Good morning, and welcome to Skyline Champion Corporation's Second Quarter Fiscal 2023 Earnings Call. The company issued an earnings press release yesterday after the close.

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 the company's 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 can be useful in evaluating 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..

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 second quarter highlights, then provide an update on activities so far in our third quarter and wrap up with thoughts about the balance of the year.

I am pleased to share that our team once again delivered strong profitability metrics this quarter including new highs for home closings, gross margin and earnings per share. We achieved these results despite supply chain challenges as well as the short-term impacts from Hurricane Ian.

Thankfully, our team members and plants came through the storm safely and we are thinking of all those impacted. During the second quarter, we grew net sales by 54% and EBITDA by 170% expanding margins by more than 1,000 basis points.

Our strong performance continues to be driven by initiatives focused on enhancing the customers' buying experience and improving operating efficiencies to protect our margins. The team's hard work and operational efficiency in completing the FEMA Disaster Relief Housing order also contributed to this quarter's overperformance.

Production volumes were up on a year-over-year basis as our focus on product rationalization led to increased output. In total, we delivered 7,577 homes, an improvement of 21% from the prior year and up 6% sequentially.

Our capacity expansions, including the production ramp at our Navasota, Texas plant, the Manis Homes acquisition in Laurinburg, North Carolina and the expansion of our retail footprint through the acquisition of 12 Altisima retail locations also contributed to our year-over-year increase in home sales volumes.

As a result of stronger production levels, dealer rightsizing of inventory and customer supply chain challenges, the backlog at the end of the quarter was down $555 million to $814 million, compared to the June quarter. Lead times improved during the quarter to 19 weeks, compared to 28 weeks at the end of June.

Normalizing production to reduce backlogs to pre-pandemic levels of 4 to 12 weeks helps the homebuyer lock in pricing and financing, and benefits our direct sales channels to better meet the needs of their customers.

As expected, we saw retailers rightsizing inventory levels during the quarter as they destocked existing inventory, resulting in the cancellations of orders in our backlog as well as selling homes out of their existing inventory ahead of placing new orders.

With interest rates continuing to rise and consumer confidence waning, we do expect retailer inventory destocking and selling out of existing stock to continue through the remainder of fiscal 2023. We estimate that the industry is currently over-inventoried by approximately 7,000 units.

With the destocking, we expect our third quarter top-line to be flat to prior year and fourth quarter to be down year-over-year. We also saw during the quarter, community and builder customers put their orders on hold due to supply chain issues in their new developments, primarily related to the availability of concrete and transformers.

Despite the near-term rightsizing of dealer inventory and the supply chain dynamics impacting new developments, we see healthy demand in the medium-term. While retailer walk-in traffic is down, the economic conditions and digital leads are driving good credit quality consumers with higher closing rates.

As a result, we see year-over-year increases in the number of deposits at many retailers and quote activity remains healthy. Additionally, REIT and tiny home demand remains good, and we are seeing increased engagement from builders and manufacturer to rent channels.

To increase awareness of our homes, we attended the Build-to-Rent Conference in Las Vegas in September, where our Genesis home was well received. We will also be displaying a home at the National League of Cities Conference to increase city officials' awareness of our products as an affordable housing solution.

In the near term, we continue to focus on streamlining our production as we have seen significant benefits from these efforts. Most recently, we have been working to tool and staff one of our idle manufacturing facilities in North Carolina.

This facility is scheduled to begin ramping later this year and will further streamline production in the Carolinas and the surrounding states.

Additionally, we are starting to invest in the opening of our Bartow, Florida plant to support growing builder developer demand and additional short- and long-term housing needs from the impact of Hurricane Ian. As we look forward, homebuyers are facing rising interest rates and inflation.

As a result, we are seeing our 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 our traditional community REIT channel and growing interest from mid-sized builders and developers.

While these growth drivers will take time to mature, we are excited by the progress we've made so far and encouraged by the longer-term impacts on our results and the overall housing accessibility.

In this environment, we need to double down on innovation and introduce more offerings that connect with the growing number of consumers who need affordable housing, given the continued economic uncertainty.

We are accelerating our investments into production automation and the customer experience, so we can help consumers have a great place to call home. 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 for the second quarter, followed by a discussion of our balance sheet and cash flow. I will also briefly discuss our near-term expectations. During the second quarter, net sales increased by 54% to $807 million, compared to the same quarter last year.

We saw revenue growth of $283 million in the U.S. factory-built housing segment during the quarter, which was driven by an increase in the number of homes sold and an increase in average selling price. The increase in the number of homes sold was 23% or 1,372 units for a total of 7,274 homes, compared to the same quarter last year. U.S.

volume growth is being driven by increased capacity. Year-over-year capacity expansions were driven by the continued ramp of our Navasota, Texas plant and the acquisition of Manis Homes and the Factory Expo retail locations, in addition to our continued efforts in streamlining our core product offerings across our existing manufacturing footprint.

During the quarter, we finished producing and shipping the remaining FEMA disaster relief homes, bringing FEMA unit sales during the quarter to $117 million and $200 million year-to-date. The average selling price per U.S.

homes sold increased by 30% to $103,700 due to product mix, including higher priced teaming units and year-over-year price increases on our core products to offset higher input costs, including labor and transportation. As a reminder, CME units have more specifications than our core product, thus driving ASPs higher.

On a sequential basis, revenue in the U.S. factory-built segment increased 14% in the second quarter of fiscal 2023, compared to the first quarter of fiscal 2023. This increase was driven by a 7% increase in both the average selling price per home and the number of homes sold.

The sequential increase in price was driven by a change in product mix and low single-digit price increases. Volume growth during the quarter was primarily driven by a decrease in finished goods inventory as capacity utilization remained flat sequentially at 72%.

Canadian revenue increased 2% to $39 million compared to the second quarter of last year, driven by a 20% increase in the average home selling price, partially offset by a 15% decline in the number of homes sold.

The higher average home selling price in Canada of $129,400 was driven by a continued shift in mix to a larger multi-section home and price increases to combat ongoing inflationary pressures on our input costs. The decline in volume was caused by the shift in product mix and a softening of demand in certain Canadian markets.

Consolidated gross profit increased to $274 million in the second quarter, up 112% versus the prior year quarter due to higher volumes and average selling prices. Our U.S. Housing segment gross margins were 34% of segment net sales, up 930 basis points from the second quarter last year.

The improved operating efficiencies and higher prices on FEMA sales helped to increase gross margin this quarter in addition to core product pricing, lower force product costs and continued product standardization, which all led to increased leverage of fixed costs.

SG&A in the second quarter increased to $84 million from $61 million in the same period last year, primarily due to higher variable compensation driven by higher revenue and profitability. The increase in SG&A also reflects additional investment to expand our capacity and footprint.

Net income for the second quarter was $144 million or $2.51 per diluted share, compared to net income of $51 million or earnings of $0.89 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.

The company's effective tax rate for the quarter was 25% versus an effective tax rate of 24.4% for the year ago quarter. Adjusted EBITDA for the quarter was $197 million, an increase of 170% over the same period a year ago.

The adjusted EBITDA margin expanded by more than 1,000 basis points to 24.4% due to gross margin improvement and leverage of fixed costs. The structural improvements in our business over the last few years has strengthened our operational capabilities, leading to increased output and 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 into the second half of fiscal 2023, we continue to expect a normalizing of margins back to fiscal 2022 levels now that the impact of FEMA unit sales have been fully realized and as we anticipate headwinds to our product mix with consumers moving to homes with less options to maintain more affordable monthly payments.

As of October 1, 2022, we had $677 million of cash and cash equivalents and long-term borrowings of $12 million with no maturities until 2029. We generated $231 million of operating cash flows for the quarter, an increase of $174 million compared to the prior year period.

The increase in operating cash flows is primarily due to the increase in net income, coupled with the higher receivables and inventory balances at the end of the first quarter, converting into cash during the second quarter.

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 to support strategic long-term growth. I'll now turn the call back to Mark for some closing remarks..

Thanks, Laurie. While the current economic environment has raised a level of caution with consumers due to the sustained inflation, rising interest rates and global uncertainty, we believe Skyline Champion can continue to outperform the broader housing market due to our affordable price points, strategic positioning and core initiatives.

The outlook for demand is supported by the channel opportunities with community REITs, build-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 the entire Skyline Champion team as our consistently strong performance is a result of our focus, hard work and ability to take care of our customers. I cannot express how blessed we are to have the great team of people that we have.

And with that, operator, you may now open the lines for Q&A..

Ladies and gentlemen, we apologize for the technical delay. We will now begin Q&A session. [Operator Instructions] Our first question will be coming from the line of Greg Palm with Craig-Hallum Capital Group. Please proceed with your question. .

Yeah. Good morning. Thanks.

I assume you can hear me okay?.

Yes, Greg. Good morning. .

So I wanted to start with the retail inventory positioning out there. Mark, I'm just trying to figure out if you can give us some sense of how far along the destocking process we are.

So if there's 7,000 units left, where were we to start in? I think you said lasting throughout the fiscal year, does that just assume that backlog comes down another couple of times before we maybe get more in a normalized position?.

Yes, Greg. I think what's important to note on the backlog, that the backlog change is more about floorplan credit and set crews than it is about end consumer demand. End consumer demand is actually healthy. So what we've seen is as the retail channel canceled stock model units, we've seen a predominance of retail solds going to dealers.

And the reason that's important is because a retail sold unit takes about a week to set and finish and a stock unit takes about a day. So with more and more retail sold going to dealers and less and less stock models because they've been leaning down stock models, it limits the set crews capacity to deliver those homes.

So they've seen about a reduction of, I'd say, 20% to 25% because of the mix shift in the products that they're setting and finishing. And what that's driving is an increase in their inventory levels and their floor plan levels, which is actually only compounded by inflation in terms of their floor plan limits.

At the same time that's happened, more played lenders over the past year have allowed retailers to have overages in their floor plan lines because of pending inflation. So they were giving an additional, let's say, overage of 20% to 25% on their floor plan lending lines to allow retailers to order in advance of inflationary changes.

With the pullback in lumber, they've gone back to just revert to not giving them those overages. So really, what we've seen backlog-wise and inventory-wise at the retailers is that their product mix shift is slowing down their ability to set and finish driving up their inventory by 20%.

At the same time, their floor plan lending limits have been pulled back by roughly 20% to 25%. So this is really kind of a short-term credit thing where they have to get their floor plan lines back in line. I do think that's about 7,000 units today. So we're going to slow down to let them catch that up.

But what we're seeing is strength in the end consumer demand. Our quote activity is still very good. Our deposits at our captive retail are actually up year-over-year by about 9%. So we've seen strengthening retail deposit activity. Not only in our own captive retail, but we're hearing the same from other retailers, especially digital ones.

So the end consumer demand is still good but I think we've got the short-term issue where floor plan lines have been pulled back, and we've got to help our retail channel kind of manage through that. So, I think it's about 7,000. We probably started off double that somewhere in that neighborhood of 15,000 to start with.

So we're probably about halfway through. But the pullback in the flooring credit line overages is probably exasperating the length of time that's taking..

Got it. Now that’s helpful color. I mean, just on the consumer demand point, can you give us any other kind of metrics out there by channel? So if deposits at quoting and traffic are still healthy in retail.

What are you seeing on the community side of things? And then also important in these evolving channels, build-to-rent builder developer, are you seeing more conversations now that backlogs are coming down?.

Yes, definitely. I mean, the REIT community channel, very strong activity. As I mentioned, they're slowed down on a few of their Greenfield developments just because of transformer timing and supply chain, along with concrete issues and other things.

So that's delayed probably a good quarter or so; until we'll see that coming through in many of these new Greenfield developments have been pushed out 4 to 6 months, roughly. So that will start coming through, but the demand there is extraordinarily healthy. Park model and tiny home demand is actually accelerating. Builder developer is picking up.

There's more conversations. We are working to tool up our Bartlett Florida plant because of the demand for builder developer. So we are opening up that idle facility and working on that, that should be opened up in early to mid calendar of 2023. So I think the demand for all the channels is still good.

Retail is just going to have to work through this dealer inventory issue to get their floor plan credit lines in line..

Okay. And then, Laurie, you mentioned the outlook for margins. I guess I'm a little bit surprised that they would hold up as well in this type of environment on this level of revenue that you're looking at for the next couple of quarters.

I just wanted to confirm, is your expectation that margins in that 26% to 27%, which is what sort of the average was in fiscal 2022 and that's for the back half of this fiscal year that I'm asking..

Greg, yes, that's exactly what we're expecting. Gross margins in the 26% to 27% range for the next couple of quarters, given the streamlining of the product offering and the structural changes we've made to product..

Great. I appreciate the color. I’ll hop back in the queue. Good luck. Thanks. .

Thanks, Greg. .

Thank you. Our next question is coming from the line of Daniel Moore with CJS Securities. Please proceed with your question. .

Thanks, Mark. Thanks, Laurie. I apologize for the first one, but I was typing as fast as I can.

Mark, can you just repeat the production outlook expectations for Q3 and Q4?.

Yeah, so, we expect top-line for Q3 to be even with last year, even with third quarter last year, and we expect fourth quarter to be down from last year's levels and maybe slightly down from third quarter as well just to get these inventory levels back in line..

I think you gave some color on this in the last question, Greg's question, but maybe just any more specificity about the level of magnitude of order cancellations that you experienced in the quarter.

I know you're expecting another kind of 7,000 unit normalization in terms of dealer inventories but, of that, what's the sort of magnitude of cancellations that you experienced and/or seeing so far in this quarter?.

Yes, the cancellations have been mainly the stock model units, Dan, that we talked about. So we've seen very few customer cancellations in terms of that. Actually, those have been really good; they've held up well. The cancellations on the stock model side have probably been running 20% or so of our total order rates from prior year.

But I think that's about done with the clean-up. We've actually seen cancellations start to slow. So I think the stock model clean up is just about done and in wrapping up that cancellation pace. The real thing is just going to be the stock model units. Dealers cannot place an order with us unless they have floor plan availability on their credit line.

So we won't see new orders coming in until these destocking happens because they just because they actually physically cannot or technically cannot place an order until they have that availability on the floor plan line. So I think that will impact kind of new orders, even though quote activity is good and all of that.

So once they get this destocking done, that will fill up the pipeline as we go forward..

Really helpful. Let me one more and I’ll jump back, but on the financing side, we talked about the inventory for the floor plan financing.

How about on the consumer side? Obviously, rates well documented or going up, but has the spread between stick built and comparable land home for MH remained narrow as it started to widen again in recent weeks/months? What are you seeing there and just the overall level of activity or participation on the lending side for consumers? Thanks..

The financing for the end consumer still remained very good. It's narrow versus traditional mortgage, which is a very big positive. I will say that we have seen more and more cash buying customers, especially in certain regions of the country.

We're seeing more and more buyers who actually have good credit, healthy credit scores, maybe cash, come in and probably had enough for a site-built home last year, but now they're priced out of the site-built market and coming to us. So healthy activity..

Al right. I’ll jump back with any follow-ups. Thank you again. .

Thank you..

Thank you. Our next question is coming from the line of Matthew Bouley with Barclays. Please proceed with your question. .

Hey, good morning, everyone. Thanks for taking the questions. On the 7,000 units of excess inventory, a couple of clarification points on that.

How many units per dealer do you think that represents? What did they have previously and where does it go to? Is your estimate of 7,000 sort of based on an expectation of what they've carried in past recessions? What I'm trying to get at is what's the risk that they could cut inventory further than that? Thank you..

Yes, Matt. Thank you for the question. The 7000 is really to get back in line with their floor plan credit lines. So it's less about the – in other words, the fact that the floor plan lenders are not allowing that overage in terms of what they have historically allowed and are actually just reverting back to pre-pandemic kind of credit limits.

That's pulling back that inventory. So they have to get their inventories back in line. So it's actually less about physical – it is in part physical destocking -- but the number of units they have in the field waiting to be set and delivered is probably more of the driver of that than even their physical dealer inventory.

But I would say there is roughly 2,500 to 3,000 retailers in the U.S. So you figure two to three models per dealer and you get there. But it's really driven more by the pullback in floor plan availability that they have to get back in line..

Got it. Okay. Now that’s great color. Secondly, just kind of following up on the gross margins. I know you mentioned the second half still needs to sort of normalize to the prior year.

I know this has kind of touched on earlier, but [Audio Gap] I am just curious, is the mix change enough to drive that sequential decline or is there anything else that [Audio Gap] for margins to normalize that quickly?.

Sorry, it's Laurie. Your question really was choppy. You cut out many times. Can you repeat? Sorry..

Sorry about that. Basically, the gross margin is – the starting point is high, right, relative to thought it would be from Q2. And so, is the mix change that you alluded to in terms of pressure, Is that enough to drive. [Audio Gap].

Sorry, you're cutting out again. I think you're talking about mix relative to margins. So, in this quarter, obviously, we had the benefit of FEMA as well as favorable forest product pricing, as we talked about on the call last quarter.

So we're going to have, obviously, the correction of both of those as well as some pulling back on material surcharges in order to adjust price for our change in input costs. And then also, the last variable, which I think you were alluding to is the change in product mix to smaller, less optioned homes.

So all of those dynamics are kind of happening at once. Hopefully, I answered all of your questions..

Yes. Thanks, Laurie. Thanks, Mark..

Thank you. Our next question is coming from the line of Phil Ng with Jefferies. Please proceed with your question. .

Hey, Mark. Lot of great color.

This is probably not a fair question, but I guess, once you kind of work through this inventory destock at the retailer level, what's your early view on how volumes could look next fiscal year? Certainly, some of these site-built homebuilders are talking about, call it, double-digit declines in orders and at least the buy sides anticipating that level of decline.

Your situation is a little different and you got some good guys at the REIT side, direct-to-builder side.

So kind of help us unpack how you're thinking about whether you think you're going to be able to grow next fiscal year from a volume standpoint?.

Yes, that's a great question. Obviously, we're watching what the Fed is going to do over the upcoming - actually today - and weeks and months. So that's a hard visibility to look at. But I see that our deposit activity and quote activity is good and stable. So I don't expect that we will see the same magnitude of decline next year that the builders do.

I know they're talking significant double-digit declines in many of them that we're hearing from where we should be able to take significant share. We haven't disclosed any type of guidance yet on that, but we will be taking share from site-built next year, for sure..

Got you. And then, similarly, Laurie, just kind of unpacking Matt's question more looking out to next year. You guys have been able to manage price cross pretty well, mix is going to be a headwind next year.

Is the basis for 2024, we should just use kind of last year's as a base and applied normal decrementals? Should we expect price cost to be a positive still? You guys have been able to manage that quite well and we're certainly seeing some pullback on some of your inputs like lumber..

Yeah, so, as we mentioned, we think the gross margins are going to come in around the 26% 27% range. I think that, that's going to continue based on our structural changes that we've made, barring any catastrophic change in demand, but we're not expecting that..

Okay. And sorry, I just sneak one more in.

FEMI units have been a good guy positive for this year and I think Mark, you alluded to Hurricane Ian, is there an opportunity there to kind of pick up some business for next year?.

Yes, obviously, FEMA hasn't disclosed any orders yet. I think they've got a few thousand units still in inventory that they can deploy for the state of Florida, that the demand -- so there could be a replenishment order for those units. But I will say that the need in devastation in Florida is pretty extensive.

So I think there will be a short-term and a long-term need. We don't know if and when FEMA will issue an order, but it is highly likely that there will be some type of disaster relief housing, I can't imagine how with the extent of the damage that there's not some type of either replenishment order or something else in the future.

But most importantly, is we've got to figure out a way to get those people that are suffering down there into a good quality home..

Okay. Thank you. Great color. .

Thank you. Our next question is coming from the line of Mike Dahl with RBC Capital Markets. Please proceed with your question. .

Good morning. Thanks for taking my questions. So, Mark, just to press on kind of the order environment and some of the comments around inventory units' cancellations. I guess if I look at the 7,000 units or even the 15,000 units as a starting point, you guys have a 20%-ish market share.

So you're really talking like 1,500,000 to 3,000 units that in theory would be applicable to Skyline. That doesn't seem to really even come close to bridging the delta between what you're seeing in the decline in order activity, at least on our math, it seems like it's much more meaningful than that.

So I don't know, maybe you could give us a little more color, help us square that a bit more. That’s just my first question. Thanks. .

Yes, Mike, I think you are looking at it just in terms of the absolute inventory number. I think what you have to also consider is roughly the 20% to 25% pullback in floor plan credit availability.

So if there's roughly 30,000 to 35,000 units normally in the entire sales channel, and they were over inventory by, let's say, 15 give or take, there's something in the neighborhood of 45,000 units overinventoried – inventory in the channel.

And if you pull back the floor plan limits by 20%, that's a fairly significant number just to pull back in addition to just getting the inventories down to the normalized levels. And then you have the stock model units that were in the backlog numbers, not physically in inventory that would kind of be matching the stock model decline.

So I think you had a number of units in the backlog that we're not physically on the ground that were canceled because you're not going to replace those stock model units. The inventory at the dealers needs to go down physically, and then you have the pullback in floor plan availability in credit lines.

So I think you really have to look at it, I think, in those three lenses and then the magnitude is fairly large..

Okay. That helps. And as a follow-up and this also follows up on Matt's question from before, it sounds like at least on the inventory side, what you're talking about here's what it would take to get back to floor plan limits.

In past cycles, what have you seen out of dealer behavior? And what have you seen out of floor plan credit availability, i.e., do dealers typically drop below their full utilization of floorplan lines or to lenders curtail for plan limit lines? Because it seems like maybe some of your commentary, looking out seem to maybe assume that this is all resolved shortly, but that may not really account for potential further weakening in the consumer and housing environment..

No, I am actually looking at this as really destocking, to be honest, Mike. The floor plan limits, the overages were really done due to once-in-a-lifetime inflationary changes. The inflationary market for homebuilding materials was very unique in terms of the timing.

So I think the floor plan lenders, seeing that and not wanting to try to overmanage every single invoice just said we're going to just, in essence, give you an overage, let you ride because we don't know what the price is going to be given the length of backlogs.

So I think we're just reverting back to normal on that, but that is a change in delta from where they were. And consumer demand and traffic still remains very good at the dealership level. Like I said, walk-in traffic is lower.

So the dealers that are really just focused on walk-in traffic, I think we'll see a slowdown in their activity, but the dealers who have a more digital presence with e-leads and other things, are seeing much better traffic and much more convertible traffic. So I'm not concerned about the end demand currently..

So Mark, if I could, just to press on that a little bit more. I guess more of what I'm asking is we've gone through cycles before in a broader macroeconomic sense in a recessionary environment, you do tend to have the credit environment tight enough. We are seeing that across a variety of parts of the credit environment today.

So when you've seen past cycles, how does the floor plan lending credit environment change that's kind of on the availability of credit side.

And then even if you've got available credit, if we were to go into a recessionary environment or if we're in one today, as an operator, as a dealer, you may choose not to use – I don't know, maybe this isn't right, but one may choose not to use all of their available credit depending on the environment. So that's more what I was getting at.

How do these cycles work in the past when you think about availability of credit in a recession or use of credit in a recession?.

No, I think the floor plan lenders are robust. There's -- the housing value today is strong, especially for affordable product, which we have. So I don't think the floorplan lending environment is at risk. And even in prior cycles, it really wasn't in risk, except when various companies went out of business.

So if the banks go out of business, then maybe you've got that. I think the banks are in a much healthier position than they were in 2008, 2009 and prior. So I am not as worried about that. And frankly, this is an asset-backed type of credit facility.

So it has strength to it in this market, even in a recessionary market, especially when we are short supply of housing. Dealers will typically have availability on their floor plan lines and manage to that and manage to that level. And it really comes down to what is the traffic patterns, how much they see.

And it also depends on the set and finish crews. One of the reasons we've gone more into set and finish is because the longer it takes a retailer to hold and set and finish a product, the longer it takes them for them to monetize and get that off their floor plan and lending line.

And with higher floor plan lending rates, speed is actually a cost advantage for them. So I don't think dealers are gun shy about how much their floor plan lending rate is as long as they're turning product, which with the deal pipeline that they're experiencing is the case.

And it really just comes down to the fact that there's a need for affordable housing. And I don't foresee the banks, you know, a majority of banks going under and needing federal support to support the banking environment today, as we saw in prior cycles..

Got it. Okay. Thank you. .

Thank you. Our next question is coming from the line of Jay McCanless of Wedbush. Please proceed with your question. .

Hey, good morning, everyone.

Just to be totally clear here, the bottleneck in the equation right now is the lack of set and finished crews to get those homes put in a timely fashion? Is that the upshot of all this?.

I would say two pieces, Jay. One is the lack of set and finished crews or maybe the mix change impacting the set and finished crews, right? If it takes you a week longer to do a retail set than it does a stock model set. If you have a dramatic shift in mix, then it will impact your capacity of those seven finished crews.

But that being said, set and finish crew availability is a key. That's absolutely one. The other one is the fact that the floor plan lines have reverted back to normal levels, and they're not allowing inflationary overages as they were before because they are seeing lumber prices come down in other things. Those are the two drivers..

I mean, is that an opportunity in addition to getting deeper in set and finish? You guys are seeing on a pretty sizable amount of cash.

Is it time to look at maybe doing a little bit of floor plan lending to help increase the return potential on that cash sitting on the balance sheet?.

I think we have discussions on financing solutions all the time, Jay, so that's definitely an opportunity..

Okay.

And then, could you just give us an idea of where current chattel rates are and also where land home rates, mortgage rates are running relative to conventional financing?.

Jay, for good credit quality customers, the spread between the 30-year fixed and a chattel rate would be 100 to 150 basis points, so relatively flat to what we talked about last quarter. So yes, that's what we're seeing today. Not a lot of change in the financing environment..

Are you seeing any tightening of lending standards? I know there's people, additional entities, that are coming into the business.

I didn't know what you've seen in terms of underwriting standards, those tightened up at all, given what's happened in the last six or nine months?.

Not significantly different, no..

Okay. All right, cool. Well, thanks for taking my questions. Appreciated..

Thank you, James. .

Thank you. Our next question is coming from the line of Greg Palm with Craig-Hallum Capital Group. Please proceed with your question. .

Yeah, thanks. Just one quick follow-up in light of everything going on, any changes in how you're thinking about capital allocation strategy? I mean, kind of on a real-time basis, you're now sitting here with, what, 25% of the market cap in cash.

So just curious if you are looking at maybe more of a buyback and M&A as a complement or if M&A is still sort of the main focus area?.

Hey Greg. We are seeing the course with reinvesting in the business, enhancing the customer experience, increasing capacity, opening idle facilities and looking at strategic M&A..

And what about CapEx expectations for the year? Do you have a number in mind?.

We haven't put anything out, but we do expect it to be higher than where we have been in the past just as we start to increase our production automation initiative..

Okay. Fair enough. Thanks..

Thank you. It appears we have no additional questions at this time. So I'd like to pass the floor over to Mark Yost for any additional closing remarks..

I want to thank everyone for participating in today's call. We appreciate the time and your continued interest in the company. We look forward to updating you on our progress on our next call. Thank you. Stay well. Stay amazing. Take care..

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