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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
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 year. 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 in 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 1 of our facilities by Memorial Day. In 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 year'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 year-over-year 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 counts last year due to the inventory destocking at manufactured housing retailers. Our backlog grew by $65 million during the first quarter to $192 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 year. There are 2 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 conditions. We would fully ramp up production activities to meet increased demand. However, we are at moderated labor activity level. We, like many manufacturing 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 head count 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 operations side, we continue to monitor, manage and execute our enhanced safety and sanitation protocols at our facilities and are 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 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 year. 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 than 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. In talking with dealers, financing is strong and inventory levels are lean. Even through the challenges presented by COVID, the team was able to continue to make progress on our long-term objectives. The traction of our Genesis brand, launched earlier this year 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 development. 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 and 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 that industry volume will be in line with recent homebuilding projections of being down 10% in 2020. Off-site and 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 off-site 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 are ready to move or undergo extensive home remodeling projects, alternative [ glowing ] 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 and 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 the U.S. factory-built revenue was primarily driven by a corresponding decrease of 26% or 1,420 homes compared to the same quarter last year, 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 wholesale 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 year. 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 year quarter. Our U.S. housing segment gross margins were 19.5% of segment net sales, down 110 basis points from the first quarter last year. Gross margins were impacted by the reduced leverage of fixed costs, which was a result of the sales volume decline. In addition, we continued 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 year. The decrease was primarily due to a reduction in variable incentive compensation, elimination of nonessential 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 year.
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, but 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 $17.4 million or earnings of $0.31 per share during the same period in the prior year driven by a combination of lower gross profit, which was partially offset by reductions in SG&A and the benefit of the government-sponsored wage subsidies. On an adjusted basis, we generated $0.22 per net share compared to $0.35 in the year ago quarter. The company's effective tax rate for the 3 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 year 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 8 weeks of production at the end of June as labor availability impedes our ability 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 schedules 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 last year. The increase in operating cash flow is due to our efforts to closely manage nonessential spend and working capital during the period as well as cash flow benefits from government program. Under the CARES Act, employers are eligible to defer the employer portion of payroll taxes until December 2021. As of the end of the first quarter, we've 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 year. 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 1 facility at campuses with more than 1 production line. Currently and as of the end of our June quarter, we have 2 plants temporarily idled. Both of these locations have a campus-style layout, so we have consolidated production to 1 building on each campus and effectively manage production efficiencies. 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 year, we may continue to incur elevated levels on 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 Champion's 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. And with that, operator, you may now open the lines for Q&A.
[Operator Instructions] Your first question comes from the line of Greg Palm with Craig-Hallum Capital Group.
Really good results given everything going on. I guess, Mark, just to clarify something you said early in the call, I think you talked about July orders up 50%, 5-0, did I hear that right? I mean, presumably, that backlog since quarter end has 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 continuing to grow. That's correct, Greg.
That's up 50% on a year-over-year basis, correct?
Yes. It's actually over 50%.
Okay. Wow. Okay, good. I mean any sense for who these buyers are? Are they folks that live in cities in rentals? Any change in the demographics? I think everybody's trying to wrap their heads around on sort of the demand for housing out there. I'm 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 site-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 improve by 50-plus basis points, I'd say the spread differential for channel lending has been double the improvement of that type level. So you've seen a much better favorability in spread in channel lending because of the new competitiveness in the channel lending market. That's one driver.
Second driver, I would say, is just 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 where kind of mid-price-points buyers are -- or renters are looking to buy, but they're buying at a 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 concerning 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 year? Would you expect a continued lag? I mean do you have the -- maybe the production volumes or the utilization in July versus June? I think you mentioned that June was up to 90%.
Yes. I would kind of expect production levels somewhere down 5% to 10% versus last year'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 on all those dynamics because that changes a little bit of the supply-demand balance in the market outlook we have. So it will kind of form our strategy on how we deal with labor. We've got 5 or 6 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 and 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 you put up and are you expecting something similar or what's your expectation there?
Greg, I think that, that's the longer backlog that are actually going to be an issue relative to the volatility in the [ core ] product. And inflation right now [indiscernible]. And then coupled with that, labor and the ability to ramp labor based on whatever the government subsidies that come out or lack of them in the last few days here.
Your next question comes from the line of Mike Dahl with RBC Capital Markets.
So first question, I'm just trying to better understand the dynamics between orders backlog, production volume and then what ultimately ships because I think with the orders and backlogs, there's been some volatility over the past year as kind of backlogs got worked down, then started to normalize higher. What is your expectation for shipments in the September quarter? Is that what should match that production down 5% to 10%, is that what you're saying shipments should trend towards? Or how should we think about that?
Yes. I think that's the correct view on it, Mike. I think we view the 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 potentially volatile around the economic outcome, the shipment trends should be less, let's call it, less robust than 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 will we see a pause in the housing market kind of later this year, 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 year is. So if we see that things get extended and things aren't as choppy towards the tail end of the year, then we'll take strategies to continue to ramp production and shipments will outpace later in the year.
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 smaller, your retail channel?
I'd say retail channel is extremely strong right now. I'd say most of the retailers are having months or record demand levels and sales period. So I think retail channel's 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 quick 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 unit 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. And if I could squeeze one more in. Laurie, 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 cycle through the rest of this year and into next year?
Yes. Labor retention is really important, so I do believe that we're going to continue to support our employees any way 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 on.
Our next question comes from the line of Matthew Bouley with Barclays.
I think, Mark, you mentioned some positive trends in the financing environment to an earlier question. 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?
Yes. I think right now, the spreads are ranging depending on FICO 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 70 to 180 basis points over the past recent time period versus traditional mortgages, which have gone in a similar time period down about 50 basis. So it really depends on the lender and the situation, but we've seen that spread compress. So that's been a very positive trend, Matthew.
Interesting. Okay. That's helpful. And then just secondly, with the demand environment improving so much, and I hear you loud and clear around some choppiness in the back half. But is there any thoughts to reinstating the margin targets if we're at a point where, yes, there might be some volatility, but clearly, volumes are trending in the right direction?
Yes. Matt, we're just going to keep an eye on the environment. So much is dependent on the broader economy and unemployment rates. So just going to keep an eye on it.
Your next question comes from the line of Daniel Moore with CJS Securities.
Again, labor availability, are you seeing the same or similar challenges across geographies, across the country? Or 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 resume or applicants, now you'll put one out and you'll get 0 or 1 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's 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 in a favorable position. If orders are growing 50% and production is down 5% or 10%, call it, for this quarter, backlog is clearly going to keep growing significantly. How much further can backlog grow before you maybe become a little concerned about losing potential sales to competitors or even to site-built?
Yes. I think we're seeing backlogs kind of across the industry continue to grow. So I think vis--vis, there might be small competitors or other people who have different backlog levels on a certain geography basis. But overall, I say backlogs in the 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 to 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 demotivates employees a different way. So I think we've got a plan in place to increase production throughout the year 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 if CARES Act gets extended through the remainder of the year?
Yes. I actually view, Dan, that you're going to see almost like a yin and a yang type of structure here. So depending on what form the next aide package has, if you continue the unemployment benefits that are currently extended through 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 you see that evictions are not -- that they allow evictions and that there's 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 will be a demand-side equation that you'll kind of -- it's 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 2 to 3 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, orders, et cetera?
Yes. No, I think the community channel is starting to return, and I expect it to continue to grow through the second half of the year. I think they've seen -- had good success with collections. They've had good success with traction and activity, many homebuyers coming into rent. You've seen ELS, you've seen some of the public REITs out there and 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 are starting to return very favorably.
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 performed over this past quarter. It was a very challenging quarter. It just shows the resiliency of our people, which are most important factor, in 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.