Good morning, and welcome to Skyline Champion Corporation's First Quarter Fiscal Year 2021 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..

Good morning, and thank you for participating in our earnings call to discuss our first 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 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..

Thank you, Sarah and good morning, everyone. Today, I will briefly talk about our first quarter results progress on our strategic initiatives and then provide you with an update on activity so far in our second fiscal quarter and thoughts about the balance of the.

Let me begin by saying that I am pleased to report better results for our first fiscal quarter than I was originally expecting when we last reported results in May. Despite a 26.5% reduction in revenue, the team adapted well and executed well to take care of our people and our customers.

As a result, we preserved margins and operating cash flows these unprecedented times. As we mentioned on our last earnings call, we temporarily idled many plants late in March and resumed operations at all, but one of our facilities by Memorial Day.

As we moved through the back half of the first quarter, demand improved even as some of our geographies lagged and our order volumes increased. We have seen steady increase in production levels since the beginning of the first quarter and we're back to approximately 90% of last 's levels in June.

During the month of July strong order rates have continued, exceeding prior levels by over 50%.

Recently we have seen strong over order increases across most of our markets due to pent-up demand caused by government ordered shutdowns early in the spring selling season, strong demand for affordable housing, as well as lower comps last, due to the inventory destocking and manufactured housing insurance.

Our backlog grew by $65 million during the first quarter $292 million from $127 million at the end of March 2020. As a basis of comparison, our backlog grew $10 million during the same period of the prior. There are two factors contributing to the increase in backlog, notably strong demand and lower production levels due to labor constraints.

First, on the demand side, our sales team is doing a phenomenal job, responding to product inquiries and quoting requests from our customer channels. Under normal conditions, we would fully ramp-up production activities to meet increased demand. However, we have moderated labor activity level.

We like many factoring operations have experienced the expected side effects from the supplemental federal unemployment assistance provided by the CARES Act. As natural employee attrition occurs, and as we seek to replace and add headcount to our facilities, recruitment has been more challenging.

Once the CARES Act supplemental unemployment benefits expire, we expect to see an uptick in qualified candidates and expect to increase our labor force to accommodate the increased demand for housing. However, we are prepared to manage any of the various forms that the next round of government support may take.

On the operation side, we continue to monitor, manage and execute our enhanced safety and sanitation protocols at our facilities in our adhering to CDC guidelines for social distancing and other measures to reduce the spread of COVID-19.

We have continued to refine and adapt our manufacturing processes to maintain a safe environment for our employees. Encouragingly, we have found that these adjustments are not significantly impacting our productivity or efficiency levels as the production teams have acclimated to incorporating these protocols in their day-to-day activities.

Our Western Canadian plants have followed a pattern similar to our U.S. plants. Sales volumes were down about 36% in the first quarter of fiscal 2021 as compared to the same period last. We temporarily idled these plants at the end of March 2020 and reopened the plants at reduced production levels during June -- the June quarter.

We saw a steady increase in orders in the back half of the first quarter and backlog is growing as orders outpaced production levels. U.S. retailers continue to see increased closing ratios on their sales leads, which are coming more from online channels has been walk-in-traffic.

While walk-in-traffic is still below pre-COVID levels due to various levels of operating restrictions throughout the U.S. Those coming to look for homes are ready and able to buy, and talking with dealers, financing is strong and inventory levels are lean.

Even through the challenges presented by COVID, team was able to continue to make progress on our long-term objectives. The traction of our Genesis brand launched earlier this at the IBS Show in January, continues to build.

We have seen success with smaller subdivision developments and we are now working towards finalizing a few deals with a mid-sized subdivision developments. With the continued social distancing and safety challenges, we continue to invest in our standardization, automation, and digital solutions to make us a better partner to our customers.

While we're very encouraged by the strong order rates and growth in backlog, we remain cautiously optimistic about the broader macro environment. The housing industry is experiencing strong demand overall due to trends that support long-term growth opportunities in single family housing.

Our optimism is tempered by the short-term supply and demand challenges, presented primarily by the CARES Act, now set to expire in the new programs that the U.S. government is considering.

We believe demand will continue to be robust over the longer term, but would not be surprised if there's choppiness in the home industry shipments in the near-term. Given the volatility in the economy and the disruption to normal business operating conditions, it is more difficult to predict how volumes will trend in the next few months.

However, we anticipate the industry volume will be in line with recent homebuilding projections of being down 10% in 2020. Offsite manufactured housing demand could outpace the overall housing industry, depending on its ability to increase production, as well as the length and magnitude of the government programs.

We remain very bullish on the longer term potential tailwinds for the housing industry, specifically with offsite construction opportunities and the need for innovation and attainable housing.

We believe that there will be a migration from crowded city environments to suburban or rural areas which could be meaningful, secular growth lever as manufactured homes have a better market penetration in rural and suburban geographies.

As companies and individuals contemplate potential long-term work at home arrangements, we anticipate changes in the types of floor plans and amenities desired by homeowners.

Finally, for people who aren't ready to move, or undergo extensive home remodeling projects, turning to blow in units offer a compelling value proposition for additional space in an existing backyard. I will now turn the call over to Laurie to discuss our quarterly financials in more detail..

Thanks, Mark, and good morning everyone. I will begin by reviewing our financial results in backlog position followed by a discussion of our balance sheet and cash flow. I will also briefly discuss some margin headwinds, we're expecting in the near term. Net sales decreased by 26.5% to $273 million in the first quarter.

We saw revenue declines of $82.7 million in the U.S. factory-built housing segment as well as declines in our Canadian factory-built housing segment of $8.5 million. The decline in U.S. factory-built revenue was primarily driven by a corresponding decrease of 26%, or 1,420 homes compared to the same quarter last.

A 1.5% increase in the average selling price per U.S. home sold to $61,800 partially offset the decrease in volume. The increase in the average selling price was due to a shift in product mix between our retail and home sales channels. Canadian revenue decreased 36% to $15.2 million, driven by a 33% decline in the number of homes sold in the quarter.

Average home selling prices decreased by 5% to $79,100 due to a shift in product mix to more single section home sales in Canada versus the same quarter last. Our Canadian business continues to be impacted by oil related industry dynamics in Western Canada. Consolidated gross profit decreased to $54 million, down 29% versus the prior quarter. Our U.S.

housing segment gross margins were 19.5% of segment net sales, down 110 basis points from the first quarter last. Gross margins were impacted by the reduced leverage of the fixed costs, which was the result of the sales volume decline.

In addition, we continue to support our employees by providing extended benefits, including increased sick pay as well as continuing health care benefits for furloughed employees, both of which totaled $1.9 million during the quarter. SG&A in the first quarter decreased to $40.8 million versus $51.7 million in the same period last.

The decrease was primarily due to a reduction in variable incentive compensation elimination of non-essential travel and marketing costs and deferral of controllable expenses in order to minimize cash spend as we continue to evaluate the near and longer-term impact of COVID-19.

We also saw favorability in SG&A costs due to the benefit of not incurring expenses related to the acquisition integration activities of $1 million as well as not having to record a charge for a fair value adjustment on an asset classified as held for sale of $1 million that we experienced in the prior.

We recorded other income of $4.2 million during the period, related to a combination of subsidies from Canada's Emergency Wage Subsidy and the United States CARES Act enacted in response to the pandemic.

Canada's Emergency Wage Subsidy was initially scheduled to run through August 2020 that there has been a proposal to extend the program through December 2020. We will continue to monitor our eligibility to apply for financial assistance in any government programs.

Net income for the first quarter was $11.9 million or $0.21 per share compared to net income of $74 million or earnings of $0.31 per share during the same period in the prior, driven by a combination of lower gross profit, which was partially offset by reductions in SG&A and the benefit of the government sponsored subsidies.

On an adjusted basis, we generated $0.22 per net share compared to $0.35 in the ago quarter. The company's effective tax rate for the three months ended June 27, 2020 was 27.7% versus an effective tax rate of 27.6% for the fiscal 2020 first quarter. Adjusted EBITDA for the quarter was $22.5 million, a decrease of 29.7% over the same period a ago.

The adjusted EBITDA margin compressed by 40 basis points to 8.2%, largely due to lower production volumes and an increase in employee benefit costs that were partially offset by government sponsored wage subsidies. Without the benefit of the wage subsidies, our adjusted EBITDA margin would have been 6.7%.

At the end of June 2020, our consolidated backlog was $192 million compared to a backlog last June of $153 million. Current U.S. backlogs are averaging eight weeks of production at the end of June, as labor availability and fees availability [ph] to ramp production to match the pace of incoming orders.

We have also seen an uptick in Canadian backlog levels, primarily in the British Columbia market. We will continue to evaluate and modify production scheduled as we navigate the current environment.

As of June, 27, 2020, we had approximately $237 million of cash and cash equivalents and long-term borrowings of $77 million with no maturities until June 2023. We generated $32 million of operating cash flow during the first quarter of 2021, compared to $27 million during the same period of last.

The increase in operating cash flow is due to our effort to closely manage non-essential spend and working capital during the period, as well as cash flow benefit from government program. Under the CARES Act, employers are eligible to differ the employer portion of payroll taxes until December 2021.

As of the end of the first quarter, we deferred almost $4 million of U.S. payroll taxes and have received almost $2 million from the Canadian wage subsidy program. In addition, our customer and commercial deposits are up versus the same quarter last. The cash inflows from these transactions were partially offset by the decrease in operating income.

We plan to utilize our cash to reinvest in the business and focus on executing on our strategic growth and operational initiatives. Shifting to our outlook for the second quarter, we believe our financial results will continue to be impacted by labor constraints.

These labor constraints may cause us to consolidate product offerings from multiple facilities into one facility at campuses with more than one production line. Currently and as of the end of our June quarter, we have two plants temporarily idled.

Both of these locations have a campus style layout, so we have consolidated production to one building on each campus to best use the available labor and effectively manage production efficiency. Shifting to our input costs.

The demand for labor and OSB has increased, along with the strength in the broader homebuilding and building products industries, while we've generally been able to pass on material cost increases.

These pricing actions are delayed when backlogs increase, therefore, creating some margin exposure, while we've seen reductions in voluntary attrition and absenteeism, compared to this time last, we may continue to incur elevated levels and employee benefit costs to maintain employee retention, health and well-being in the wake of the pandemic.

While we're prepared to take additional actions if needed to control costs, we are also prepared to respond to growth opportunities and continue to drive our strategic initiatives. I'll now turn the call back to Mark for some closing remarks..

Thanks, Laurie. While first quarter results were significantly impacted by COVID-19, we are encouraged by the improvements that we saw as we progressed through the quarter and more recently in July with demand trends and order activity.

We are prepared to manage through the continued variability in the coming months, but remain very confident in the long-term attractiveness of the market and Skyline Champions ability to remain a market leader.

I continue to be impressed with the way our organization has responded in the current environment as our employees adapt and work hard to continue to provide the market with affordable housing solutions for our customers and end consumer. With that operator, you may now open the lines for Q&A..

Thank you. [Operator Instructions] Your first question comes from the line of Greg Palm with Craig-Hallum Capital Group. Please proceed with your question..

Yes, thanks. Good morning. Really good results, given everything going on, I guess, Mark, just to clarify something you said earlier in the call. I think you talked about July orders up 50%, 5 0. Did I hear that right? I mean presumably that would mean that backlog since quarter-end is increased pretty significantly.

Am I thinking about that right?.

Yes. I think, you're thinking that right. Our orders in July are well over 50%.

So, our backlogs have been, we've have been continuing to grow them correct, right?.

That's up 50% on a -over- basis, correct?.

Yes. It's actually over 50% growth -over- basis..

Okay. Well. Okay, good. I mean any sense for whom -- these buyers are they folks that lived in cities in rentals, any change in the demographics. I think everybody is trying to wrap their heads around on sort of the demand for housing out there.

I am not sure if you have a, some sort of sense as it relates to manufactured housing?.

Yes. I think, you're seeing several, trends kind of converge. One, obviously we're starting to see a pickup in financing. You've seen the overall built housing, financing improve. And you're seeing a pickup there. Spreads with manufactured housing have been even more favorable. So while we've seen traditional mortgages improved by, 50 plus basis points.

I'd say the spread differential for chattel lending has been double the improvement of that type level. So you've seen a much better favorability in spreads, in chattel lending because of the new competitiveness, in the chattel lending market. That's one driver.

Second driver, I would say is just we're seeing, we are seeing a little bit higher activity level in rural areas and rural demand. Millennials currently buying homes in the marketplace and I think you're also seeing a trend we are kind of mid-price points buyers are renters are looking to buy, but they're buying it will step down price.

So I think you're seeing that as well. Just out of caution and wanting to lower their future payments in kind of a concern market. But overall demand is very strong..

Okay. Good. I guess, we'll probably know more in the coming weeks about labor availability. But what's your expectation for production volumes in the September quarter. I mean, could they be on par with last. Would you expect to continued lag, I mean, do you have the -- maybe the production volumes in or the utilization in July versus June.

I think you mentioned that June was up to 90%?.

Yes, I would kind of expect either production levels for somewhere down 5% to 10% versus last 's levels in the quarter. I think we're going to ramp up, labor, but it will be towards the tail end of the quarter. We're obviously watching very carefully.

What the new aid packages are from the government, and what effect that has on either evictions on unemployment and all those dynamics, because that changes a little bit of the supply-demand balance in the market outlook we have. So it will -- it will kind of form our strategy and how we deal with labor.

We've got five or six scenarios on how we're going to ramp production coming out of this, but it's somewhat dependent on what form the government aid takes will be the strategy that we utilize to increased production in balance the supply and demand..

Okay, makes sense. And if I could sneak one last one, in here. I think Laurie, you talked a little bit about labor costs and OSB, given the expectation of significantly higher volumes in the September quarter relative to June. Does that help offset some of the sort of the cost increase that you're seeing.

I'm just trying to get a sense for that 19.5% U.S. manufacturing gross margin [indiscernible] mix between orders backlog, production volume and then what ultimately shifts, because I think with the orders and backlogs there's been some volatility over the past as kind of backlogs got worked down then started to normalize higher.

So I guess when we're thinking about just what is your expectation for shipments in the September quarter, is that what should match that production down five to 10%? Is that what you're saying shipment should trend towards or how should we think about that?.

Yes. I think that's the correct view on it Mike. I think we knew that shipments during the quarter will follow in line with production levels..

Got it. Okay.

And is there some then future catch up in terms of the acceleration based on these orders? Or are these orders really just kind of replenishing the backlog and the shipment trends albeit essentially volatile around the economic outcome, the shipment trends should be less as far -- less robust than that what those recent order trends suggest?.

No, I think the backlog levels are building, sales are very strong, demand is exceptionally good. So what I view is we're going to see what some of the outcomes of some of the government programs are.

And as I mentioned on the prior call, some of our view is shaped based on where we see a pause of the housing market kind of later this, depending on what happens with kind of the situation happening with evictions, happening with unemployment.

Does that create a pause in the housing market? If we see a wave of evictions happening over the next X amount of time, if it doesn't get extended, is that going to create a pause as renters and other people are trying to backfill those vacant properties, right. So you could see a slight pause in home demand ordering.

So actually having backlog currently is part of our view on how we want to manage forward, depending on how the outcome of the remainder of the is. So if we see that things get extended and things aren't as choppy towards the tail end of the, then we'll take strategies to continue to ramp production and shipments will outpace later in the..

Got it. Okay. And then, my next question is sticking with kind of demand or shipments.

But what are you seeing in terms of trends from your large developer customers versus, versus smaller, your retail channel?.

You know, I'd say, retail channel is extremely strong right now. I'd say, most of the retailers are having record month or record demand levels and sales period. So, I think, retail channels extremely strong, probably similar to the -- what you're seeing in the difference in site built between build-to-order and on-site ready-to-go product.

So, we're seeing the same thing with retail. People are walking into sales centers, actively buying and moving off the shelf and then retailers are selling as quickly as they can. On the builder developer channel, I think, we see a tremendous amount of activity because of the supply/demand imbalance in housing and the shortage of affordable housing.

Those, obviously, have a longer lead time. I am encouraged, as I mentioned on the call that we've seen the traction with our Genesis brand, where we've had very good success with a handful of smaller subdivision builders to-date, and now we're getting into and finalizing agreements with builders in the 100 to 500 units subdivision levels.

So it's starting to progress into larger scale developments. And I think there's a lot of activity in that market..

That's great. Thanks. And if I could squeeze one more in for you. I think you said that, ex some of the wage subsidies, your margins would have been 150 basis points lower in the quarter.

As you evaluate the different stimulus proposals in Congress today, do you have a sense of kind of what the continuing support could be relative to that or how to think about that, as we kind of cycled through the rest of this and ended of the next?.

Yes. Labor retention is really important. So, I do believe that we're going to continue to support our employees anyway we can, in order to retain them despite what the government subsidies are. Just given the demand, we need our labor to get our production up..

Okay, thank you..

Your next comes from the line of Matthew Bouley with Barclays. Please proceed with your question..

Hey, good morning, everyone. Thanks for taking the questions. I think Mark you mentioned, some positive trends in the financing environment to an earlier question and obviously just mortgage rates being so low and all the strong demand on the site-built side and clearly you guys are feeling that as well.

Any thoughts as to kind of the relative cost of financing for MH versus clearly how strong things have been for traditional mortgages and sort of, how that's playing into these recent orders? Thank you..

Yes, I think right now the spreads are ranging depending on like scores anywhere between 2.25% and 4%. So somewhere in that range. Our current spreads versus traditional mortgages. So that's come down quite a bit like anywhere.

Depending on the lender, depending on the time period that's come down, you know, 70 basis points to 180 basis points over the past -- recent time period versus you know, traditional mortgages which has gone in a similar time period, down about 50 basis. So it really depends on the lender in the situation, but we've seen that spread compress.

So that's been very positive trend, Matthew..

Interesting. Okay, that's helpful. Thank you. And then just secondly with the demand environment improving somewhat here and I hear you loud and clear around, you know, some choppiness in the back half.

But is there any thoughts to reinstating the margin targets, if we're at a point where, you know, yes, there might be some volatility, but clearly the volumes are trending in the right direction?.

Yes, Matt. We are just going to keep an eye on the environment. You know, so much is dependent and the broader economy and unemployment rate. So just keeping eye on it..

Okay. Thanks, Laurie. Thanks, Mark..

Thanks..

Your next question comes from the line of Daniel Moore with CJS Securities. Please proceed with your question..

Good morning, Mark. Good morning, Laurie..

Good morning, Dan..

Again, labor availability.

Are you seeing the same or similar challenges across geographies, across the country? Are there specific areas where you're maybe being pinched a little bit more?.

No, I think it's really widespread. I think what we're seeing in essence is -- where before we put an application out to hire an employee and you get 20 or 30 resumes or applicants. You know, now you will put one out you'll get zero or one for that same job.

So as the CARES Act unemployment, as I view it stimulus expires and takes a different form in the near term, we're going to watch that and see how we react to it. So it's just -- there is not a tremendous amount of incentive for employees who are currently unemployed to find work when the unemployment benefits were very rich..

Helpful. And just kind of looking at the supply-demand dynamics, obviously favorable position, if orders are growing 50% and production is down 5% or 10% call it for this quarter, backlogs clearly going to keep growing significantly.

How much further can backlog grow before you may be become a little concerned about losing potential sales to competitors or even to site-built?.

Yes, I think we're seeing backlog kind of across the industry, continue to grow. So I think vis-à-vis, there might be small competitors or other people who have different backlog levels on a certain geography basis. But overall, I see backlogs industry are keeping pace fairly well.

I view that the outcome of how we manage through this will be highly dependent on how we react, what the new programs rolled out by the government. We don't want to take a certain action to increase employment levels if we then have a surprise reaction from the government that he motivates employees a different way.

So I think we've got a plan in place to increase production throughout the and just really waiting another hopefully week or so before putting some of those policies in place..

Helpful. Okay.

And then the focus on the optimism rather than the caution, but the cautious side of your cautious optimism, is it more related to demand and concerns about rising unemployment and supplemental checks running out or is it supply, lack of available labor CARES Act is extended through the remainder of the?.

Yes, I actually view then that you're going to see almost like a union again type of structure here.

So depending on what form the next aid package shares, if you continue the unemployment benefits that are currently expected to the CARES Act, I think you'll see -- it will put much greater pressure on the supply side, and we'll have to take one form of strategies to react to that.

If we see that evictions are not -- they allow evictions and that there is no unemployment benefits extended and certain other factors. I think you're going to see a larger pause in the housing market and in that case, you're going to -- it'll be a demand side equation that you'll kind of -- one of the reasons we're looking at the backlog.

So, specifically is because, if there is a pause from evictions or other things, we'll have the ability to remain resilient and produce through that downward cycle that will take probably two to three months to work itself through, and kind of get resolved..

Okay. And then, I apologize for asking a similar question.

But you mentioned your Genesis brand, obviously starting to gain traction, more generally what are you hearing from the community developers? Are they still sort of sitting on their hands, wait and see or are you seeing more activity, interest not orders etcetera?.

Yes. I think the community channel is starting to return and I expect it to continue to grow through the second half of the. I think they've seen -- had good success with collections. They've had good success with traction and activity, many home buyers coming into rent.

You see -- you've seen some of the public REITs out there, what they've commented on. I think, they're very bullish on the outlook. And so I think REITs are starting to and the communities is starting to return very favorably..

All right. That's very helpful. Thanks. Congrats. And best of luck..

Thank you..

Ladies and gentlemen, we have reached the end of the question and answer session, and I would like to turn the call back to Mr. Mark Yost for closing remarks..

Thank you, Hector. And thanks everyone for joining the call today. Very proud of the team and how they've performed over this past quarter. It was a very challenging quarter. It just shows the resiliency of our people, which are most important factor and taking care of the customers.

With that the outlook is very good, long term demand and the tailwinds provided by not only the financing environment, but the trend from urban to rural and housing affordability are going to be the key for us going forward. So, look forward to taking care of our customers and our people. Thank you and have a good day..