Skyline Champion Corporation (NYSE:SKY) Q3 2023 Earnings Call Transcript
Skyline Champion Corporation (NYSE:SKY) Q3 2023 Earnings Call Transcript February 7, 2023
Operator: Good morning, and welcome to Skyline Champion Corporation's Third Quarter Fiscal 2023 Earnings Call. The company issued an earnings press release yesterday after close. I would like to remind everybody 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 factors set forth in the earnings release and in the company's filings with the Securities and Exchange Commission. Additionally, during today's call, the company will discuss non-GAAP measures, which we believe can be useful in evaluating its commission -- 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.
Mark Yost: Thank you for joining our earnings call and good morning, everyone. I'm pleased to be joined on this call by Laurie Hough, EVP and CFO. Today, I will briefly talk about our third quarter highlights and then provide an update on activity so far in our fourth quarter and the year ahead. I'm pleased to report another solid quarter as we delivered year-over-year growth in sales and profitability despite our strong performance in the prior year period. During the third quarter, we grew net sales by 9% and EBITDA by 13%, expanding margins by 60 basis points. Margins began to normalize now that the impact of FEMA unit sales have been fully realized and our product mix began to shift to achieve a more affordable monthly payment for our customers.
We remain steadfast on our key areas of focus, enhancing the customer experience, streamlining our product offerings and transforming the way homes are built and bought. Over the past few quarters, we have seen significant progress in normalizing our backlog because of stronger production capabilities, dealer destocking inventories and easing of supply chain challenges. The backlog at the end of the quarter was down $282 million to $532 million or 35% compared to the September quarter. Lead times improved during the quarter to 13 weeks compared to 19 weeks at the end of September. Normalizing backlogs to pre-pandemic levels of 4 to 12 weeks helps the homebuyer lock in both pricing and financing and also -- benefits our direct sales channels to better meet the needs of their customers.
We saw strong year-over-year growth in shipments during the quarter to our community REITs and builder developer channels. Additionally, orders from communities and builders were healthy as backlogs of both of those channels grew sequentially from the second quarter levels. While retailer walk-in traffic is down year-over-year, digital leads are driving good credit quality customers with higher closing rates. As a result, we are seeing year-over-year increases in the number of home deposits at our captive retail operations and our financial partners are seeing an increase in loan applications. We have also seen increased interest in our homes from our future growth channels. We attended the International Builders' Show in Las Vegas last week, where builders and manufacturer to rent customers saw the advantages, our 2 Genesis model homes could give them.
In total, we delivered 6,022 homes compared to 6,168 homes in the prior year, a decline of roughly 2.5%. Production volumes were down slightly during the quarter as retailers continue to destock their inventory levels in response to higher carrying costs and rightsizing of their floor plan credit limits. Sequentially, our decline in production reflects the completion of the FEMA units in the prior quarter and the normal holiday shutdowns at the end of the third quarter. Order cancellations have subsided and quoting activity at our manufacturing operations, are trending up in the first part of our fiscal fourth quarter. That said, we expect the retail inventory destocking to continue through the end of March. Demand varies widely by geography with lower orders and backlogs in the South Central regions of the U.S. In these areas, our plants have lowered production rates for the short-term while retaining talented team members for the spring selling season.
Consistent with our last earnings call, we anticipate a sequential seasonal decline in the fourth quarter revenue, which we estimate in the high single-digits, putting our second half top line above where we expected and anticipated. In the near term, we continue to focus on streamlining our production as we have seen significant benefits from these efforts. In early January, we started production at 1 of our idled manufacturing facilities in North Carolina. Additionally, we continue to prepare and open our R&D plant in Decatur, Indiana and our Bartow, Florida plant to support the growing builder developer demand, and additional short and long-term housing needs from the impacts of Hurricane Ian. We anticipate that the ramping of these plants will impact margins over the next few quarters as we bring, very needed affordable housing to our customers.
As we look forward, home buyers are facing higher interest rates and inflation. As a result, we are seeing traditional site-built homebuyers moving into our more value-oriented factory-built home solutions. Our confidence in the long-term growth potential is further strengthened by the growing upside from the build-to-rent channel, expanded penetration into the traditional REIT channel and the growing interest from midsized builder developers. While these growth drivers will take time to mature, we are excited by the progress and we continue to make and are encouraged by the longer-term impact, the results and the impact to the overall housing accessibility. In this economic environment, we need to continue to invest in innovation by introducing offerings that connect with the growing number of customers who need affordable housing.
We are accelerating our investments into production automation and the customer experience. We continue to expand our digital presence by investing in technology and content that engages and educates consumers on the value of manufactured homes. This includes expanding awareness via social media where we can visually demonstrate the great design and quality of our homes as well as allow customers to design and price their homes online. These investments bring additional leads to our dealers while making it easier for our customers to find and personalize their new home. We've been recognized for our advancements in housing as we were recently named the Most Trusted Manufactured Housing brand by Lifestyle Research for the third straight year.
I will now turn the call over to Laurie to discuss the quarterly financials in more detail.
Photo by Jan Huber on Unsplash
Laurie Hough: Thanks Mark, and good morning, everyone. I'll begin by reviewing our financial results for the third quarter, followed by a discussion of our balance sheet and cash flows. I will also briefly discuss our near-term expectations. During the third quarter, net sales increased 9% to $582 million compared to the same quarter last year. We saw revenue growth of $58 million in the U.S. factory-built housing segment during the quarter, which was primarily driven by the increase in average selling price. The number of homes sold during the quarter was down roughly 1%, or 83 units, for a total of 5,749 homes compared to the same quarter last year. U.S. volume levels during the quarter were supported by increased capacity driven by the opening of our Navasota, Texas plant and the acquisitions of Manis Homes and the Factory Expo retail locations earlier this year.
Volumes elsewhere in the business were down year-over-year due to reduced production schedules. Plants located in certain markets where demand softened or retailer inventory destocking occurred, realigned production schedules given lower backlogs and holiday shutdowns. The average selling price per U.S. homes sold increased by 14% to $94,200 due to product mix and year-over-year price increases on our core products to offset higher input costs. On a sequential basis, revenue in the U.S. factory-built segment decreased 28% in the third quarter of fiscal 2023 compared to the second quarter of the same year. This decrease was due to the absence of FEMA sales, which were completed in the prior quarter and the plant shutdowns around the holidays.
A decline of 21% in the number of homes sold and a 9% decline in average selling price per home is primarily a result of completing the FEMA order in the prior quarter, which drove higher ASPs versus our core products. In addition, we saw a decrease in our core product ASPs sequentially due to a shift in product mix to smaller, less optioned homes and a reduction in our material surcharges on a per home basis. As mentioned earlier, some markets are experiencing softening demand because of retailer destocking, resulting in reduced production levels, which caused our capacity utilization to decrease to 66% during the quarter compared to 72% in the prior quarter. Canadian revenue decreased 15% to $31 million compared to the third quarter last year, driven by a 19% decline in the number of homes sold, partially offset by an increase in the average selling price per home.
The average home selling price in Canada increased 5% to $114,800 and was driven by previously enacted price increases in response to rising material and labor costs. The decline in volume was caused by softening demand in certain markets and a shift in product mix. Consolidated gross profit increased 11% to $174 million in the third quarter, while gross margins improved 50 basis points versus the prior year quarter, primarily due to higher average selling prices. Our U.S. housing segment gross margins were 29.9% of segment net sales, up 30 basis points from the third quarter last year, primarily due to the increase in retail sales as a percentage of the total U.S. housing segment, resulting from our expansion of our captive retail operations.
SG&A in the third quarter increased to $72 million from $66 million in the same period last year, primarily due to the acquisition of 12 Factory Expo retail locations earlier this year and investments made to enhance our online customer experience and supporting systems, both of which were partially offset by lower incentive compensation. Net income for the third quarter increased 22% to $83 million or $1.44 per diluted share compared to net income of $68 million or earnings of $1.18 per diluted share during the same period last year. The increase in EPS was driven by higher sales and improved gross margin, resulting in improved profitability as well as higher net interest income. The company's effective tax rate for the quarter was 23.1% versus an effective tax rate of 25.6% for the year ago quarter.
The decrease in the effective tax rate was primarily due to lower state tax expense and an increase in the tax benefit for R&D tax credits. Adjusted EBITDA for the quarter was $109 million, an increase of 13% over the same period a year ago, the adjusted EBITDA margin expanded by 60 basis points to 18.7% due to gross margin improvement. The structural improvements in our business over the last few years have strengthened our operational capabilities, leading to increased profitability. These improvements also enhance our ability to navigate periods of economic uncertainty, while continuing to service our customers and protect our margin profile. As we move toward the end of our fiscal 2023, we reiterate our expectations of margins normalizing back to fiscal 2022 levels as we anticipate headwinds to our product mix with consumers moving to homes with less, options to offset inflation and interest rate increases and maintain more affordable monthly payments.
In addition, we expect some margin compression from the ramp of the 3 new manufacturing facilities in North Carolina, Indiana and Florida. As of December 31, 2022, we had $712 million of cash and cash equivalents and long-term borrowings of $12 million with no maturities until 2029. We generated $85 million of operating cash flows for the quarter, an increase of $10 million compared to the prior year period. The increase in operating cash flows is primarily due to the increase in net income. During the third quarter, we repaid our outstanding floor plan borrowings of $39 million, which the company historically utilized to fund the purchase of home inventory for its captive retail operations. 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 for opportunities that support strategic long-term growth.
I'll now turn the call back to Mark for some closing remarks.
Mark Yost: Thanks, Laurie. While the current economic environment has raised the level of caution with consumers due to sustained inflation, higher interest rates and global uncertainty. We are confident that Skyline Champion can continue to outperform the broader housing market due to our affordable price points, strategic positioning and our core initiatives. The outlook for demand is supported by the channel opportunities with community REITs, manufactured to rent and builder developers, as well as helping our retail partners adapt to different consumer demographics. In addition, the need for affordable housing continues to grow, and we believe that the elevated cost of housing will drive more traditional site-built buyers to our homes. Before we open the lines for Q&A, I want to take a moment to thank our entire Skyline Champion team, as our consistently strong performance is a result of our focus, hard work and our ability to take care of our customers.
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