Good morning, and welcome to Skyline Champion Corporation's First Quarter Fiscal Year 2020 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 our expectations and projections. Such risks and uncertainties include the factors set forth in the earnings release and in the company's filings with the Securities and Exchange Commission. Additionally, during today's call, the company will discuss non-GAAP measures, which they believe can be useful in evaluating their performance. A reconciliation of these measures can be found in the earnings release. I'd now like to turn the call over to Mark Yost, Skyline Champion's Chief Executive Officer. Please go ahead.

Thank you for participating in our earnings call to discuss our first quarter results. Joining me today on today's call is Laurie Hough, EVP and CFO. I'm excited to be joining you today for my first earnings call as Chief Executive Officer of Skyline Champion, following the retirement of Keith Anderson in June. It is an honor to be leading such a strong organization, and I believe that we have a long runway ahead of us to continue to grow our business and improve our operations while providing our customers with high-quality, innovative and affordable housing solutions. I'll start off today's call with some highlights from our results, then provide updated commentary on the market, discuss some of the progress we've made with our operational and growth initiatives, and Laurie will deliver some additional detail on the results. Then we will touch on the outlook. As a reminder, the combination of Skyline and Champion closed on June 1, 2018, which was during our first quarter of fiscal 2019. Therefore, the results for the first quarter of fiscal 2020 include 3 full months of operations for the combined company Skyline Champion, while our year-ago comparables include 2 months of legacy champion and 1 month of the combined Skyline Champion. Let me begin by saying that I am pleased to report very solid results, in a quarter where the HUD market was in a period of destocking and the housing market was choppy. During the first quarter, we grew our revenue by 15% year-over-year. We sold 20% more homes in the U.S. at an average selling price of $60,900. We leveraged our top line growth and delivered 38% year-over-year increase in gross profit. Adjusted EBITDA for the quarter was $32.1 million, a 41% increase year-over-year. Adjusted EBITDA margin in the quarter was…

Thanks, Mark. We're pleased with our performance during the quarter as net sales increased 15% to $372 million compared to $322 million in the year-ago quarter. The net sales increase was mainly driven by the inclusion of the legacy Skyline operations, an increase in the number of homes sold in the U.S. and an increase in average home selling prices. U.S. sales grew by 25% to $332 million. The number of U.S. factory-built homes sold increased 20%. When adjusting out the additional 2 months of the legacy Skyline operations, our U.S. housing segment number of homes sold increased 3% versus the first quarter of last year, despite lagging industry conditions. We also continued to drive volume improvement in our modular and park modal product sales. Average selling price per U.S. home sold increased by 4% to $60,900, primarily as a result of a shift in product mix. In addition, U.S. segment revenue benefited from stronger shipments of finished goods inventory at the end of the first quarter. Timing of shipments vary from quarter-to-quarter based on site readiness, weather conditions and truck availability. We expect finished goods inventory levels to normalize in the coming quarters. Canadian sales declined by 13% to $24 million as a result of a decline in housing demand in the British Columbia and Alberta provinces. The number of homes sold in the quarter declined to 285 homes compared to 362 homes in the prior year period. However, average home selling prices increased 10% to $83,200 due to product mix and pricing. Consolidated gross profit increased to $76 million, up 38% compared to $55 million in the prior year quarter. Our U.S. housing segment gross margins were 20.6% of segment net sales, up from 17% last year. Sequentially from the March 2019 quarter, U.S. factory-built housing segment gross…

Thanks, Laurie. With the inventory destocking stabilized, we anticipate short-term pricing pressures as the industry rebalances backlog levels. We continue to see end consumer demand remain healthy, driven by the increasing demand for attainable housing, supported by improving financing and regulatory environments. With favorable long-term demand fundamentals, we are taking steps to position Skyline Champion for continued success. In the near term, we are continuing to invest in our Leesville plant start-up, in employee training and development, in our go-to-market strategy. This includes technology, which will help grow our relationships with our building developers as well as our independent retailers, increasing our market share of single-family housing starts. As we continue to pursue organic growth initiatives, supported by a favorable market backdrop, we are also evaluating potential acquisition opportunities that fit our discipline criteria. Longer term, we are well positioned to remain one of the leading providers of factory-built homes and generate attractive returns for all of our stakeholders while providing quality housing for our customers and their families. And with that, operator, you may now open the lines for Q&A.

[Operator Instructions] Your first question comes from Daniel Moore from CJS Securities.

Mark, try not to brag too much around the office to Keith about these numbers. But wanted to start with ASPs, up 4% in the quarter. Maybe just walk us through how much of an impact was pass-through of rising raw material costs year-over-year in terms of pricing? And what did the mix look like? I'm wondering if you're selling maybe a slightly higher proportion of park models and smaller homes, given the streamlining efforts in California. Just talk about mix a little bit.

So Dan, I would -- the ASP 4% growth is primarily mix. There is a little bit of price increase year-over-year, just from the timing of our price increases from the raw material inflation last year. But most of it, I would say, is mix. We are seeing a higher contented home overall as well. So that is impacting the ASPs. And then more modular -- I'm sorry, more delayed shipments as well.

Very good. And in terms of gross margin, up 330 bps year-over-year. How much of that do you attribute to favorable input costs? A little bit of input cost deflation over the last few months versus operating improvements in Skyline and legacy Champion and synergies. Just trying to get a sense for what the maybe rank ordering, the largest impacts on gross margin year-over-year?

Yes. Difficult to rank. Certainly, we saw some benefit from the lower lumber and OSB costs. We also saw some productivity gains just from a higher sales volume. And the synergies, reaching run rate was helpful this quarter. We did see offsetting some of that higher employee benefit costs and general wage inflation.

Okay. And last thing, and I'll jump out. Backlog, down year-over-year, but up sequentially in the U.S. Can you just talk about how many weeks of backlog you're operating at now? How does that compare to historic averages? And what are optimal levels, where would you like to be?

Yes. So, Dan, right now, we're operating at about 6 weeks of backlog. Typically, we'd like to operate in the 4 to 6-week range of backlog that allows us to have a timely delivery to our customers, but it also allows us to effectively schedule production and the supply chain with our suppliers. So 4 to 6 range is optimal. I think backlogs last year were elevated due to kind of the lingering effects of the FEMA production. And compared to prior years, 6 weeks is actually above normal, actually. So I think the backlog levels are good, especially given the fact that we've increased our productivity year-over-year-over-year. So 6 weeks this year is probably much better than 6 weeks 2 years ago because of the productivity enhancements.

Your next question comes from Greg Palm from Craig-Hallum Capital Group.

Congrats on the really good results here. So starting out with unit growth, specifically, let's talk about U.S., which has trended nicely better than the industry volumes, obviously, implies some market share gains. But just kind of curious, how much of that is a byproduct of the new capacity coming online. Where are you seeing the most strength?

Yes. I think, overall, we did see our U.S. shipment growth, on a similar basis, go up 3% year-over-year. So we do feel we're performing very well given the challenging markets. Overall, we've seen growth somewhat, to be honest, Greg, across the board. Our park model and mod sales have been up year-over-year. HUD shipments, I'd say, we still had the destocking in the Texas to Tennessee region throughout the quarter. Things have picked up since then. So we've kind of seen a normalization. I would say the geographic slowdown in destocking is now kind of behind us. Now what we're seeing is product specific, plant specific, more normalization of some of the backlogs and some of the product development pipeline. So I think, overall, we're feeling pretty good across the country just with certain product categories still kind of coming out of the backlog inventory destocking.

All right. Great. Shifting gears to Leesville. I'm curious, you talked about some of this new technology that you're incorporating over there. Is that targeting, I guess, better margins for that plant, improved efficiencies and throughput? What's sort of the end goal? And can you maybe talk a little bit in detail what you're actually putting in there from a pilot program?

Yes, sure. So we're starting off, Greg, with just some very basic technology that will advance over time. So our incubator team that we've assembled is kind of working through how to redefine our production processes. So the automation will, one, it will improve quality, so at the end of the day, we'll have a much cleaner product coming out; two, it will save our material costs, we'll have less scrap generation and enhancement there. So you'll get benefits there. On the direct labor side, we'll save a little bit of direct labor costs, but I would say, I view it more as a future direct labor risk avoidance, direct labor is going to get more challenging, not less challenging in the future. And so in doing this, we can hire a more stable workforce and get up to speed training faster, along with the benefits that we found that the up-and-coming millennials will enjoy working with this technology much more so than maybe prior physical labor. So all those benefits kind of accrue, and we're going to roll it out and work out the bugs in Leesville and then roll it forward as we learn and discover how to optimize it and step up the curve.

Good. Okay. And then Laurie, how should we be thinking about the margin drag as some of these newer facilities have started to come online? What's been, I think you mentioned something like $1.3 million this past quarter. I don't know if that was specific to Leesville or that was an overall number. But just anything from a modeling standpoint that we should be kind of paying attention to going forward?

Yes, the -- well, $1.3 billion was an overall number. And we're going to continue to see a little bit of a drag. We're moving forward and going to be shipping products here in the second quarter out of Leesville. So instead of all of the drag in SG&A, it's going to flip into margins. So we're going to -- you're going to see a little bit of a drag in margin from that. So from a modeling perspective, consistent with what we've seen in the last couple of quarters, I would say.

Okay, perfect. And then I guess, just last one. Mark, going back to a comment towards the end of your prepared remarks. You said something like kind of pricing pressure due to destocking. Was that a comment sort of in hindsight, what you've seen sort of in the spring and early summer months? Or was that kind of a future comment? Just wanted a clarification, if we could.

No, I think it's probably more of a future comment over the next month or 2, let's say, Greg. Towards the end of the inventory destocking, we saw a handful of the market participants looking to generate or trying to stimulate orders with some pricing, and we have backlogs of 6 to 8 weeks depending on the parts of the country. That pricing came into effect toward the tail end of the quarter. So you'll just see that kind of rolling through. I don't think it's everybody, but you just see a little bit of softness.

Your next question comes from Phil Ng from Jefferies.

Good to hear that the destocking has winded down at the retailer level. Have you seen any restocking activity? And now that you're lapping some of the tougher FEMA comps, how do you think about the type of shipment growth you're expecting in the next few quarters?

Yes. I think it has been good, Phil, to see the destocking kind of getting in the rear view mirror. So that's been encouraging. I think, overall, we see the next few quarters, I would say that the market itself will be relatively, for the remainder of this calendar year, be somewhat similar to last year, maybe slightly up. And then towards the -- going into next year calendar, we'll see growth. In the marketplace versus last year.

Okay. So you're expecting kind of flattish-type growth in the market. But given some of your geography [indiscernible] you're bringing on, do you expect to continue to kind of outpace the market?

I think as long as we're bringing value to our customers in the right ways that we should continue to outpace the market, yes.

Got you. And then given some of the modest pricing pressure you called out in the channel right now, can you kind of quantify or expand on the magnitude? It didn't sound like that was that meaningful. The reason why I'm asking, obviously, you benefited from input costs fading a bit. The tariffs, I understand, are coming through, obviously. How impactful could that be in with maybe some more modest pricing? Could we see margin depression the next few quarters?

I think the question would be with tariffs coming in or maybe slight input costs increasing, you'll probably be a little delayed in passing through some of those price increases for a month or 2. So I do think there could be a little bit of compression as you go, just to normalize the market. But I think with backlogs building -- like I said, our backlog has built 9% in the U.S. year-over-year. So as backlogs continue to build, I think we'll see the market kind of normalize that. I think it was just towards the tail end of the short-term downturn due to the destocking.

Got it. And just one last one from me. I think, Laura, you mentioned now that integration of Skyline behind you, and obviously, your balance sheet is very solid, you mentioned potentially taking a more proactive stance on capital deployment. Curious, from an organic standpoint, where is your capacity kind of shaping up across some of these major regions. Are there any pockets where you think ramp up more capacity? And then when you think about M&A, should we expect bolt-ons to be a meaningful driver going forward? And any way to kind of think about valuation? Understand there's a few M&A -- some M&A activity lately in the industry.

Sure. I think, overall, we're always looking at M&A activity. I think, both in the consolidation of the industry to expand economies of scale and lower the costs overall to the end consumer, I think there's some opportunities in certain geographies. I think we see strong market demand. When you look at end consumer demand and the placement levels that we see in staff survey and other third-party services, the end market is still growing quite healthily, especially in certain regions of the country. So I think we would be interested in continuing to grow, especially with the backdrop of the financing returning and the new class of homes and the expansion of that into both the retail channel and also into the larger home building market with builder developers. So I think both of those opportunities, to expand capacity and with further M&A or organic startups, is an opportunity. And I think, overall, we probably look to make ourselves better to do business with for our customers. So looking at opportunities and pain points for our customers in the retail channel and in the builder developer channel that if there's acquisitions or investments we could make to solve communication or development or other channels for them, interested in doing those activities as well.

Your next question comes from Matthew Bouley from Barclays.

I wanted to follow up on the Leesville plant. You mentioned that it is a pilot program and that you've got this incubator team. Just what's the timeline for evaluating that? And I guess, Mark, over time, just how do you envision ultimately bringing these processes to additional facilities?

Sure. Sure, Matt. I think, overall, the plant just started up in June. So I think we're kind of in the midst of the learning curve. So we're learning quickly, which is a great thing. I would expect that different pieces of this could be rolled out relatively quickly in the next year or so to other facilities. Some of the things like the larger wall building technology and changing some of the production flow processes that we would need to do, probably a little bit longer term, probably in the 2- to 3-year horizon. So it really just depends on which piece of automation. We have 3 or 4 different processes ongoing at that plant. And they're all kind of in that incubator stage.

Okay, perfect. And then I think last quarter, you guys talked about April orders, up double digits. Any color on order trends through the quarter and into July?

Sure. I think order trends overall, April was strong, May was down, June was strong. So I'd say, overall, for the quarter, our orders were up year-over-year on a same basis, 1% to 2%. And so I think as we see the trend forward, we're going to continue to see the backlog strengthen between now and September, October and then our typical normal winter slowdown.

Got it and then just to clarify on the pricing pressures, the short term pressures. Are those actually enough to offset the positive mix that we've been seeing, such that the average price will actually decline from the current $61,000 just in the near term?

Matt, I would expect to see a little bit of pressure in the second quarter, so I would say, in the short term, possibly. And then as the effects of the destocking and the build of the backlog comes in, in the third quarter, a little bit more normalization.

[Operator Instructions] Your next question comes from Mike Dahl at RBC Capital Markets.

Mark, I wanted to follow up on the comments around orders just now. I guess, if I take your commentary about moving past the inventory issues, it would seem like at retail, the retailers would have some room on the forefront plan of credit lines again, but you're still seeing the destocking. With consumer demand strong, just wanted to get your views on why you don't think there's been a quicker ramp back up in order activity from the retailers? And what are kind of the impeding factors here?

Yes. Thanks, Mike. I think the way we see it and the way it normally works is when backlogs are long in duration, so we have larger backlogs, normally, orders will pull forward in the cycle, meaning that they will place orders earlier. And when backlogs are low, you'll see orders come in at the last minute. So I think the order level can be a little bit of a misread. In terms of the fact that when backlogs are light, people will delay their orders to the last minute to get them in the pipeline. So on an equivalent basis, I think you've really got to take the shorter-term backlogs in conjunction with the order rates. I think they kind of go hand in hand because you won't see strong orders until the last minute, which will probably start coming in towards -- in the second quarter time period.

Okay. So while your expectations are that the market is still relatively flat in the second half, it seems like some of that's also just probably prudent conservatism based on what you've just seen, and there's some potential for a better uptick from those last-minute orders?

Sure. I mean, that's fair.

Okay. Shifting gears back to the margin side. I just want to make sure we're understanding some of the cadence commentary correctly with these puts and takes around pricing and some of the other costs. Laurie, I think you also made a comment that near-term margins in the U.S. would look similar to the last few quarters? And I guess, you've done an 18.5% and then 2 quarters at 20.6%. So can you just level set on what your new normal is when you talk about that in terms of expecting it to be fairly similar going forward?

Sure. So generally, we feel that the U.S. margins are sustainable. But I think we're going to see some short-term impact from the capacity expansion and the ramp of Leesville and the continued ramp of our Leola, Pennsylvania. Although by the end of June, we were seeing profitability out of that plant. So that will be more minimal than the Leesville facility. In addition, we're going to continue with the training and development of our employees. And we are going to continue to see some of wage inflation that we saw as well as higher insurance costs and the 401(k) match that we put in place. So there's going to be some puts and takes. I think the second quarter; we might be flat to slightly down in the margins but generally sustainable where we are in the third and fourth quarters and further out.

Okay, great. That's helpful. And also a nice level if you can continue there. And then my last question, just around the comments on the product refinement. I just wanted to dig in a little bit more on that and figure out kind of how much of that is some of the forward plan and SKU rationalization versus other mix issues or intentional shifts there. Can you just give us a little more detail on when you say that product refinement was a benefit, what specifically are you talking about?

Yes. I think it's more the SKU and forward plan and other factor refinement to where we are getting ahead of the design curve, allowing us to bring in predesign flexibility to give more optionality for our customers, but at the same time, optimize our manufacturing processes. So I think it's that combination along with the product standardization and SKU rationalization that has helped us to optimize some of that product refinement.

There are no further questions at this time. I would now like to hand back to our presenters for closing remarks.

Thank you very much, Cameron. Well, I would like to just reiterate the fact that we are very proud with our second -- our first quarter results. As we look forward, the overall trends for the industry we couldn't be more excited about. We're starting to see engagement of retailers and builder developers on the new class of homes that we're starting to produce as we go forward, along with just overall end demand being relatively strong in most of our markets. With that, thank you very much for joining the call, and look forward to the future. Thank you.