Good morning. Welcome to Skyline Champion Corporation's Third Quarter Fiscal Year 2020 Earnings Call. The company issued an earnings press release yesterday after 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 third quarter results. Joining me on today's call are 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 our 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.

Sarah, thank you. Good morning, everyone. I am pleased to report strong gross margin and operating income improvement this quarter compared to the same period a year ago. As we look at industry demand trends, we've seen HUD industry shipments rebound favorably over the last few months and anticipate that trend will continue throughout the calendar year. With revenue down 3.5% to $342 million this quarter, we were able to deliver strong operating leverage with a year-over-year increase of nearly 50% in operating income. Adjusted EBITDA grew by 13% year-over-year reaching $29.7 million for the quarter. Adjusted EBITDA margin in the quarter was 8.7%, a 130 basis points improvement compared to a year ago. We saw strong gross profit improvement across all of our reporting segments, driven by merger synergies, standardization, and operational improvements, as we saw material inflation start to rise during the quarter. I’m particularly proud of the fact that we were able to deliver these results without the benefit of top-line growth in the quarter. During the quarter, we saw our Canadian and Star Fleet revenues down due to economic and housing conditions in Western Canada along with a softer RV market in the U.S. We anticipate that those markets will remain soft in the short term. In the U.S., we experienced marginal unit volume increases with a shift to single-section product resulting in lower average selling prices during the quarter. Focusing on the market, there are ample opportunities for continued growth, driven by favorable demographic and economic factors. HUD industry volumes for the three months ended November increased by approximately 6.7% year-over-year with strong growth in the South-Central region of the country offset by declines in California and parts of the Midwest. We are seeing strong demand for affordable housing and expect HUD industry’s year-over-year volume to continue at this mid-single-digit growth rate for the remainder of the calendar year with California rebounding towards the end of our fourth fiscal quarter and the Midwest expected to return late spring after the customer consolidations finalize. The broader housing market has also shown signs of strong growth, especially for the affordable missing middle price point. This will translate into higher levels of demand for the industry later in the year due to a lag between single-family starts and HUD shipments. Additionally, we believe that manufactured and modular homes will play an increasingly significant role in filling the gap for new single-family homes at more affordable price points compared to other housing options. We are seeing evidence of this increasing role from recent events on the financing, regulatory, and both fronts. On the financing front, while we are still waiting for the GSEs to rollout their secondary market for chattel loans as outlined in their duty-to-serve, we're encouraged by the private placements that occurred late in 2019. Financing terms are starting to become more competitive as a result, which should translate into demand later this year. Zoning changes are additionally starting to happen throughout the country to help solve the housing shortage. We are seeing increased demand for accessory dwelling units or ADUs in states like California, which has lifted zoning restrictions to address the need for affordable living spaces in urban areas. The feedback from customers for our ADUs from the International Builders’ Show in Las Vegas last week was very positive. The product provides a simple solution for affordable housing in those markets. Additionally, in Las Vegas at the International Builders’ Show, we showcased our Genesis home series, an affordable housing solution for builder developers. The feedback from builders on the quality and features of those homes at that price point exceeded our expectations. They were surprised by the speed to market and labor solutions that these products provide. One supplementary benefit was that these products had lower financing costs due to the support from the GSEs. In addition to the interest we received at the IBS show, we have started to experience traction in this past quarter with a handful of models ordered for delivery to subdivisions. We're very excited about the long-term potential of this new class of homes. I will now turn the call over to Laurie to discuss our quarterly financials in more detail.

Thanks, Mark. Net sales decreased to $342 million in the current quarter from $355 million in the year-ago quarter. We saw revenue declines of $4.7 million in the U.S. factory-built housing segment as well as declines in our Canadian factory-built housing segment and transportation business revenue of $7.7 million. The number of homes sold in the U.S. increased slightly versus the same quarter last year, while the decline in the U.S. factory-built revenue was driven by a reduction in average selling price per U.S. home sold of 2% to $60,600. The decline in average selling price was due to a shift in product mix as we sold a larger percentage of single-section homes this third quarter versus the December quarter last year. Canadian revenue decreased by 16% to $23 million with corresponding decreases in the number of homes sold in the quarter. The number of Canadian units sold decreased to 276 homes, compared to 329 homes in the prior year period. Average home selling prices were stable at $82,600. We expect similar Canadian year-over-year volume shortfalls for the remainder of fiscal 2020, compared to the same period in fiscal 2019, consistent with the broader housing market in Western Canada. Consolidated gross profit increased to $69 million, up 6% versus the prior year quarter. Our U.S. housing segment gross margins were 20.1% of segment net sales, up from 18.5% last year. Sequentially, from the September 2019 quarter, U.S. factory-built housing segment gross margins were down 80 basis points from 20.9% driven by the impact of normal seasonal shutdowns as many of our facilities reduced or ceased production during the holiday season. SG&A in the third quarter decreased to $45 million versus $49 million in the same period last year. The decrease was primarily due to a reduction in non-cash equity-based compensation expense and integration costs. Net income for the third quarter was $17 million or $0.30 per share compared to net income of $10.5 million, or earnings per share of $0.19 during the same period in the prior year driven by an increase in profitability from higher operating income, a reduction in equity compensation and other expenses, and lower net interest expense. On an adjusted basis, we generated $0.32 of net income per diluted share compared to $0.27 in the year-ago quarter. The company's effective tax rate for the three months ended December 28, 2019 was 27% versus an effective tax rate of 29.7% for the fiscal 2019 third quarter. The change in the effective rate was primarily due to higher non-deductibles share-based compensation expense incurred in the prior year. Adjusted EBITDA for the quarter was $29.7 million, an increase of 13% over the same period a year ago. The adjusted margin expanded by 130 basis points to 8.7%, largely due to continued margin capture from synergies related to last year's combination reaching their run rate levels earlier this fiscal year and execution on identified operational improvements. At the end of December, our consolidated backlog was $133 million compared to backlog last December of $181 million. Although backlog varies significantly by plant, our average U.S. plant backlog stood at five weeks of production at the end of the quarter. Backlog remains within our optimal range of four to six weeks, which allows us to effectively schedule production and manage the supply chain with our vendors. We believe backlogs have returned to more normal levels compared to the elevated levels experienced over the last year. We are focused on continuing to execute on our operational improvements and product rationalization initiatives while bringing more value to our customers by continuing to elevate opportunities to refine and strengthen our costing and pricing strategies on our products as well as prioritizing efforts on operational improvements and efficiencies leveraging our knowledgeable and capable team members. We feel that these self-help initiatives will allow us to achieve a 10% adjusted EBITDA margin target at our current volume levels. We are on track to achieve this target in the next 18 to 24 months. As of December 28, 2019, we had $171 million of cash and cash equivalents. Cash generated from operations during the third quarter of fiscal 2020 decreased slightly to $21 million, compared to $23 million in the same period last year as cash flow generated by increased profitability was offset by cash utilization for working capital purposes. During the quarter, we used excess cash to pay down $5 million of our revolving credit facility. As a result, the company had $44 million of unused borrowing capacity under our $100 million revolving credit facility as of December 28, 2019. We have a strong cash position with added liquidity from our credit facility that provides ample flexibility to invest in our core business and our strategic initiatives. We continue to be focused on identifying areas to utilize our strong free cash flow on opportunistic growth which could include potential acquisitions or further organic capacity expansions. I'll now turn it back to Mark for some closing remarks.

Laurie, thank you. As you can see from our results, we continue to achieve solid financial and operational performance. We are pleased with our continued track record of progress as we continue to achieve incremental improvements along our path to reaching our medium and long-term goals. We are encouraged by the feedback from our retail and community partners on the products and services we're providing them as well as the future opportunities to expand our off-site construction model offerings with an evolving customer channel like builder developers. As we look forward, we expect our markets to remain healthy, driven by the increased demand across the country for affordable housing. Our optimism is supported by the improvements that we’ve seen in the financing environment and the attention by regulators to suggest changes that are ultimately a benefit to our end customers. With favorable long-term demand fundamentals, we continue to invest and evaluate opportunities to position Skyline Champion as a sustainable solution for the future of our customers and their families. And with that, operator, you may now open the lines for Q&A.

Thank you. Our first question is from Daniel Moore with CJS Securities. Please proceed.

Starting with I guess backlogs, obviously, now back down to as you described more normalized level of five weeks, you certainly laid out a scenario where shipments likely start to increase. Can you just maybe talk about underlying demand trends, traffic at the dealer level, expectations for backlog as we look into fiscal Q4? Do you expect that to stay flat for the next quarter or two, start to build again, how should we kind of think about all that over the next say 90 to 180 days?

Thanks, Dan. We are observing strong traffic at the dealership level. Overall, the industry activity is very good and healthy, which leads us to feel quite positive. Recently, we have experienced significant growth in the South-Central Atlantic region, with a 77% increase over the past few months, particularly in areas from Alabama through the Carolinas and into Mississippi. This region was among the most affected by last year's weather, but we are now seeing a rebound there and other markets beginning to recover as well, which is promising. We anticipate that our backlog will increase into the fourth quarter and continue into June. We are confident that there will be a typical seasonal dip in backlog, especially in our Northeastern areas, which is expected. Our current backlogs are quite strong for this time of year.

Very helpful. And then just in terms of mix and modest decline in ASPs, you expect that to continue as far as U.S. product is concerned in Q4 and obviously you can't necessarily predict the impact of raw materials going out further. But what are your thoughts for trends as we get into fiscal ‘21?

I would expect multi-wides to pick up as we go through the season kind of into the June time period. Most of the dealers, as we talked about on the last two earnings calls, have low inventory levels and I think this quarter particularly what they focused on is they had their sites ready for single wides. So they were able to take that product quickly because it's easier to set up a single wide product in the field for some of the community customers and some of the retails because there's less site work involved in setting those up. So during the winter period, keeping inventory lean, you probably tend towards those products first. But I think as the fall happens and things warm up, you will see a more larger trend to multi-wides as the season picks up throughout the year. So you will see a general uptick, a gradual uptick as the year goes on in ASPs into the June, July, August time period.

Perfect. Lastly for me, subject to I know you don't mind talking about, maybe just elaborate on Genesis and the builder developer channel, you mentioned a couple of specific orders that you have seen, any more specific tangible evidence of progress and detail that you can provide for us would be helpful? Thanks.

Yes. Thanks, Dan. I think Genesis was well received at the International Builders’ Show this past week. We've seen a tremendous amount of inquiry and activity from that. As we mentioned earlier, we have seen a handful of orders start to be produced for subdivision, to get things go on with subdivision. So they are actually in production now, being produced. So that's very encouraging that those levels of activity have happened. We have already produced MH Advantage in the field but this is kind of a main foray going into subdivision builder developer channel and it’s actually starting. So we're encouraged by that.

Our next question is from Rohit Seth with SunTrust. Please proceed with your question.

Just wanted to ask, what are the kind of trends you're seeing in January?

Trends, Rohit, in just the overall HUD market or what are you…?

The HUD market on volumes.

Yes, I think January trends and orders are good. So I think year-over-year order activity has increased. So general trends are probably consistent with what we mentioned on the call. We're seeing good year-over-year growth.

And then just curious if you maybe could compare and contrast, like the entry-level stick builders are seeing very good order progression. Just curious why you think there is such a big delta between manufactured housing and the stick builders are seeing entry-level housing demand really, really surge right now?

I believe we will see an increase in demand, but there's a natural delay in activities related to manufactured housing and the HUD market. For instance, much of the demand for site-built homes has been driven by falling interest rates. Typically, when interest rates decrease, our retail partners reach out to their customer base to inform them of the change. Once a customer decides to purchase a home, they need to find land to put it on, which usually takes about four to six months. In the site-built market, a drop in interest rates can be acted upon quickly since land and home are generally part of the same deal. In contrast, traditional manufactured housing products sold through retail distribution don't respond as swiftly because the land isn't always connected to the home. Additionally, there tends to be less financial benefit from lower interest rates for some of our customers. For many buyers of manufactured housing or HUD code products, a drop of about 1.25% in interest rates over the past year could save them around $600 annually, whereas a traditional site-built homebuyer might save between $2,700 and $3,000 a year. Thus, the motivation to buy is stronger for site-built homes. It's just a matter of timing; we will see the effects, but it takes time for it to flow through the system due to land considerations.

Understood. And then, maybe could you talk about the M&A pipeline. You got substantial cash on the balance sheet. And I believe you said you would be willing to take your net debt-to-EBITDA at about 3x. So, maybe just talk about what you are seeing out there? Are there any opportunities to do some deals in the near term or is that more of a longer-term fixed story?

No, I think we are always actively looking at the M&A pipeline. There is a pipeline of potential near-term and long-term M&A activity.

Our next question is from Greg Palm with Craig-Hallum. Please proceed with your question.

Can you provide more details on what you're observing in the near term? Mark, you shared some qualitative insights last quarter regarding your expectations for December and March. I'm curious if you could update us on your perspective for the near term, as it seems like the situation is somewhat mixed.

Yes. And you are talking in terms of just outlook on revenue, Greg?

Yes. Exactly. That’s it.

Yes. I believe we will continue to observe a downturn in the RV market, which significantly impacts our trucking business revenues. In Canada, we see that single-family home starts have declined, specifically in British Columbia where they dropped by 28% year-over-year during the quarter. Saskatchewan experienced an 18% year-over-year decline in single-family starts. Our own drop was only 16%, so it's encouraging that we are gaining share in the overall Canadian housing market. However, I expect our Canadian revenues to be weak in the upcoming quarter due to the downturn in single-family starts and the associated lag. In the U.S., I anticipate strong growth across most regions, though we may experience delays in parts of California due to land and zoning permitting issues. I expect this rebound will take until the first quarter to materialize. Additionally, in certain areas of the Midwest, customer consolidation—stemming from mergers and integrations across various sites—will likely lead to a pause in purchasing until these transactions are finalized, probably around April or May. Overall, I think we will see robust growth in the South-Central region, with Texas beginning to recover after being down about 12% in the last three months. Thus, I believe the overall outlook for the quarter will be neutral, including Canada.

What is your expectation for industry growth in the U.S. HUD code for calendar year 2020? Do you see yourselves as outperforming, underperforming, or neutral compared to the industry as we sit today?

Yes. And you're talking HUD market right, Greg?

Yes. Correct.

I believe HUD growth will resemble the rebound we've observed in recent months, with mid-single to upper single-digit growth anticipated for the HUD industry this year. Our HUD growth should align closely with industry trends. We will experience our usual seasonal fluctuations, likely surpassing growth in the summer while lagging in the winter. However, overall, we expect to remain neutral regarding that growth. There may be increased activity in non-growth HUD markets, such as the ADU market and certain park model markets. This could cause shifts in our growth trajectory related to HUD. Ultimately, it will come down to the product mix we decide to produce.

Shifting gears a little bit to build developer, which obviously seems like a very, very big opportunity. I am hoping you can just give us some more color here on kind of who your typical end customer might be and maybe use sort of the feedback that you got from the Vegas show. But in general, is there a certain number of homes that folks are looking for, and probably more importantly, how long does a typical sales cycle like this take to play out in your mind?

Yes, that's a great question, Greg. At the International Builders’ Show, we encountered builders who typically construct between 25 and 700 houses per year. The customers we engaged with at the show fell within this range. We've seen significant activity and discussions with this group of customers. Additionally, there are land developers who, while not builders themselves, are interested in collaborating with a company to enhance the value of their land without getting directly into homebuilding. These two demographics are key for us at the moment. The activity really depends on the site. We have builders in the pipeline who have completed zoning, permitting, and infrastructure, and we’ve already begun producing homes for them. Other developers have their land zoned and permitted and are working on infrastructure, which might take three to six months to complete. Once that's in place, we can deliver homes. There are also builders still working on securing permits and zoning. Our focus is on building a robust pipeline and filling the sales funnel with these opportunities. We're expecting to launch several subdivisions later this year, ideally between June and September. Ultimately, our goal is to fill the sales pipeline and seize this long-term opportunity.

Okay. Great. Last one from me, I guess maybe a question for Laurie given her commentary around margins. I thought it was interesting. I think what you said was the ability to achieve 10% EBITDA margins on this level of revenue. I'm assuming you're not thinking that revenue will be flat call it 18 months from now. But you know even if it was, I guess, what are the key levers in going from call it a mid 8s EBITDA margin to 10%, I mean is that gross margin expansion, is it operating leverage or something to do with the cost structure? Can you just kind of walk us through how you're thinking about that?

Sure. Thanks for the question. Yes, it's definitely in the gross margin line and it goes back to, Greg, all those things that we've been talking about related to our operational improvements that we're focusing on and the standardization of product offerings, rationalization of base metals and options as well as material usage, product value, engineering the product, operational excellence, things like that.

Our next question is from Matthew Bouley with Barclays. Please proceed.

I wanted to ask for additional insights on the difference between your U.S. HUD shipments and the industry overall. In the past, you mentioned potentially passing up lower margin business, and it sounds like you were also referring to some geographic aspects like the Northeast. What gives you the confidence that SKY can outperform the market in the summer months as you mentioned? Thank you.

Thank you, Matt. I believe there are two key points to consider. First, it’s common for us to experience seasonal variations, particularly since many of our plants are located in the Northern part of the country, which is more susceptible to weather impacts than other regions. Consequently, we typically observe variations in market share throughout the year due to our geographic distribution. That said, if we analyze the markets that saw the most significant declines last year, it was evident that the South-Central area—specifically Alabama, Mississippi, Tennessee, and South Carolina—faced the steepest downturns. These declines began around October and extended into the spring of last year, mainly in areas affected by rain where crews were unable to install units. This was the region that experienced the sharpest year-over-year declines. However, this year, as we anticipated, that area has recovered quickly due to favorable weather conditions, and we’re also seeing strong demand for our orders. This suggests that everyone is gearing up for spring orders, and we should expect the usual seasonal increase.

And then secondly just on the gross margin side. Two parter. Number one, just was there any offset in there from Leesville? I know you guys had signaled there could be some temporary pressure as that ramps up. And then secondly just given you have seen that modest uptick in lumber prices, how are you guys thinking about the ability to kind of push price a little bit going forward to offset that? Thank you.

Hi, Matt. Yes, I think there definitely was a bit of offset from Leesville in the numbers and will probably continue for the next couple of quarters as we continue to ramp the plant. We have about 12 more months of ramp of that plant. So the next couple of quarters for sure we will see some pressure from that. As far as ASPs in lumber, we did see lumber kind of even out this quarter versus the same time last year. We expect lumber pricing to go up a bit just based on general housing trends and what we're seeing in the market. So I do believe that we will be able to match that in price.

Our next question is from Mike Dahl with RBC Capital Markets. Please proceed.

First question, I wanted to start with the margins and Laurie you mentioned a number of things going into the success in terms of margins for the quarter and then your expectations going forward. But I wanted to ask you for a few more details there, and so a couple things that I'm curious about. On the synergy side, have you identified incremental opportunities for synergies and can you give us an update on where you're running versus the target? And then secondly, I think one of the bigger buckets was on this SKY rationalization or standardization. So, maybe just a little more color on where you are in that process, and how much incremental progress you expect over the next six, 12 months?

Sure. So, I would say that the margin improvement is really coming from our operational initiatives that we have talked about more than deal synergies. Just as a reminder, we have reached the deal synergy run rate targets in the June quarter. So, year-over-year, the synergies are certainly helping us. But I would say sequential quarters we had some movement in the margin. But definitely saw some improvement from operational synergies, the rationalization and standardization of the product offerings, simplifying the product to get the plant more quickly helping production efficiencies. We're going to see kind of a steady increase in those over the next couple of quarters. I think the March quarter is going to be just generally overall more similar that to this quarter from a margin perspective. We're going to see some pressure in Canada. We're going to see, as I mentioned before, lumber costs increasing which will hopefully be able to offset with price. We have seen some labor inflation. So all of that inflation is getting offset with those price or operational improvements depending on the geographic locations of the plants.

Our next question is from Matthew Bouley with Barclays. Please proceed.

I wanted to ask for any additional insights on the difference between your U.S. HUD shipments and the overall industry. I recall you mentioned previously that you might be passing on some lower margin business, and it seemed Mark was referring to certain geographic areas, particularly the Northeast. What gives you the confidence that SKY can outperform the market during the summer months as you mentioned? Thank you.

Thanks, Matt. I think there are two key points to consider. First, it’s typical for us to experience seasonality. Our northern plants are more affected by weather compared to others in the industry, so we see market share fluctuate throughout the year due to our geographic distribution. Overall, the markets that experienced the greatest impact last year saw a sharp decline, particularly in the South-Central region, including states like Alabama, Mississippi, Tennessee, and South Carolina. The declines we observed last year began around October and continued into the spring, primarily in areas affected by rain where crews were unable to deploy units. This was the region that faced the steepest year-over-year drops. However, this year, that area has rebounded quickly due to favorable weather conditions, as we anticipated, and we are seeing strong interest in our orders. It seems that everyone is preparing to place orders for the spring, so we expect to see the usual seasonal increase.

And then secondly just on the gross margin side. Two parter. Number one, just was there any offset in there from Leesville? I know you guys had signaled there could be some temporary pressure as that ramps up. And then secondly just given you have seen that modest uptick in lumber prices, how are you guys thinking about the ability to kind of push price a little bit going forward to offset that? Thank you.

Hi, Matt. Yes, I think there definitely was a bit of offset from Leesville in the numbers and will probably continue for the next couple of quarters as we continue to ramp the plant. We have about 12 more months of ramp of that plant. So the next couple of quarters for sure we will see some pressure from that. As far as ASPs in lumber, we did see lumber kind of even out this quarter versus the same time last year. We expect lumber pricing to go up a bit just based on general housing trends and what we're seeing in the market. So I do believe that we will be able to match that in price.

Our next question is from Mike Dahl with RBC Capital Markets. Please proceed.

First question, I wanted to start with the margins and Laurie you mentioned a number of things going into the success in terms of margins for the quarter and then your expectations going forward. But I wanted to ask you for a few more details there, and so a couple things that I'm curious about. On the synergy side, have you identified incremental opportunities for synergies and can you give us an update on where you're running versus the target? And then secondly, I think one of the bigger buckets was on this SKY rationalization or standardization. So, maybe just a little more color on where you are in that processing, and how much incremental progress you expect over the next six, 12 months?

Sure. So, I would say that the margin improvement is really coming from our operational initiatives that we have talked about more than deal synergies. Just as a reminder, we have reached the deal synergy run rate targets in the June quarter. So, year-over-year, the synergies are certainly helping us. But I would say sequential quarters we had some movement in the margin. But definitely saw some improvement from operational synergies, the rationalization and standardization of the product offerings, simplifying the product to get the plant more quickly helping production efficiencies. We're going to see kind of a steady increase in those over the next couple of quarters. I think the March quarter is going to be just generally overall more similar that to this quarter from a margin perspective. We're going to see some pressure in Canada. We're going to see, as I mentioned before, lumber costs increasing which will hopefully be able to offset with price. We have seen some labor inflation. So all of that inflation is getting offset with those price or operational improvements depending on the geographic locations of the plants.

This concludes our question-and-answer session. I would like to turn the call back over to Mark for closing remarks.

Thank you very much. As we mentioned, it was a very good quarter. We see the strength of the industry, strengthening builder developer activity getting better and improving as we launched our Genesis brand and look forward to the future. Thank you very much and have a great day.

This concludes today's conference. You may disconnect your lines at this time. And thank you for your participation.