Champion Homes, Inc. (SKY) Earnings Call Transcript & Summary

Good morning, and welcome to Skyline Champion Corporation's Conference Call. The company issued a press release yesterday after the market 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. 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, and good morning, everyone. I am joined on this call by Laurie Hough, EVP and CFO. I'm pleased to announce a very exciting development, including a strategic relationship with ECN Capital and the formation of a captive finance company with Triad Financial Services. Laurie will provide more details on the transaction, and there will be additional disclosure information in our filings with the SEC as well as materials from ECN Capital on their website at ecncapitalcorp.com. We believe that the formation of a captive finance company will unlock significant value for our key stakeholders. It will allow Skyline Champion to grow by providing broader and more attractive financing options and services to our customers. It will enable us to provide a comprehensive home line solution while becoming more deeply connected with our channel partner customers and the end consumers who purchase our homes. Through this finance arm, we expect to improve visibility to our customers' needs while driving growth. This will also enhance the overall customer experience by creating a more streamlined and efficient process with a dedicated team of underwriters and loan processors. Moreover, this advances our longer-term digital strategy by enabling consumers to price, configure and eventually finance their homes online for a truly integrated experience. Importantly, this will be an asset-light structure. We will leverage Triad's existing best-in-class origination and servicing infrastructure and ECN's funding capabilities which include relationships with community banks and leading institutional investors such as Blackstone and the Carlyle Group. ECN's diversity of Capital Partners is a strategic advantage as it allows for greater access to capital even as regional and community bank loan growth slows. Additionally, the structure of the relationship with ECN gives Skyline Champion optionality in today's world governed by change. In summary, this partnership allows Skyline Champion to grow with more comprehensive offerings to our customers through a captive finance company while not exposing the company to additional loan risk. Laurie will now provide some additional details on the transaction.

Thanks, Mark, and good morning, everyone. As Mark mentioned, we have agreed to make an equity investment of approximately $138 million through a private placement purchase of preferred and common shares of ECN Capital. This investment will be structured with 55% common shares and 45% mandatory convertible preferred shares and will result in a beneficial ownership of approximately 19.9% of ECN. Skyline Champion will own 51% of the new captive finance company through an asset-light business model with Triad Financial Services, providing tailored retail loan programs for our retail network and a branded floor plan financing offering, all with no loan risk on Skyline Champion's balance sheet. We intend to fund this transaction with cash on our balance sheet. If you recall, we ended our first fiscal quarter of fiscal 2024 with approximately $798 million of cash and cash equivalents and an undrawn revolving line of credit of approximately $166 million. If we were to include the purchase price as of quarter end, our liquidity position would still have exceeded $800 million. We continue to feel good about the strength of our balance sheet and remain well positioned to continue to invest in our longer-term commercial and operational priorities. I'll now turn the call back to Mark.

Thanks, Laurie. As you can tell, we're very excited about this new partnership with ECN Capital and the important benefits that it will bring to our customers and our business. We continue to believe Skyline Champion is well positioned to outperform the broader housing market due to our affordable price points, strategic positioning and our core initiatives and this development will further improve our capabilities and our long-term competitive positioning. And with that, operator, you may now open the lines for Q&A.

[Operator Instructions] And our first question comes from the line of Mike Dahl with RBC Capital Markets.

This is actually Chris Kalata for Mike [ to take the ] questions. I was hoping just to start off, if you could maybe provide some more color on the rationale for this deal and timing. What's your long-term growth prospects for the business? Clearly, the way you structured the deal, you've flipped yourself a purchase option for the remainder of the business. Is that the long-term thinking around this? Just some more color on longer-term thoughts and timing.

Yes. Chris, I think the rationale is pretty simple. Our customers and our customer experience that we're driving at our own captive retail and our retail partners and community channel partners, they all need financing and they're all looking for financing in a one-stop solution from us. Whether it be for manufacturing, our construction services, our trucking division, I think having a comprehensive offering of solutions that include financing is very important to our customer base, so there's a key rationale for it. It also fits with our longer-term strategic view on digital and digital selling and digital configuration with the customer in allowing them to eventually finance homes online or at least filter the homes that they can qualify for online. So that's a strategic growth initiative for us in that methodology. By creating a captive world, we're enabling the ability for our captive dealers to have better service terms. So the turnaround time, the responsiveness for the customer experience can be far superior to other solutions that are out there in the marketplace. And then I think as far as the purchase and the way we have structured it, we left ourselves tremendous optionality. The future is dynamic in today's banking market environment. So we've left a lot of optionality on the table to proceed with different options short-term and long-term is the structure of the deal.

Got it. Maybe just a follow-up on that last point and I ask it another way. In terms of capital allocation priorities at this point, given the $800-plus million in liquidity, so you still have, post this deal, is expanding further into the financing side of the business, the main priority at this point?

I think we've got a deep pipeline of M&A opportunities and other growth initiatives, Chris, that are out there. We have our automation initiative, which is going very well. We have the further enhancement of our digital front-end and back-end solutions that will further accelerate our growth and drive simplification in our business model. So those are going to be priorities for capital allocation as well as M&A pipeline into manufacturing and retail expansion that we have been doing over time. So all of those priorities, I think, are really dynamic in terms of what we're trying to achieve.

Our next question comes from the line of Dan Moore with CJS Securities.

Yes. It's Pete Lukas for Dan. So just to clarify, you had mentioned an asset-light business model. So is that to say that there is no expectations for Skyline to use that balance sheet to finance the Triad's floor plan and retail loans?

Pete, we can certainly use the balance sheet as part of the captive finance company for floor planning, if we so choose, we talked about expanding into floor planning on our earnings call just recently, but we don't have a requirement to do that. And we will not be using our balance sheet for end consumer loans.

Helpful. And then one of the slides, I think said 80% of Skyline's floor plan financing is done by non-Triad lenders. How does Triad's existing floor plan services and interest rate compared to its competitors? And how will this investment from Skyline improve that to be more attractive to Skyline customers?

Yes, Pete. I think the floor plan offerings of Triad are very competitive in the market. It really depends on who that dealer has the relationship with generally speaking, that determines the floor plan availability. The rates of the marketplace are fairly agnostic across the board. So it really comes down to relationships, who that dealer prioritizes and what their overall relationship with the partners are.

Great. And last one for me, just trying to understand how does the non-Triad portion of ECN impact Skyline shareholders? And what are the -- what, if any, are the risks of that business to Skyline holders?

Yes. So the non-Triad portion, they have a division that's a RV marine business. I think on ECN's call, they said that was still under strategic review. Those are good businesses, the floor plan businesses that floor plan RV and marine actually are backstopped by many of the retailers and manufacturers similar to the floor plan structure of our industry, of the MH industry and the retail loan side of that is actually quite still robust as well. So I think they've got a good position in the RV Marine. They've been growing it. It's especially on the floor plan side, very secured, and they've been gaining access to capital from some of their partners like Blackstone and Carlyle that allow them to further enhance that business. So -- but I do know that they're evaluating strategic options for those businesses still as kind of a second wave of what they mentioned in the call last night.

Our next question comes from the line of Greg Palm with Craig-Hallum Capital Group.

I guess maybe in terms of a few other things that ECN said on the call last night, they talked about some potentially pretty aggressive earnings potential from the JV. And I was just curious to get your thoughts on how this might progress over the coming years? And then just in terms of the time line of the rollout, can you give us some sense on what that might look like as well?

Sure. The timing, obviously, we have to get through Hart-Scott-Rodino. We anticipate having that in place by the end of September, hopefully sooner. But that's the soonest we would start action on the JV and the relationship with ECN once that closes officially. As far as the roll-offs and the financial projections, I think there's a lot of opportunity, Greg. You may have heard on ECN's call last night that with additional capital coming from Blackstone and Carlyle Group there's more liquidity in the market, which is good because it's offsetting some of the deterioration in the community and regional banking liquidity that's in the marketplace today. So I think there is an opportunity to definitely drive higher business levels and volumes. So I think ECN sees that, we see that definitely in the outlook and I think this is going to be a very good avenue for us to grow. We, right now, today, I think, are only about 13% of Triad's business, as they mentioned on the call. So obviously, as we ramp that up and grow our partnership together. It's good for both partners because not only will it strengthen our volumes, Skyline Champion and create a deeper, more integrated connection with our dealers and in end consumers, but it also will give more volume to them, which will draw more capital on the backside from their alliances with some of their flow partners. So actually, it will grow the entire pie of the industry with this transaction, which is very exciting.

Yes. That's maybe a good tie to my next question. It's pretty clear what the benefits are, strategically to Skyline. But in terms of industry, how do you think this sort of affects overall industry growth as you look ahead?

I think it's a positive, Greg. As you know, the -- when you look at the sources of financing across the board, you have the agency financing of Fannie and Freddie, which still have their duty to serve, but they really haven't taken massive action to date. So that's -- I'm not going to say at a stand still, but it's a slow growth. You have the financing provided by community and retail banks, which we all know is slowing down a little bit. You have the financing or coming in from the secondary markets, which is at a decent pace. And then you have the insurance funds, which are driving what Clayton and ECN's business models do, which are very active. So I think having the diversity of capital source is a big driver for the industry. And the more you can get financial products out to the market and they can see how they perform, the more capital inflows that we'll have, and that has the potential, as you know, when capital was readily available, the industry was about 2 to 3x where it is today. So I think these capital inflows in creating capital partnerships to bring in sources of new capital will definitely help to accelerate the growth of the industry overall.

Okay. Yes, that's helpful. And I guess just lastly, you mentioned you've got the opportunity to acquire ECN outright. I think it's a 2-year period. Why not do that now? And I guess, as you look ahead over the next couple of years, what are you sort of looking for that would maybe enable you or increase that desire to acquire the whole entity versus just the stake?

I think it's optionality, Greg, if I can sum it up in one word, I think optionality in today's marketplace is very, very important. We're in a dynamic economy, we're in a dynamic banking environment. I think keeping those options open and also to allowing future optionality for other opportunities to come up, I think, is very important for the company. So I think that's really our focus. And as we progress with the JV, as we deepen our relationship even further with Triad, that puts an opportunity on the table for us to obviously take that to a different level.

And our next question comes from the line of Jay McCanless with Wedbush Securities.

So fast forward, let's say you get the approvals done. The JV, I'm assuming it's going to have to be reported on your income statement. And then the holdings of the ECN shares, those are going to have to get mark-to-market each quarter. Is that the right way to think about it?

So Jay, the preferred shares will be remeasured at fair value on a quarterly basis. The common shares we most likely will account for under the equity method of accounting. The JV at this point, we think will not be consolidated into our financial statements, and we'll also use the equity method of accounting.

Okay. And then I guess the other question I had is -- with some of these new pools of capital coming in, in the market, Carlyle, Blackstone, et cetera. I guess, is there opportunities above and beyond just doing floor plan and consumer loans, is there opportunities to start loaning into the manufactured home community space? Or maybe what are some of the other options that you guys talked with the ECN folks about and that maybe we haven't thought about yet or something that could add to the value of this deal.

Yes, Jay, thank you. I think when you look at ECN and the new products they brought to market, so Triad is actually active in the community space already. They're one of the largest lenders to the community space today, they've got some very good land home products that are out there. They're starting to -- they've got some rental products that are financing products that are out in the marketplace. As we move into builder developer, there could be some opportunities there. I think one of the reasons that this partnership with ECN and Triad is so good is because they're innovative. They're innovative, they've got great deep capital partner relationships that have been around for years. And so as they bring new products to market, they've done very well at seeding those and then starting to scale those over time. So I think part of the benefit here is this gives us an opportunity to work with kind of the -- our strategic partners, if you will, in this case, ECN and Triad to really create a deeper connection and say, what does the market need? How can we bring those products to market faster, quicker in a better way, so that it has a better timing and real-time experience for the consumer. So yes, part of this is really going to be to deepen the relationship between the 2 companies to bring new products, new financing products and new products to begin with, to bear so that we can better serve our community partners, our retail dealer partners, our builder developer channel that we're penetrating today and, frankly, then the end consumer. So I think that's part of this big win is that there will be a better, closer tie for innovation in the future.

And we have reached the end of the question-and-answer session. I'll now turn the call back over to Mark Yost for closing remarks.

Thank you very much for participating in today's call. We appreciate the time, and we're excited about our future partnership with ECN and Triad and the great times ahead. We appreciate your continued interest and look forward to the next call.

And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.