Champion Homes, Inc. 2027 Q1 Earnings Call

Thank you for joining us for today's conference call and review of Champion Homes results for the first quarter ended June 27th, 2026. Here to review the results are Tim Larson, CEO, and Dave McKinstray, CFO. Yesterday, after the market closed, Champion Homes issued its earnings release. As a reminder, the earnings release and statements made during today's 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. 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. Please note that today's remarks contain non-GAAP financial measures, which we believe can be useful in evaluating performance.

Definitions and reconciliations of these measures can be found in the earnings release. I will now turn the call over to Tim Larson.

Thank you, Ellen, and good morning, everyone. The Champion Homes team delivered a solid start to fiscal 2027, with results that align with our expectations. We continue to outperform the broader industry, demonstrating the strength of our customer-centric strategy and the team's operational execution. The recent closing of the Homes Direct acquisition marks an important milestone in advancing our direct-to-consumer strategy. The transaction closed on August 1st, and we are honored to formally welcome the Homes Direct team to Champion. While the financial impact in the second quarter will be limited due to timing, we remain excited about the strategic opportunities that we are already seeing as we work with the Homes Direct team. This acquisition reflects how we are allocating our capital to enhance and accelerate our strategic priorities. Across our channels, product portfolio, and operational scale, Champion remains uniquely positioned to help address the need for affordable housing.

We remain focused on producing high-quality homes that provide compelling value when compared to traditional site-built alternatives. We will achieve this by advancing a differentiated customer-centric strategy that supports long-term growth and value creation. Let's turn to our quarterly results. The quarter unfolded largely as we anticipated, and we are pleased with the consistency and execution demonstrated by our team in a dynamic economic environment. Net sales increased 1.3% year-over-year to $710.2 million. Manufacturing capacity utilization during the quarter was 62%, up from 59% sequentially and up one percentage point compared to the same period last year. As a reminder, our utilization reporting includes our six idled facilities. Champion again outperformed the broader industry. Our U.S. home sales were up 1.8% versus the same period last year.

This performance is against a backdrop of declining HUD industry shipments, which were down year-over-year approximately 5% during the three-month period ending May 2026. The demand environment was very encouraging for us in the first quarter. Manufacturing orders increased year-over-year, resulting in an increase in backlogs to $421.8 million versus $302 million at the end of the first quarter last year. Manufacturing backlog lead time ended the quarter at approximately nine weeks, which is within our target range of four to 12 weeks. We continue to manage production responsibly and balance customer demand with market conditions. From a channel perspective, we achieved solid results across our portfolio, reinforcing the resiliency of our diversified go-to-market model. Sales to our independent retail channel were up 4% year-over-year.

We continue to invest in tools and capabilities to support our independent dealers' businesses, including lead management capabilities via our dealer portal, consumer digital engagement initiatives, and being nimble with our product offerings. We believe these important investments position both Champion and our dealer network for long-term success. Our captive retail channel continued to perform well. Captive retail represented approximately 35% of consolidated sales during the quarter, compared to 34% in the prior year period. Execution across our retail network remains strong as we leverage our investments across our now 95 captive retail stores, including 11 Homes Direct stores in the Western U.S. It's worth noting that our first quarter results do not include Homes Direct, which as I mentioned, closed August 1st. Community orders were up modestly this quarter. Community operators continually carefully manage inventory levels and monitor consumer demand.

Orders from some of the larger operators were drivers during the first quarter. We are encouraged by community customer engagement trends. Builder-developer sales increased year-over-year with momentum accelerating in this channel. During the recent quarter, our off-site construction event in York, Nebraska, attracted more than 150 attendees and showcased the interest in module and HUD housing solutions. Developers, builders, municipalities, and housing advocates from across the nation attended the event. This reflects the growing interest and demand for affordable and timely home construction solutions. Our joint venture with Triad Champion Financing continued to perform well in the quarter. As we reported on our last call, the ECN transaction closed successfully in our first quarter and generated proceeds of approximately CAD 189.1 million, a portion of which we have reinvested in the Homes Direct transaction.

Turning to the regulatory developments, we are pleased with the continued momentum of policies that expand affordable housing. The 21st Century ROAD to Housing Act recently passed both chambers of Congress with overwhelming bipartisan support, becoming law on July 10th. While implementation will take time and the HUD rulemaking process is ongoing, we believe the legislation represents a meaningful step toward expanding housing opportunities and removing barriers to factory build housing adoption. Our teams remain actively engaged with HUD and other stakeholders as technical specifications and implementation details continue to evolve. As you would expect, in addition to the HUD rulemaking, there will be new engineering, transport, and set considerations for HUD homes that are not built on a permanent chassis. Our teams are excited to implement this change while also remaining focused on our traditional HUD product that is built on a permanent chassis.

We envision over time that both types of construction will be utilized throughout the industry. Additionally, Champion will once again return to the National Mall for HUD's Innovative Housing Showcase in September. The showcase and legislation demonstrate that federal housing leaders are increasingly supportive of manufactured homes as a central solution to the housing affordability crisis. We continue to monitor zoning reform at the state and local level as well. The Commonwealth of Virginia, for example, recently enacted legislation that allows manufactured housing placement in residential districts where site-built homes are permitted. This represents additional momentum towards the long-term acceptance of off-site built in parity with site built. We believe the continued incremental regulatory progress leads to a favorable long-term outlook for our industry. As we've moved through the opening weeks of the second quarter, our observations remain consistent with the themes we've discussed today.

The macro environment remains dynamic. Consumers continue to face broad affordability pressures. However, demand for attainable housing remains strong. Our team continues to execute our strategy with excellence. We are encouraged by the customer engagement trends and the opportunities we're seeing across our channels. We believe Champion is better positioned than ever to help address the housing affordability challenge with best-in-class products designed for the specific customers and markets we serve, supported by diversified channels and a highly engaged team. Our balance sheet remains exceptionally strong, providing flexibility to invest in growth opportunities, pursue disciplined capital allocation, and continue creating long-term shareholder value. With that, I'll turn the call over to Dave.

Thanks, Tim, and good morning, everyone. Before I get into the quarter and outlook, I want to briefly welcome the Homes Direct team to Champion. We're excited to have them as part of the company. We look forward to collaborating together as we continue to expand our retail platform. Now, I'll begin by reviewing our first quarter financial results, followed by our balance sheet and cash flow performance. I'll then conclude with our outlook for the second quarter of fiscal 2027. Overall, our first quarter results reflected steady execution in a dynamic operating environment. With demand improving as the quarter progressed, the business performed in line with expectations. We're pleased with how we're starting fiscal 2027. Net sales increased 1.3% compared to the prior year period to $710.2 million. These results were slightly ahead of expectations, reflecting stronger anticipated overall demand throughout the quarter.

In the U.S., homes sold increased 1.8% to 7,089 units for Q1. Average selling price increased 0.6% to approximately $95,600, primarily driven by pricing on homes sold through our company-owned retail locations. In Canada, homes sold declined to 185 from 250 in the prior year quarter. The volume decline, which was impacted by weather-related disruptions, was partially offset by higher average selling prices. Adjusted gross profit was $179 million, representing an adjusted gross margin of 25.2%. This was in line with our expectations and reflected disciplined pricing actions, operational execution, and ongoing efforts to offset higher material cost in a volatile macro environment. As we discussed last quarter, these pricing actions typically lag cost increases. We expect the benefits to gain momentum in the second quarter. Adjusted SG&A expenses represent 16.4% of net sales for the quarter within our expected range.

Adjusted net income attributable to Champion Homes was $48.3 million or $0.88 per diluted share. Adjusted EBITDA was $73.6 million, representing an adjusted EBITDA margin of 10.4%. Our effective tax rate was approximately 25%, compared with 21% in the prior year quarter, reflecting the expiration of ENERGY STAR-related tax incentives, which we spoke about on our Q4 call. We ended the quarter with cash and cash equivalents of $784.7 million, compared to $638.3 million at fiscal year-end. The increase was primarily due to the proceeds received from the ECN transaction. Operating cash flow totaled $72.5 million during the quarter, demonstrating the strong cash generation characteristics of the business. We also continued to return capital to share owners, repurchasing and retiring $50 million of common stock during the quarter. In July, the board refreshed the share repurchase authorization back to the $150 million level.