Good morning, and welcome to Skyline Champion Corporation's Third Quarter Fiscal 2019 Earnings Call. The company issued an earnings press release yesterday.

Before we begin, I'd like to remind everyone that yesterday's press release and statements made during the 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, the company will discuss non-GAAP measures, which they believe can be useful in evaluating their performance. A reconciliation of these measures can be found in the earnings release..

I would now like to turn the call over to management. Please go ahead. .

Good morning. This is Keith Anderson, Skyline Champion's CEO. With me this morning is Laurie Hough, EVP and CFO of the company. Thank you for joining our third quarter 2019 earnings call..

I'll start off today's call with some highlights from our third quarter results, and then provide updated commentary on the market and finally, discuss some of the progress with our operational and growth initiatives..

As a reminder, as a result of the combination of Skyline and Champion during the first quarter, our results for the third quarter include 3 full months of operations for the combining company, Skyline Champion, while our year ago results include only legacy Champion..

During the third quarter, we grew our revenue by 20% year-over-year. Our results were driven by core business gains and did not include any onetime or FEMA-related revenue benefits. We sold 17% more homes in the U.S. at an average selling price of $61,700..

Gross profit increased by 15% to $64.7 million year-over-year. Adjusted EBITDA for the quarter was $26.4 million, for a margin of 7.4%. We achieved solid sequential margin progression of 70 basis points supported by our operational initiatives, which Laurie will discuss in more detail later..

In addition, we made good progress capturing synergies from the business combination during the quarter. However, margins declined year-over-year due to largely tough comps from FEMA-related activity, which did not repeat this quarter..

Turning to the market, volumes for manufactured housing have been recovering, but remain well below long-term averages, and we see significant runway for combined industry growth.

We expect growing demand, combined with our new financing options, to help close the gap with historical trends as manufactured housing plays an increasingly important role in providing the market with affordable housing solutions..

Our U.S. business represents approximately 86% of our pro forma net sales, with Canada and our transportation business each representing approximately 7%. Within the U.S., some of our biggest markets such as Florida, Texas and California, remain strong and continue to have growth opportunities.

We did see some softening in certain markets in the South Central Region, with order activity and backlogs that are lower than we'd like to see..

While difficulty to quantify, we believe some of this softness was caused by disruptive weather-related events, and we are closely monitoring production levels for our 3 plants affected..

On balance, we feel good about the trends in the U.S., supported by our diverse geographic footprint. Demand remains strong within the manufactured housing industry, as HUD shipments increased 9% on a unit basis and 10% on a floor basis, excluding industry-wide FEMA shipments in the calendar year-to-date period through November versus last year.

Going forward, we continue to see the industry outpacing the growth of overall housing starts as HUD and modular are expected to continue to take market share from traditional site-built housing..

We are also seeing the park model market continue to strengthen. While there are concerns about the outlook for the broader housing market given softening in recent statistics, overall, the U.S. manufactured housing market remains healthy..

Consumers continue to view our homes as attractive and affordably priced. They are built with the quality and care and with the features fitting the needs of today's families. Supportive demographic trends along with low unemployment rates continue to help our sector, given the growing cost advantages compared to other housing alternatives..

Outside of the U.S., Canada remains a more challenged market, largely driven by continued pull back in the Alberta province as housing demand remains weak. Economic conditions there remain stressed due to the impact from lower crude oil prices and depressed agricultural markets.

However, our Canadian plants remain profitable with solid margins, but orders and backlog are down year-over-year..

independent dealers, company-owned stores and communities, continue to be healthy. At the end of the third quarter, our consolidated backlog was $181 million compared to $252 million in the second quarter, but up from $169 million in the year ago period..

As discussed last quarter, we did expect a normal seasonal slowdown in the third quarter. As discussed last quarter, Skyline Champion shipped over 900 units for the FEMA disaster recovery efforts during the third quarter last year.

In fact, as a result of these orders, a number of our core customer orders last year were pulled forward as retailers rushed to get in line with increasing backlogs..

Encouragingly, backlogs for a number of our plants have now seasonally adjusted to a more normalized 6- to 8-week level. This is an optimal level, which where our plants have plenty of visibility for labor staffing and bulk purchasing without taking undue inflation risk on our quoting activity..

On the financing front, we continue to see steady progress. While financing is still constrained, especially for chattel loans, we are encouraged by recent developments. Freddie Mac announced their MH Choice product in December. This program complements Fannie Mae's MH Advantage product, which both serve the land home market.

In addition, both GSEs have committed to launching their pilot chattel program this year by purchasing a minimum of 1,000 loans each. While the numbers are modest, the momentum and increased liquidity is important for the industry..

We operate 36 manufacturing facilities strategically located in markets that are close to our customers. We are seeing plank capacity utilization rates rising into the 90s in some of our markets. As a result, we have taken a number of actions to expand capacity to meet demand and improve efficiency..

I'll highlight 3 of those actions. First, this past quarter, we completed our expansion of our Corona, California facility by adding a second production line, which is now contributing to earnings.

Second, similar to our Corona strategy of utilizing a strong management team and workforce, we are opening an additional plant in Leola, Pennsylvania campus. This plant will primarily produce park models as well. We anticipate this plant's expansion will be completed by the end of March, and begin production shortly thereafter..

And third, we are making good progress on opening our new facility in Leesville, Louisiana, with the hiring of our management team and plant readiness teams to prepare the plant for production. We are still on schedule to start production in June 2019..

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

Thanks, Keith. We are pleased with our performance during the quarter as net sales increased 20% to $355 million compared to $294 million in the prior year. The net sales increase was driven by the inclusion of net sales of $63 million for the legacy Skyline operations and an increase in the average home selling price..

U.S. sales grew by 27.5% to $309.5 million. The number of U.S. factory-built homes sold increased 17%. Average selling price per U.S. homes sold expanded 9% to $61,700, as a result of increased market demand, product mix and pricing actions to offset the impact of rising material and labor costs..

Canadian sales grew by 8.7% to $27.1 million, while homes sold increased by 1.9%, with strength in certain markets partially offset by soft housing demand in the Alberta and Saskatchewan provinces. Average selling prices increased by 6.8% to $82,500. Gross profit increased to $65 million, up 15% compared to $56 million in the prior year quarter..

Our U.S. factory-built housing segment gross margins were 18.5% of segment net sales, down from 19.9% last year. The standard FEMA floor plans sold in last year's third quarter allowed Skyline Champion to achieve higher than typical production efficiencies and resulting margins..

Sequentially, when comparing the U.S. factory-built housing segment's gross margins in the third quarter versus the second quarter, we saw a 200 basis point increase due to synergy capture, disciplined material and labor inflation management as well as operational improvements and product rationalization..

SG&A in the third quarter increased to $49 million versus $33 million in the same period last year. The increase was primarily due to the inclusion of the Skyline operations for the entire third quarter of fiscal 2019 and continued integration and equity compensation cost associated with the combination..

Net income for the third quarter was $10.5 million or $0.19 per share compared to net income of $5.4 million or $0.11 per share during the same period from the prior year. The increase was driven by lower tax expense..

On an adjusted basis, we generated $0.27 of net income per diluted share compared to $0.15 in the year ago quarter. The company's effective tax rate for the 3 months ended December 29, 2018, was 29.7% versus an effective tax rate of 73.6% for the fiscal 2018 third quarter..

The change in the effective tax rate was primarily due to costs related to the combination, for which no tax benefit can be recognized, and the remeasurement of U.S.

deferred tax assets and liabilities as the new corporate income tax rate of 21% from 35% under the Tax Cut and Jobs Act (sic) [ Tax Cuts and Jobs Act ] enacted in last year's fiscal third quarter..

Adjusted EBITDA for the 3 months ended December 29, 2018, was $26.4 million, an increase of 3% over the 3 months ended December 30, 2017. The adjusted EBITDA margin declined by 130 basis points to 7.4%, largely driven by tougher comparisons resulting from last year's FEMA shipments..

Sequentially, from our second quarter, adjusted EBITDA as a percent of sales improved by 70 basis points due to synergy capture, operational improvement and pricing and costing discipline..

As of December 29, 2018, we had $129 million of cash and cash equivalents. Cash generated from operations for the first 9 months of the year improved by $53 million versus the same period last year, driven by improved profitability, adjusted for the noncash equity-based compensation and improved working capital management.

The company has $32.1 million of unused borrowing capacity under our $100 million revolving credit facility as of December 29. We have a strong and growing cash position with added liquidity from our credit facility that provides ample flexibility to invest in our core business and strategic initiatives..

We continue to make good progress with the integration of Skyline Champion. A critical aspect of this integration is moving the core functions within Skyline's plans onto Champion's system. Systems conversions completed to date include payroll and benefits as well as 80% of our ERP functionality.

Over the next 2 quarters, we will complete the integration of the remaining ERP functions..

We remain on track and expect to have systems integrations complete by June 2019. The company has been focused on synergy capture and are on track to achieve our targeted range of $12 million to $16 million, which we raised from our original estimate last quarter.

Operational improvements included in the synergy targets continue to progress better than expected. These improvements are resulting from eliminating redundant material cost, streamlining throughput and refining product mix..

Procurement rationalization synergies are coming in as expected. Recall that last quarter we revised our time to achieve synergies from our original estimate of 24 months to 18 months or reaching run rate by December 2019. As anticipated, we experienced a larger impact to our financial results in Q3 from synergies.

In all, we are pleased with our results in the third quarter..

With that, I'd like to turn the call back to Keith for some closing remarks. .

Thanks, Laurie. As evident in the numbers, we continue to make progress in improving financially and operationally. While I'm pleased with this quarter's sequential improvement in margins, we have more work to do to realize our expected goals.

The integration of Skyline and Champion is progressing to a point where the focus will shift to costing, pricing and margin initiatives versus activities such as systems conversions..

Another focus of ours is on revenue growth initiatives. Given the expectations that the industry will continue to grow, our near-term focus remains on internal opportunities, but we will continue to evaluate acquisition opportunities as well..

As we look forward, we expect our markets to remain healthy driven by increasing demand for affordable housing, supported by improving financing and regulatory environments, yet we are closely monitoring overall economic conditions and trends in the housing market..

Longer term, we are well positioned to remain one of the leading providers of factory-built homes and generate attractive returns for all our stakeholders, while providing quality housing for our customers and their families..

Operator, you may now open the lines for Q&A. .

[Operator Instructions] Our first question today is coming from Greg Palm from Craig-Hallum. .

I would love to start on the demand environment.

Maybe you could -- maybe help us understand what you're seeing out there by walking us through the trends in your various channels, independents, company-owned stores and communities?.

Sure. Well, we see pretty good strength and health in each one of the channels. From the retailer side, there was a little bit of slowdown in the middle of that quarter, but we typically see that slowdown in many of our plants, given the geographic footprint that we serve. From the kind of early November time period sometimes into February and March.

This is normal activity for us or seasonal activity for us, so we expect that, we manage to that and that's -- our backlogs reflect that and are favorably comparable to historical time periods when backlog does see that seasonal decline. Last year, certainly wasn't a normal period with 1,100-plus FEMA orders and all the other impacts that had.

The community channel, Greg, still looks really good. We're getting a lot of good vibes from them. There's a number of expansions going on in the community space on existing communities around the country.

But what's even more encouraging and exciting is the number of greenfields that are popping up now, not only in Florida and Texas but Colorado, the Carolinas, Michigan, so that bodes well for future demand. .

As it relates to the independents and maybe the associated order backlog moderation, what's your sense of the impact from a sell-in versus a sell-through issue? I mean, do you think it was more of on the lines of year-end inventory adjustment? Or what's your color there?.

There was -- it's hard to separate all the pieces, but one thing I'd say is certainly in the South Central area of the country that we have plants from the Carolinas, through Tennessee and Kentucky, that's how we define South Central, excluding Florida, Texas, et cetera.

There was certainly a lot of weather-related events that have caused a delay in setting the homes. Remember, our homes are required to be set on either slabs or foundations, but it's all weather-dependent on the retailer being able to get that accomplished.

So we know there was a number of retail sold sitting on their inventory that were delayed being set and thus, it slows down the whole process of getting new orders. So it's hard to quantify that but we're -- we heard a lot of that.

And you got to remember, that was kind of the region that had record rainfalls during that time period, so -- but we're hearing good vibes from those same retailers now, and I guess that's important for our spring season. .

Yes, makes sense. Okay. Gross margin improvements, at least relative to the September quarter, were really fantastic.

So you mentioned -- I think Laurie, you mentioned 200 basis points, but maybe you can help bucket out the impact whether it was pricing, operating efficiencies, synergy benefits? And more importantly, I mean is this a level that you feel comfortable with going forward? Was there anything may be onetime in nature in the December quarter that specifically helped you out?.

Good question, Greg. Thanks. We thought -- and the 200 basis point improvement quarter-over-quarter is in our U.S. housing segment. And it's really a mix, it's a mix of synergies because we did see some capture there as well as our continued margin improvement. There is some pricing action. We saw a 9% improvement in average selling price.

I would say, a portion of that was certainly due to offsetting inflation as well as product mix. So it's all kind of bucketed together. As far as my comfort level with gross margin currently, and whether it's sustainable, I believe it's sustainable. I also believe that we're going to continue to see and capture our remaining run rate synergies. .

Our next question is coming from Matt Bouley from Barclays. .

This is actually Marshall Mentz on for Matt. Just quick clarifying question here. First, on the FEMA units, I know you mentioned 1,100.

Is that -- should we expect another 200-unit headwind as we enter the fourth quarter here?.

As it relates to Skyline Champion, I think it's a little less than that going into the fourth quarter. .

Okay. .

So this was -- the brunt of our headwind was in the third quarter. .

Okay, that's helpful.

And then just taking into account the 900 units that you called out for this quarter, could you give us a sense of what organic growth looked like at a unit level in the business?.

Excluding FEMA, Marshall?.

Right, exactly. .

Yes. It was pretty substantial. It's a hard number to quantify because -- especially on a unit basis, because the FEMA units last year would have been replaced with some portion of core product. So it is a measurement of how much replacement you would have in core residential product. But we feel that we would be in the mid-single-digit organically. .

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

It's actually Mike Eisen on the line. Just wanted to start off following up on those prior comments of organic growth. The industry data was a little weaker than we would have expect to see. And Keith, you mentioned some of the tailwinds you see for your sector that are different from traditional built housing and the slowdown we've seen there.

Can you talk a little bit about what caused the industry slowdown in the quarter? And what your expectations are kind of on a near-term basis over the next 3, 6, 9 months?.

Yes. I think it's important to note that the FEMA shipments, they were significant for us, they were significant last year at this time, for the industry. And as Laurie mentioned, it is difficult to measure what we would have produced and shipped on a core product basis. But we're still seeing really strong trends in the industry.

And I can tell you last week, we were at our largest retailer show in Louisville, Kentucky. And if it's any measurement at all, attendance was up 25%, the retailer confidence was strong.

Our orders that are coming out of that show were very solid, so we feel pretty good about the short-term trends and medium term and longer term, I couldn't feel better. I mean, we're starting to see some more momentum coming out of the financing side. Fannie Mae and Freddie Mac were at that show.

They were partnering with us on seminars, marketing and training the retailers on their new products. Frankly, it was pretty exciting.

We're not seeing that in our numbers, either ours or the industry's yet on the impact of the GSEs coming in, but we are starting to see a little bit stronger financing environment, so that's going to help medium term and long term.

So given how strong the economy is and consumer confidence and unemployment being so strong, we feel really good about the future trends. .

Got it. That's really helpful to know.

And then on some of your comments around backlogs, and particularly in the South Central and what you're seeing there, that is lower numbers than you would have expected and some of the seasonal slowdown, does that impact in any way your ability to ramp up the new facility in Louisiana?.

No, we feel really good about the markets in and around Louisiana and East Texas, and that we also think we can tap into the Western Florida Panhandle area that got devastated with last year's storm. So we feel very good about that decision. I wish it was open today, but it takes time to equip and staff a plant.

So now I think we should be good in June opening that plant up. .

Understood. And then one last one, if I could sneak it in. In just thinking about the government shutdown that recently took place, and you just made comments about FEMA supply into the Panhandle Florida.

Is there anything we should consider from HUD or FEMA perspective on the impact from you guys in the industry?.

Well, we know FEMA has shipped units out of their storage yards all the way to Northern California in fire areas. We know that they've also placed some of their units in the Carolinas and continue to look at areas in the Panhandle that were affected.

But we have not received any RFPs from the FEMA officials to help them restock their storage units, so I guess time will tell there. That's kind of a ancillary or over-the-top business channel for us, so if that happens, great. But we're focused on building our core. .

Our next question is coming from Phil Ng from Jefferies. .

This is actually Collin on for Phil. I just want to start with the backlog.

You noted that the decline sequentially was at least partially driven by normal seasonality, could you just give us a little color about how much do you think that decline was normal seasonality versus the change in order trends you called out in the South Central Region? And then could you talk about the slower order rates in the South Central, and how big that business is for you guys?.

Yes, that South Central Region, Collin -- I mean, it's 3 plants and then we also call out our Western Canada 3 plants that are affected by the slower economy there. So combined, we're keeping a closer eye on those 6 plants. But in South Central, it started midsummer, late summer, which is very abnormal weather trends and it just didn't slow down.

We all know the effects of Hurricane Florence, but then they got also hit with Hurricane Michael, and it just never stopped into the early -- late fall, early winter time period. So while there seem to be customer traffic with our retailers, our retailers were satisfied there. They just couldn't ship and set their homes.

So I can't say how much of that is weather related. I guess coming out of this winter slowdown -- seasonal slowdown, we'll keep a closer eye on that. But it's hard to separate orders from weather-related events from a slowdown in perhaps the economy in those regions. .

Okay, understood. And then just on interest rates and the cost of borrowing, end of last year -- at the end of last year, we saw some increases in the traditional mortgages -- mortgage interest rates.

Can you talk about how interest rates for your products trended during that period? And if you've seen any affordability issues, just given rising interest rates and significant ASPs?.

Yes, I think we talked a little bit, Collin, about that on our last quarter call, and really we haven't seen any real movement in interest rates on any of our products, whether it's on the chattel side or on the land home side, so I guess that's a good thing, given that we were gaining a little ground in comparability and competitiveness with site-built financing cost.

So from our perspective, financing certainly hasn't hurt us. And in many ways, things like lower down payments and a little more competitive underwriting is starting to show tailwinds toward us. And I think our products will continue to get more competitive with financing help.

We -- last week at our retailer show, we had a number of new lenders come into the exhibits and come into the show, and they seemed very energetic about jumping into our industry. And these are new lenders, they are national lenders on the site-built side, but they're new to our space. And I think they can really make a difference.

They have the capital means and a broad network and distribution channels that, over time, they could really make an impact. So we're looking forward to seeing that. .

Our next question is coming from Rohit Seth from SunTrust. .

I think we covered most topics, but, for me, I just -- given the limited financial history of the company, wondering if you guys can comment on your sense of comfort with the fiscal 2020 Street expectation on EBITDA of $113 million?.

Seth, it is -- it's reasonable, reasonable. .

Okay. So it's fair to say, you're comfortable with that or... .

Fair to say without giving guidance. .

[Operator Instructions] Our next question is coming from Susan Maklari from Crédit Suisse. .

This is actually Chris Kalata on for Susan. So my first question is just on the additional capacity you guys are bringing online.

What is the run rate capacity you're expecting in both your Louisiana and Pennsylvania facilities? And when do you expect that to benefit your results?.

Well, we will start our production in late May, early June of this year in the Leesville facility. It'll start modest, 1, 2 floors a day just -- you get a new workforce. We're really trying to standardize that product and floor plan strategy out of that plant so that we can be efficient and productive with the new workforce from day 1.

But we anticipate the Leesville plant ramping up to 6 floors a day. That could take 9 to 12 months to accomplish that. But given that market and given the workforce, we expect to have in place there, that's where we think it'll be.

The Leola, Pennsylvania additional plant that we are in the process of opening up here in April, it'll start slow, maybe 0.5 floor a day growing to 1 unit a day.

And then as we hit full steam there, given park models are more complex, I think we'll be able to achieve a 2- to 2.5-floor a day ramp by early 2020, but that will take a little bit of time as well. .

park modular product? And whether you're expecting this new capacity to be creative or dilutive to your overall company average margin?.

Yes, we don't break down our margins by product. Obviously, within our walls, we have a lot of the information, but park models are very strong margins, tend to be a tad higher than our overall margins. And the market's strong for park models. Modular products tend to be very similar to HUD.

And HUD varies a little bit by region and based on competitive pressure and plant efficiency, but Leesville should be right in our mainstream or kind of right on top of our normal margins once they achieve their ramp or get through their ramp up. .

Thank you. We have reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further closing comments. .

Well, thank you for your interest in our quarterly results. We're excited about what we've accomplished. We know we have a lot more work to do, but we look forward to talking to you next quarter. Take care. Thank you. .

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today..