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Yes, I think that's a good channel. We're not hearing much. I think it's just at the beginning stages of interest or thought process on that. But with our amount of business we do with the large REITs, build to rent type of housing in accommodation is kind of a bread and butter product of ours. And I think this MH Advantage and MH Choice product that you're going at the builder show is really geared towards both a rental and a purchase option for home builders out there. So I think it really, really suits the rental market strongly because of its features and amenities and price point. So I think it's definitely an opportunity for builder and developers to serve that market. Definitely a growing trend.

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Operator [14]

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Our next question comes from Daniel Moore with CJS.

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Daniel Joseph Moore, CJS Securities, Inc. - Director of Research [15]

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I want to start with gross margin. Operationally, obviously, this is a very strong quarter and I know Mark, you mentioned there is more opportunity over time near term, gross margins that we saw in Q2. That type of level is sustainable as we think about the rest of this year?

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Laurie M. Hough, Skyline Champion Corporation - Executive VP, CFO & Treasurer [16]

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Yes, the U.S. margins we think generally are sustainable. But in the third and fourth quarter, we expect some impact from our planned holiday shutdowns in November and December, which is pretty normal for our company and generally the industry. And then also we'll see some investments in the IBS show that we mentioned, but other than that, generally sustainable. Canada on Star fleet, we'll probably see a little bit of pressure in the third quarter and then maybe bounce back in the fourth.

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Daniel Joseph Moore, CJS Securities, Inc. - Director of Research [17]

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And at this stage can you quantify the investment in -- the marketing investment in the show that you expect?

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Laurie M. Hough, Skyline Champion Corporation - Executive VP, CFO & Treasurer [18]

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No.

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Daniel Joseph Moore, CJS Securities, Inc. - Director of Research [19]

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Okay. And volume growth, not to pin you down too much Laurie, but expect this modest volume growth for the remainder of the year or should we think about that as sort of low single-digit and what are your expectations for ASPs for the remainder of the year as well?

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Mark J. Yost, Skyline Champion Corporation - President, CEO & Director [20]

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Dan, I think volume growth for the remainder of the year, we kind of see mid-single digits. I think it will increase as we go from the third quarter to fourth quarter so the average is kind of that mid-single digits. But I think it'll be a little less than that in the third and stronger in the fourth as we go through. So I think it will pick up as we go. Retailers are really not going to stock more inventory or rebuild inventories to normalized levels until -- they've spent 6 months to a year destocking inventories to lean down. After all that time and effort, they're going to want to go into the December period lean and then kind of restock after the holiday season there.

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Daniel Joseph Moore, CJS Securities, Inc. - Director of Research [21]

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Makes sense. And Mark, maybe just talk about the GSEs. As we work toward chatter lending, obviously we had the first securitization which is a great sign albeit some seasoned loans in that portfolio. What is it that's taking a little bit longer than expected? Is it purely education or is there other things that you can sort of put your finger on at this stage?

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Mark J. Yost, Skyline Champion Corporation - President, CEO & Director [22]

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No, I think with the securitization market, it's just here we are at the end of October, beginning of November. And I think it's just taking longer to get traction. The government now is firmly prompt on all their programs and initiatives, and I think so -- I think it's really just a timing issue. Just a few weeks ago in front of Congress, there was discussion and there's still committed to the duty to serve and they're still progressing along that track. I think they just need to make that first move and get it done. And I just think that's going to take a little longer than at the end of this calendar year given where we're at today.

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Daniel Joseph Moore, CJS Securities, Inc. - Director of Research [23]

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And last from me, you mentioned some of the "automation" that has been installed in Leesville in terms of floor and wall building. How is that learning going? And how big of an opportunity is that to transport some of those capabilities across some of the other legacy or existing plants?

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Mark J. Yost, Skyline Champion Corporation - President, CEO & Director [24]

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Thanks, Dan. I think the learning is going phenomenally well actually. I couldn't be more excited about what the takeaways from the team have been, especially given the fact that no automation company today that builds this equipment has really done anything for manufactured production. They've done it for a small (inaudible) type of doing wall panels or doing normal roof trusses and things like that, but they've -- it's a big difference when you have an automation piece of equipment that does an 80-foot wall panel or an 80-foot floor. It's different load requirements and everything else. So I think the takeaways from that have been monumental and very impressed buyers. There is the automated tools. I think will be a fast rollout in terms of how we've looked at those and how we're approaching that. I would like to see Leesville ramp another few months to get the final kinks out of it and fine-tune the process a little bit. And then I think we can look at the larger automation projects in terms of wall and floor builds and some of those other dynamics, but what we're seeing right now is encouraging.

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Operator [25]

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Our next question is from Mike Dahl with RBC Capital Markets.

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Michael Glaser Dahl, RBC Capital Markets, Research Division - MD of U.S. Homebuilders & Building Products [26]

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I have a couple of follow-ups on the volume side and, Mark, you alluded to the placement data running up 7 year-to-date and I think if you look at the implication for the summer months, is that actually accelerated to high-single digits, specifically through the summer. So as it relates to your expectations for the low-single-digit growth potentially, then higher in fourth quarter and getting to the mid-single for the second half. Is there anything other than timing and that really prevents you from seeing the same growth? That's what we're seeing out of placements. And I'm thinking, whether it's the things you've pointed out about choosing to pass on some volume that's been price driven, or also just because you're putting through higher mix so you may not see the unit numbers, but we'll see it in price. Just a little more color on that would be great.

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Mark J. Yost, Skyline Champion Corporation - President, CEO & Director [27]

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Yes, sure, Mike. Just one clarification, I think the 7% was for the last 3 months ended in August, so it's not year-to-date necessarily, as far as MH placement data. It's kind of a comparable period for us, but I think there is nothing stopping us from seeing the 7% type of growth rate as we go.

I think the big things we saw this past quarter, as I mentioned, was we rebuilt a normalized our inventory. If you remember, last quarter we destocked, I'll call it, or we had some inventory and cash flow generation from shipments of inventory and we expected normalization. So we've build back up our finished good inventory this quarter. So some of our process went there, backlogs built up healthily, and that's why we're seeing that in the backlog, our backlogs are up 12%. So we see quite a healthy demand environment as orders are processing through.

Like I said, it really comes down to the timing of when the customers take those, in all those things, I don't know, with the holiday seasons and everything else. If they're going to take them in the last few weeks of December, or if it's going to roll over into January, right? That's really the question. When the dealers are going to take those and depending on their demand and set crew availability and everything else.

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Michael Glaser Dahl, RBC Capital Markets, Research Division - MD of U.S. Homebuilders & Building Products [28]

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Got it. Okay, that's helpful and encouraging. My second question really relates to the margins and bigger picture as others have alluded to, you have done a tremendous job expanding margin at a fairly rapid pace, over the past year and certainly ahead of where we would have expected. The question is, as we think through the next 12 months to 18 months, given the progress that you've already made, yet the runway that's still left, in your view what's a realistic goalpost per where EBITDA margins can get to over the next 12 months to 18 months? How much of that would you say is internal initiatives versus market recovery in volumes?

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Laurie M. Hough, Skyline Champion Corporation - Executive VP, CFO & Treasurer [29]

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I really think, as we've stated before, that we can get our EBITDA margins to around the 10% level. I do think it might take a little bit longer than 18 months, maybe all the way to 24 months because we've captured the low-hanging fruit. Now we're focusing on the operational improvements that we've been talking about, which just take time to roll out to all 38 plants. We're going to see slow progression of that increase in EBITDA margins, but it's really going to be from all operational improvements in that volume improvement.

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Michael Glaser Dahl, RBC Capital Markets, Research Division - MD of U.S. Homebuilders & Building Products [30]

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Volume improvement would be?

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Laurie M. Hough, Skyline Champion Corporation - Executive VP, CFO & Treasurer [31]

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Upside.

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Michael Glaser Dahl, RBC Capital Markets, Research Division - MD of U.S. Homebuilders & Building Products [32]

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Upside. Yes?

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Laurie M. Hough, Skyline Champion Corporation - Executive VP, CFO & Treasurer [33]

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Yes.

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Michael Glaser Dahl, RBC Capital Markets, Research Division - MD of U.S. Homebuilders & Building Products [34]

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Okay, that's great. And last one from me. Mark, you've mentioned the securitization that recently occurred. Can you talk a little bit more about -- have you heard post than any changes in the landscape, as far as what that's done to potentially encourage further deals or larger deals along the same lines? And whether you're starting to see any new entrants into the lending market on the back of this?

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Mark J. Yost, Skyline Champion Corporation - President, CEO & Director [35]

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Yes, Mike, I think we're definitely seeing new entrants and maybe even as important in my mind or it's just important because new entrants -- we've seen improvements in the lending environment from the existing players in the market. So there is definitely a stronger level of competition, there is more engagement, the turnaround times are faster, the response of this is faster. I think the whole process in the chain has improved. The securitization has been that one that was completed, it has been a wonderful thing to see the first type of its kind, since, you know, the secondary market went away.

The thing I would caution everybody, just to be transparent and honest, is that that was a portfolio of mature loans. So it was rated by the rating agencies that had good strength to it. It had good duration. So they were able to accomplish those ratings. And so we have a mature portfolio, getting a secondary issuance of it is easier, we'll say, then having a bucket of newly issued loans that doesn't have quite the maturity time duration on it. So I think there is excitement, there is a secondary market and then it bit of performed well.

I think now, the next step is, okay, that started the ball, now we've got to get the rating agencies and other people to take a look at a batch of new loans and get those through the process, and I think Fannie and Freddie, when they target that secondary market, will assist that, but I think also too, you're going to see more activity from the current players in the market, who are actually going to just look to do securitization in the secondary market offering of their portfolios, regardless. I think you will see the lenders in the market start to go that route, independent of Fannie and Freddie, and they won't wait for Fannie and Freddie. I think it is a good sign, but it obviously would be helpful as Fannie and Freddie got behind it and started the program as well.

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Operator [36]

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Our next question comes from Rohit Seth with SunTrust.

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Rohit Seth, SunTrust Robinson Humphrey, Inc., Research Division - Associate [37]

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On the secondary purchase, just to be clear, that was on the chattel loan side?

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Mark J. Yost, Skyline Champion Corporation - President, CEO & Director [38]

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Yes. That was, I think, about 80% of that was Chattel loans, Rohit.

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Rohit Seth, SunTrust Robinson Humphrey, Inc., Research Division - Associate [39]

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Okay. And then, what is the ASP of those MH Advantage homes that you produced in the Genesis homes?

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Mark J. Yost, Skyline Champion Corporation - President, CEO & Director [40]

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It really varies by amenity and feature and the brands just rolling out. So we're going to work through pricing and everything else by the builder show. But I would say, it's generally in line with our HUD product, maybe slightly up, with the added features that are built and generally have if the customer chooses, like a garage component to it. So it will be built with the garage and other amenities which will raise the price. But you're getting more helps for the money. So general average ASP is going to be higher.

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Rohit Seth, SunTrust Robinson Humphrey, Inc., Research Division - Associate [41]

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Okay. And then do you have any comments on the M&A pipeline?

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Mark J. Yost, Skyline Champion Corporation - President, CEO & Director [42]

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M&A pipeline is always good. We're always looking at that. We have a stronger balance sheet that we can utilize. I would say right now, we're just looking for the right opportunities and making sure that we do the right amount of diligence in that rush into anything. So I would say, prudent diligence and looking for the right opportunities.

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Rohit Seth, SunTrust Robinson Humphrey, Inc., Research Division - Associate [43]

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Are you looking on the manufacturing side or the regional side, or both?

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Mark J. Yost, Skyline Champion Corporation - President, CEO & Director [44]

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To be any and all of the above.

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Operator [45]

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(Operator Instructions) Our next question comes from Phil Ng with Jefferies.

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Collin Andrew Verron, Jefferies LLC, Research Division - Equity Associate [46]

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It's actually Collin on for Phil. Just wanted to go back to the Genesis brand. Can you give any more color on the value proposition that this has for the builder developers like how much cost savings you can pass along and how much time do you anticipate being able to save the builder developers and I know it's early days, but any quantification of the opportunity size that you see for Skyline whether that's an shipments or revenues?

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Mark J. Yost, Skyline Champion Corporation - President, CEO & Director [47]

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I think the value proposition for the market is, the average homebuilder today uses 22 subcontract in trade to build a home, and sometimes it varies there's some builders that use 51 subcontractor, somebody use a few less, but on average across the industry, they use 22 subcontract in trades to build a home. In those homes generally, depending on the geography, everything else, can take months upon months to multi-year, type of a -- or 18 months to build subdivision out.

I think the benefit for the builder developer is if they look at their return on capital employed or return on invested capital and the speed of that getting our product to weeks and being able to put it into a site. I think it really improves their returns overall and eliminates the challenges they have in managing the multiple sub-contractors, we in essence replace, and augment our call, if you will, all the subcontracting trade. So the architect with the builder, or with the plumber, the electrician where all of those things to the builder. So I think the market is there.

Right now today the manufactured housing industry is what between 90,000 and 100,000 units this year. Single family starts is 860 over the last 12-month period. So when you take a look at it, the market opportunity is really opening up for ourselves and our retail partners to sell into that 850,000 type unit market and if broaden our horizons. So I think it's a large opportunity especially as subcontracting trades and labor challenges become more challenged and as liquidity risk, perceived liquidity risk becomes more top of mind with builder developers and other partners -- if they are focused on return on capital employed or return on invested capital and they're are concerned about liquidity risk, it's really hard to start and stop of subdivision, when you employ subcontracting trades because they, it will be hard to hold them together, where we can supply 1 or 2 houses at that time or entire subdivision within weeks.

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Collin Andrew Verron, Jefferies LLC, Research Division - Equity Associate [48]

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Okay, great. And then just in terms of your backlog. I was wondering if you could help us understand of how much of the sequential move higher was normal seasonality versus any acceleration in order trends you saw from your customers?

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Mark J. Yost, Skyline Champion Corporation - President, CEO & Director [49]

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So backlog, I think, we saw a 12% growth in our backlog and I would just say that the normal demand curve that we saw during the quarter. So really the way we saw the quarter was we rebuilt inventory and the early months of the quarter. And then as orders and demand were strong we've built our backlog in the latter half of the quarter. So it's good.

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Operator [50]

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Thank you. It appears we have no additional questions at this time, so I would like to pass the floor back over to Mr. Yost for any additional concluding comments.

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Mark J. Yost, Skyline Champion Corporation - President, CEO & Director [51]

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Well, thank you, everyone, excited about the progress we've made, so about the opportunities. Hopefully, we'll see all of you at the Las Vegas show in -- at the IBS showing in the Vegas in January to see the new product, it is really game-changing and we're very excited about it. Look forward to the opportunity and we'll talk to you soon. Have a great day.

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Operator [52]

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Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation and you may disconnect your lines at this time.