Edited Transcript of SKY earnings conference call or presentation 29-Jan-20 1:00pm GMT – Yahoo Finance

Q3 2020 Skyline Champion Corp Earnings Call

ELKHART Feb 4, 2020 (Thomson StreetEvents) -- Edited Transcript of Skyline Champion Corp earnings conference call or presentation Wednesday, January 29, 2020 at 1:00:00pm 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

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Conference Call Participants

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* 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

* Philip H. Ng

Jefferies LLC, Research Division - Senior Research Analyst & Equity Analyst

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

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Sarah Janowicz, [2]

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

I would like to remind everyone that yesterday's press release and statements made during this call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. Such risks and uncertainties include the factors set forth in our earnings release and in our filings with the Securities and Exchange Commission.

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

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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 strong gross margin and operating income improvements this quarter compared to the same period a year ago. As we look at industry demand trends, we have seen HUD industry shipments rebound favorably over the last few months and anticipate that trend will continue throughout the calendar year.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Questions and Answers

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Operator [1]

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

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Daniel Joseph Moore, CJS Securities, Inc. - Director of Research [2]

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

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

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

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Daniel Joseph Moore, CJS Securities, Inc. - Director of Research [4]

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

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

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

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Daniel Joseph Moore, CJS Securities, Inc. - Director of Research [6]

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

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

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

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Operator [8]

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Our next question is from Rohit Seth with SunTrust.

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Edited Transcript of SKY earnings conference call or presentation 29-Jan-20 1:00pm GMT - Yahoo Finance