Skyline Champion Corp

NYSE:SKY

Earnings Call Transcript 2018-Q2

[Operator]

Good morning and welcome to Skyline Champion Corporation, Second Quarter Fiscal 2019 Earning Call. The company issued an earnings press release yesterday. Before we begin, I would like to remind everyone that today’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 risk and uncertainties that could cause actual results to differ materially from our expectations and projections. Those risks and uncertainties include the factor set forth in the earnings release and in their filings with the Securities and Exchange Commission.

Additionally, during today’s call the company will discuss non-GAAP measures which we believe can be useful in evaluating their performance. A reconciliation of these measures can be found in the earnings release.

I would now like to turn the call over to management. Please go ahead.

[Keith Anderson, Chief Executive Officer]

Good morning. This is Keith Anderson, Skyline Champion’s CEO. With me this morning is Laurie Hough, EVP and CFO of the company. Thank you for joining our second quarter 2019 earnings call.

I’d like to express my continued excitement about our new company and the opportunity ahead as we integrate the businesses and pursuing number of growth opportunities and operational improvements. I’ll start off by providing some background on the company and lay out our strategy for those of you that are new to the story.

Following the business combination of Skyline and Champion in June of 2018, we’re now a second largest factory built housing company in the U.S. with pro-forma market share of approximately 17% of the HUD manufactured housing industry. We also hold a leading position in Western Canada.

On a pro-forma basis we generated $1.4 billion of net sales and adjusted-EBITDA of $95 million for the trailing 12 months ended September 29, 2018. This equates to an adjusted-EBITDA margin of approximately 6.8%, which is before realizing all expected synergies stemming from the combination.

Our U.S. business represents approximately 84% of our pro-forma net sales with Canada, and our transportation business, each representing approximately 8%. Our product portfolio is broad as we offer a number of different types of homes at various price points. While manufactured housing accounts for the majority of our shipments, we have a strong presence is Modular Homes, Commercial and Park Model RVs.

Our products were sold through a network of more than a 1000 independent dealers across the country, as well as 21 company owned retail stores located primarily in the Southern U.S. We operate in 36 manufacturing facilities strategically located in markets that are close to our customers.

Our industry is attractive and it is being driven by differentiated and secular trends leading to outsized growth compared to the traditional site built housing market. Market volumes for manufactured housing have been recovering, but remain significantly below long term averages with 2018 MH industry volumes expected to approach 100,000 units compared to the long term average of 224,000.

Viewed from another perspective, MH is expected to be about 10% of single family housing starts this year, compared to the longer term average of more than 17%. We believe there is significant room for continued growth in the MH industry. We expect growing demand, combined with new financing options to help close the gap with historical trends as MH plays an increasingly important role in providing the market with affordable housing solutions.

Before I jump into the financial results, I’d like to highlight that we had a very busy quarter in the capital markets as we successfully completed two secondary equity offerings. First in August, we completed a 10.35 million share offering raising gross proceeds of $227.7 million for the selling shareholders.

Then in September was completed on 11.5 million share offerings, raising gross proceeds of $336.4 million for the selling shareholders. The core operating of 10 million shares in September was upsized from the original 6 million share offering.

The completion of this transaction marked an important milestone as our sponsors equity ownership fell to under 50%, meaning that Skyline Champion is no longer considered a controlled company as defined by the New York Stock Exchange. This also prompted three of our sponsor’s representatives to transition off of our Board of Directors.

I appreciate the strong investor interest in both offerings and would like to welcome all of the new shareholders to Skyline Champion. We look forward to continuing to get to know you and updating you about our business and performance going forward.

Now, moving on to the financials. While this is our second earnings call following the business combination between Skyline and Champion on June 1, this is the first time that our results included three full months of operations from both companies. Recall that our fiscal Q1 results had three months of Champion, but only one month of Skyline.

As a reminder, our second quarter results are for the three months ended September 29, 2018 and our fiscal year will end on March 30, 2019. I am pleased with the performance we delivered in the second quarter. We grew our topline by 37% and are adjusted-EBITDA by 58%. We expanded our adjusted-EBITDA margin by 90 basis points to 6.7%.

Our results were driven by improved volumes and margins from the U.S. manufacturing and retail segment. We sold 29% more homes at an average selling price of nearly 61,000. We continued to see improvements in margins due to the pricing, discipline and effectiveness, better control over material content in usage and improved operating leverage and volume improvements. Next quarter we should begin to realize more the benefits from our synergies initiatives.

I’ll provide some comments now on the trends in our markets. We are continuing to see strong demand in most of our U.S. markets. Specifically large markets such as Texas, Florida and California continue to have long backlogs. We are selectively adding capacity to meet demand which we will describe in more detail shortly.

Overall backlogs remain strong as demand through all three of our distribution channels, independent dealers, company owned stores and communities remain healthy. During the second quarter our consolidated backlog grew to $252 million from $222 million in the first quarter. We did see some softening in Canada, the provinces of Alberta and Saskatchewan continue to experience a weak housing demand, while other Canadian markets that we are in remain healthy.

In terms of the overall manufactured housing industry, there continues to be strong demand as hard shipments increased by 9.7% year-over-year through the first eight months of 2018. Going forward we continue to see the industry growing in high single digits, outpacing the growth of overall housing starts as manufactured housing is expected to take market share from traditional site built houses. We are also seeing the markets for Modular and Park Model strength, which is helping to boost backlogs and drive average selling prices higher.

While there are concerns about the outlook for the broader housing market given softening in recent statistics, we have not seen any slowdown in our U.S. market as our order growth and backlog remain strong. We do expect a normal sequential seasonal slowdown in our backlog during our third quarter, but the positive underlying drivers remain in place.

Consumers continue to view our homes as attractive and affordably priced. They are built with quality and care and with the features fitting the needs of today’s families. Supportive demographic trends along with low unemployment rates continue to help our sector given the growing cost advantages compared to the other housing alternatives.

We also continue to see improving competitive retail financing programs for both the chattel and land home segments of our business. Increased competition has resulted in interest rates for purchasers that are largely unchanged or in some cases lower when compared to a year ago. This also compares to the site built market where our Fannie Mae and Freddie Mac rates have increased by 75 to 100 basis points year-over-year. The result is that our product continues to be a very affordable alternative, providing tangible benefits to consumers, such as allowing them to purchase larger homes with attractive features such as energy, efficiency, granite quartz countertops and smart technology.

In addition, last year only about half of our industry shipments were financed. We expect this number to increase as more lending institutions enter our niche industry. Fannie Mae enhanced their MH advantage product for land home purchases recently to benefit the appraisal language in their underwriting guidelines. We expect Freddie Mac to release their version of this product shortly as well. While the impact from GSC has not been materially impacting the industry this year, we do see momentum building along with other products that should enhance chattel financing next year.

Lastly we’re seeing plant capacity utilization rates rising into the 90s in some markets. As a result, we’ve taken a number of actions to expand capacity and improve efficiency. We recently completed the expansion of a second production line in our Corona, California facility. This line will focus on Park Models and small homes, streamlining production capacity of both Corona and [inaudible] facilities. We have a proven track record of driving growth in revenue and margin by expanding facilities that have strong management teams and labor forces that are in place.

In addition, we are opening a new manufacturing facility in Leesville, Louisiana. This will allow us to expand our share in an underserved region and is historically been a top 10 flood market and it also allows us to meet growing demand in the nearby markets such as Houston, Austin and the Florida Panhandle. We anticipate that that will take approximately six to nine months to equip and staff the facility. This is another important step as we continue to execute our strategy as a combined company with increased scale and scope.

I will now turn the call over to Laurie to discuss the quarter in more detail.

[Laurie Hough]

Thank Keith. We are pleased with our performance during the quarter, as net sales increased 37% to $355 million compared to $260 million in the prior year. The net sales increase was driven by four main factors; one, the inclusion of net sales of $68 million for the Skyline operations; two, plants operating improvements which led to increased output; three, additional retail sale centers and operation during the most recent quarter; and four, an increase in the average home selling price.

The number of U.S. factory built homes sold in the second quarter of fiscal 2019 increased 29%. Average selling price per-U.S. home sold increased 16% as a result of increased market demands, product mix and pricing actions to offset the impact of rising material and labor costs.

Canadian sales volume decline by 10%, driven by soft housing demand in the provinces of Alberta and Saskatchewan. Gross profit increased to $59 million up 43% compared to $41 million in the prior year period. Our U.S. factory built housing segment increased gross margins to 16.5% of segment net sales from 15.8% in the same period last year.

Although material prices and labor costs have been increasing in recent periods, we have been able to offset the margin effect of those increases with the combination of price adjustment, operational improvements and product rationalization. Decreased volume at the Canadian operations did impact overall company gross margin.

The company continues to enhance our product innovation by adding cost effective value to our product portfolio, allowing us to meet the growing needs of our customers, while continuing to rationalize our material SKUs.

Continuing to streamline how and what we build and the number of models we offer as demand continues to increase, it allows our plans to increase output, which allows for better leverage of fixed costs.

SG&A in the second quarter increased to $128 million versus $28 million in the same period last year. The increase was primarily due to $86 million of non-cash equity compensation expense for employee restricted shares issued in connection with the combination. These shares divested as a result of the equity offerings.

In addition, SG&A increased due to the inclusion of the Skyline operations for the entire second quarter of fiscal 2019 and continued integration and restructuring costs associated with the combination.

The net loss for the second quarter was $77 million compared to net income of the $7.4 million during the same period from the prior year. The decline was driven by the increase in SG&A associated with the $86 million of equity compensation. On an adjusted basis we generated $0.23 of net income per diluted share compared to $0.17 in the year ago quarter.

The company’s effective tax rate for the three months ended September 29, 2018 was a negative 8.2% versus an effective tax rate of 36.5% for the fiscal 2018 second quarter. The change in the effective rate was primarily due to non-deductible transaction related expenses and non-cash stock compensation expense. Absent these non-deductible discrete items identified in the quarter, the company’s effective tax rate would have been 31.5%.

Adjusted EBITDA for the three months ended September 29, 2018 was $23.8 million, an increase of 58% or $8.7 million over the three months ended September 30, 2017. The adjusted EBITDA margin expanded by 90 basis points to 6.7%. We are seeing improvement driven by strong demand in the number of our markets, improved operating leverage as our volume grows and continued results from our operating margin improvement initiative.

As of September 29, 2018 we had $130 million of cash and cash equivalent. Cash generated from operations for the first six months of the year improved by over $25 million versus the same period last year, driven by improved profitability adjusted for the non-cash equity based compensation and improved working capital management.

The company had $32.1 million of unused borrowing capacity under $100 million revolving credit facility as of September 29. We have a strong and growing 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 make good progress integrating Skyline into Champion’s legacy platform. A critical aspect of this integration is moving the core functions within Skylines’ plants on to Champion systems.

Systems conversions are on track and we expect to have them complete by June 2019. The company has been focused on synergy capture, and are revising our original estimate of $10 million to $15 million to our updated range of $12 million to $16 million.

Operational improvements included in the synergy targets are progressing better than expected. These improvements are resulting from eliminating redundant material costs, streamlining throughput and refining product mix.

Procurement rationalization synergies are coming in as expected and will take time as material changeovers rolled through the supply chain and our process fees. We are revising our time to achieve synergies from our original estimate of 24 months to 18 months or reaching a run rate by December 2019.

We did begin to realize some synergies towards the end of the September quarter, but expect a bigger impact to our financial results in Q3.

I’d like to turn the call back to Keith for some closing remarks.

[Keith Anderson, Chief Executive Officer]

Thanks Laurie. As you can see, we delivered strong results during the first half of the fiscal year. We feel good about the outlook for the second half given our strong backlog and the potential for some pent up demand in areas impacted by recent hurricanes.

In recent weeks material inflation has soft. We are beginning to see synergies from the Skyline transaction. Collectively these trends provide a nice backdrop for the company and they continue to deliver revenue growth and margin improvement.

As we look forward, we expect our markets to remain healthy, driven by increasing demand for affordable housing, supported by improving financing and regulatory environments. We see opportunities to grow our business organically, pursue incremental M&A and expand our margins through operating leverage, operational initiatives and transaction related synergies.

Longer term, we are well positioned to remain one of the leading providers of factory built homes and generate attractive returns for our stakeholders, while providing affordable housing for our customers.

Operator, you may now open the lines for Q&A.

[Operator]

[Operator Instructions]. Our first question comes from a line of Daniel Moore from CJS Securities Incorporated. Please proceed with your question.

[Daniel Moore, CJS Securities Incorporated]

Good morning, Keith. Good morning, Laurie. Thanks for taking the questions.

[Keith Anderson, Chief Executive Officer]

Good morning, Dan.

[Daniel Moore, CJS Securities Incorporated]

I wanted to start with just top line, obviously exceptionally strong revenue growth. I’m wondering if there was any impact at all as far as hurricanes and/or weather Florence and Michael in the quarter and whether you expect to see any impacts in Q3?

[Laurie Hough]

Thanks Dan. Good question. There was some impact in the results of this third quarter for hurricane Florence. Obviously hurricane Michael didn’t make landfall till after the quarter end, but relatively immaterial. We did have – we have one facility in Willington, North Carolina that lost seven days of production and then obviously the heavy rainfall impacted the shipping abilities off the East Coast and into the Midwest. In addition to that, there was a tropical depression that came through in Texas that impacted shipping capabilities there.

[Daniel Moore, CJS Securities Incorporated]

And then as far as Q3 is concerned, you know are you expecting any impact as well or is that encompass – those comments encompass that as well.

[Laurie Hough]

You know, we do see that the shipments will catch up, I would say for the delay and then eventually through the end of the year we’ll catch up the lost production at the Willington facility. But overall it’s really more dependent on the ability of the transporters to ship the product and know if those areas that were impacted by flooding in the hurricane, as well as the set crews to set the homes.

[Daniel Moore, CJS Securities Incorporated]

Okay, and then kind of a related question. Expectations for FEMA, you know Q3 has a pretty tough comp. Obviously you’re backlogs are rising, so expect you to grow through it. But any comp thoughts or comments on that and then the outlook for FEMA, you know for a potential inventory replenishment as we look at fiscal ‘19, sorry calendar ‘19?

[Laurie Hough]

There is no FEMA in either of the year-to-date periods presented in our earnings results. There’s also no FEMA in our current backlog number, and you’re absolutely right, there are some tough comp coming up in the third and fourth quarter. Last year Champion alone produced 1,100, close to 1,100 FEMA units. That was very heavily concentrated in the third quarter and those production rates are very standardized products which help with efficiency through the plan.

[Daniel Moore, CJS Securities Incorporated]

Got it, and lastly for me and I’ll jump out; gross margins, it’s very strong year-over-year. If we kind of compare it to fiscal Q1, down about 50 bips sequentially, I’m wondering how much of that would you attribute to Canada and how much to the change in mix given we’ve got a kind of a full quarter now of Skyline in the operations, just trying to put it on a bit of an apples-to-apples basis. Thanks.

[Laurie Hough]

Yeah, certainly a piece of it was Canada I would say. It was last Canadian driven than it was mix of Skyline. You know going back, in the first quarter we only had one month of Skyline included in the operating results versus the full three months in the second quarter. And as we know, Skyline’s margins were historically a bit lower than the traditional Champion plants. So we are working to improve those margins, but not quite there yet obviously, that’s part of the synergy capture. So that was definitely dilutive to the whole in the third quarter – in the second quarter, sorry.

[Daniel Moore, CJS Securities Incorporated]

Got it. It’s helpful. I will jump back. Thanks.

[Laurie Hough]

Thanks Dan.

[Operator]

Our next question comes from the line of Greg Palm from Craig-Hallum. Please proceed with your question.

[Greg Palm, Craig-Hallum]

Yes thanks. Good morning everyone and congrats on the continued progress here.

[Keith Anderson, Chief Executive Officer]

Thanks Greg.

[Greg Palm, Craig-Hallum]

You know Keith, maybe we could start some commentary out there, mix commentary as it relates to the broader housing cycle. You talked about backlogs and order trends. It would curious to kind of get your true sense on what you are seeing from a demand perspective. And maybe more relevant, you know how does your product fare against some of the other options out there and how specifically does that change in a rising rate environment in your opinion?

[Keith Anderson, Chief Executive Officer]

Yeah, it’s a good question Greg. You know we’ve been watching our demand closely throughout this past quarter and it’s been very stable. As I mentioned in my opening comments, in some areas of the country it’s more than stable, it’s still growing robustly and that’s caused some challenges and we’re working through our backlog to get our homes delivered on a timely basis. But we feel good about it.

There is a very different price points on our homes from an affordability perspective and what our consumers are seeing from a value perspective versus the rising costs on the site built side and the alternative housing costs with rising apartment trends.

So I think you know the industry at a 9.7% growth rate year-over-year still is performing quite strong. So thus our view to – it’s time to open up more capacity in some of these markets that we’ve got longer backlogs in Greg.

[Greg Palm, Craig-Hallum]

Yeah, no that makes sense. I mean any evidence that you have seen in the past quarter or maybe year-to-date that as rates are rising and affordability becomes a bigger concern for maybe the traditional site built that you’re seeing more you know consumers of that product you know start to look at other options, you know i.e. manufacturer house, anything that you’re seeing.

[Keith Anderson, Chief Executive Officer]

Yeah I think you know in the in the short window of rising rates here over the past year, we have seen some drop down buyers. Especially in our modular product, modular has been growing even faster than the HUD product and that’s your typical buyer that is taking a one-time looking at a site built home, finding potentially affordability being an issue and then dropping into the next class of homes down which would, in our product array would be would be modular.

The other distinguishing factor is for our HUD product, our rates haven’t gone up across the board like you are seeing on the site build side with Fannie and Freddie. So we are a niche industry. We’ve got unique financial institutions with different capital sources and our rates have been very stable. So that’s also helping from an affordability perspective.

[Greg Palm, Craig-Hallum]

Interesting, okay. And I guess just following-up on the previous question in terms of you know demand, hurricane related impacts, you know what are you seeing now from a replacement opportunity. I mean assuming you’re seeing some demand, but you know at what point do you start be able to set some of those homes back in and you know any sense in how big the replacement opportunity is down in that region?

[Keith Anderson, Chief Executive Officer]

You know it’s still very early, especially in the Florida Panhandle, but we haven’t seen the spurt yet in both from the community and the dealer network, from hurricane Florence in the Carolinas. But from everything we hear and see and our people local on the ground, there will be a definite surge in volumes in the coming quarters as people start settling down and getting their insurance proceeds in determining their next steps.

[Greg Palm, Craig-Hallum]

Okay, great. Alright, I appreciate the color. Good luck! Thanks.

[Keith Anderson, Chief Executive Officer]

Thank you, Greg.

[Operator]

Our next question comes from the line of Mike Dahl from RBC Capital Markets. Please proceed with your questions.

[Mike Dahl, RBC Capital Markets]

Good morning. Thanks for taking my questions.

[Keith Anderson, Chief Executive Officer]

Hi Mike.

[Mike Dahl, RBC Capital Markets]

Hi! I wanted to start out on the demand side as well. I guess if I think about you know the moving pieces, it seems like organic growth is in that low to maybe well mid-single digit type range in the quarter, which would be lagging the industry a little bit. You outgrew the industry last quarter. Can you just give us a sense for kind of how you are seeing your share position as you’ve kind of moved through the year and how much of that is going back to the kind of geographic mix related to whether or how we should be thinking about that as it relates to the balance of the year?

[Laurie Hough]

Mike, to answer your question, we really need to consider the mix that’s running through the financial statements. So in unit numbers you have both retail and manufacturing. We are also seeing which impacts overall units.

So we did see an increase in multi-section home sales versus single wide home sales in this quarter and year-to-date period, over the same period last year. And we are also seeing an increase in our other product type; our modular builds, as well as our park models and unit that we produce and ship into Canada from our U.S. factories, mostly into Eastern Canada. So all of that is impacting I think how one would maybe calculate organic growth given unit numbers.

[Mike Dahl, RBC Capital Markets]

Got it, okay. Is there a comparable number that you have that you can offer?

[Laurie Hough]

Yeah, when I look at floor volume, which I think I was more directionally from an organic perspective, we are in the – we closer to the mid to higher single digits.

[Mike Dahl, RBC Capital Markets]

Great, that’s helpful Laurie. And then my second question relates to kind of the pricing environment and clearly you know you had an inflationary environment for the first half of the year on lumber and that’s helped you push pricing and you’ve pushed price ahead of costs. Now that you’re in a more deflationary environment, how should we be thinking about – for lumber that is, how should we be thinking about your average unit price and you know related effects on kind of operating or EBITDA margins.

[Laurie Hough]

Well, there’s a couple of things I think to consider when talking about price and inflation and how we look at it together. So not only are we raising prices to offset inflation, but we’re looking at once again different mix of products and optimizing our product portfolio and rationalizing those products that we’ve talked about earlier. In relation to lumber specifically, lumber prices are softened more recently, but we’re also seeing – we’re really waiting to see to solidify the impact of tariff, not necessarily on our company specifically.

But the broader building product segment and even those products sourced in the United States, whether because of the tariffs of those products increase their price. And then in addition to that we have labor and healthcare inflation that we are managing. So even though some commodities are coming down, we have other costs that are going up. So as we’ve managed in the prior quarters, we are going to continue to manage price and margin overall.

[Mike Dahl, RBC Capital Markets]

Okay, that’s helpful. And then last one from me, just given the strength that you are seeing in modular and you know that does seem to be any easier conversion process for the traditional site-built-buyer and also conventional mortgage product on that. Is there any change in the way you are viewing that and potential increases in investments to expand that business more rapidly?

[Keith Anderson, Chief Executive Officer]

You know we have to monitor that mix challenge in a number of our plants around the country and I’ll give you – for instance Mike, right now right now in Colorado the modular sector is growing very rapidly. So we have a few plants that produce and ship in the Colorado that now have converted a bigger portion of their backlog in production from HUD product into more modular products.

So it is something that each market and each one of our plants monitor closely, as well as, as we consider making expansions and looking at the new investments, what areas of the country are growing and what types of product line and we’ll continue to have to do that. So it is a very important factor.

[Mike Dahl, RBC Capital Markets]

Okay, thanks Keith and Laurie.

[Keith Anderson, Chief Executive Officer]

Thank you.

[Operator]

Our next question comes from the line of Matt Bouley from Barclays. Please proceed with your question.

[Matt Bouley, Barclays]

Good morning. Thank you for taking my questions. So just following up on I guess broader housing questions, you know I think in the industry data it seems like there was some deceleration in the August growth for manufactured housing. And so for your own I guess U.S. business, did you see a similar deceleration? How did the growth trends track into September you know just given everything you’ve heard from the site-built companies and you know would love to hear any comments I guess about trends in October as well. Thank you.

[Keith Anderson, Chief Executive Officer]

Yeah, in August and September they were very stable months from us from our order rate and then obviously a production rate, so thus producing the $252 million of backlog at the end of the quarter.

We really haven’t seen in any major markets, any real changes in demand from our overall industry HUD shipment level. The month-to-month numbers I have cautioned you, do bounce around some because of weather related events. So we tend to look at things in a more macro environment as far as the industry goals and then what are our local markets, what are our people on the ground telling us and so far traffic’s been good at the retailers.

I’m sure some of you have listen to some of the calls with the big REITs from the community side, their occupancy rate continue to improve, they are opening up new communities, so we have a pretty robust outlook.

[Matt Bouley, Barclays]

Okay, thank you for that. And then secondly, you know the Leesville opening, you know I think we were under the impression a few weeks ago that that was going to be on hold as you were you know integrating Skyline and Champion. So I guess what’s changed in your thought process these past few weeks? Is it really just the specific demand in that region or just kind of how well the integration is going? I guess you know what’s led to kind of the change in thought process in such a relatively short period of time? Thank you.

[Keith Anderson, Chief Executive Officer]

Yes, it’s a good question. The number one impact was progress made on the integration side as Laurie mentioned in her opening comments around synergies and specifically the systems conversions are going well. So that certainly gave us a greener light to move forward internally, but externally we’ve identified the management teams that are going to be running Leesville; the market in East Texas; Louisiana remain really strong and now it’s buried by the hurricane Michael impacts from – for the Florida Panhandle that certainly are going to help in demand over the next 12 months.

So it’s a combination of things Matt that drove us, that the timing was ready. It will take six to nine months to buy and quit the plant, as well as to staff the plant. So we are really preparing for a launch you know later next spring in those markets.

[Matt Bouley, Barclays]

Okay, I appreciate the details. Thanks a lot.

[Keith Anderson, Chief Executive Officer]

Thank you.

[Operator]

[Operator Instructions]. Our next question comes from a line of Phil Ng from Jefferies. Please proceeds with your question.

[Colin Devine, Jefferies]

Hi, this is actually Colin on for Phil. Just going back to the praising discussion, you talked about that 16% improvement. Can you just give us a little bit more of a feel about how much of that was actually like for like pricing versus the change in that product mix that you were talking about earlier?

[Laurie Hough]

Yeah Colin, it’s really a mix of both and generally difficult to separate the two unfortunately.

[Colin Devine, Jefferies]

Okay, I guess then is that 16% growth rate at the second quarter you put at the mid-teens. Is that something that is sustainable you think for the rest of the year?

[Laurie Hough]

Yeah, it’s certainly we need to manage both inflation and competitive pressures and the competitive pressures are generally you know more regionally based and sometimes even plants with the set. So if we can’t necessarily raise price in those markets where our products are more price sensitive because of the competition. We’ll look at de-specing the unit, changing the way that we build the models in order to maintain margins.

[Colin Devine, Jefferies]

Okay, great and then just going back to the capacity additions, can use just provide a little bit more color about what kind of capital investments are going to be involved in that and any potential drag on profitability before you see this plant be fully optimized? Thanks.

[Laurie Hough]

Yeah, for Leesville specifically the CapEx is going to be in the range of $2 million to $2.5 million, and then the ramp time to break even is generally 12 to 18 months and that can range anywhere from you know $1 million to $2.5 million, depending on the product that’s being built in the training needs and speed at which we can bring on the labor force.

[Colin Devine, Jefferies]

Great! Thank you very much.

[Keith Anderson, Chief Executive Officer]

Laurie you may want to mention Corona, Laurie.

[Laurie Hough]

Yeah, at Corona you know a different situation, because we have the management team and a lot of the labor force in place where we added the additional product line there for park models, which helps to streamline the production of the core product lines that were famous entering Corona. So that’s a much shorter time to ramp and really very little ramp cost.

[Operator]

Our next question comes from the line of Daniel Moore from CJS Securities. Please proceed with your questions.

[Daniel Moore, CJS Securities Incorporated]

Thank you again. Number one, you spent some time on modular. Wondering outside of traditional HUD code, what are you seeing in other markets, hospitality, other verticals that’s first and second Canada obviously was a bit soft. What are you seeing there as the market is stabilizing? Any comments would be great?

[Keith Anderson, Chief Executive Officer]

Sure. Well, we were pleased and continued to see growth in a few other sectors as you mentioned Dan. The modular side is outpacing the HUD side and year-to-date. Our park models, those are those tiny homes that we typically put in our RV Communities, are up nearly 30% year-over-year and then lastly, the commercial sector, we are just completing a large apartment complex known as the Corners in Detroit, as well as we completed a Fairfield in hotel unit in Wisconsin.

We do have a good pipeline of additional hospitality units coming on later next year, early next spring. So that’s an Avenue we always will be looking at as to spreading our different product array around different plants as demand and margin work through. So that will be a continued importance for us to diversify in certain markets.

[Daniel Moore, CJS Securities Incorporated]

In Canada are you seeing things stabilize there? What should we expect from current demand levels in the quarter?

[Keith Anderson, Chief Executive Officer]

Yeah, in British Columbia they remain very strong, we got very long backlogs, but as we mentioned in our opening comments, Alberta and Saskatchewan, the backlogs are shorter than we’d like. The order rates are down. We haven’t seen a bounce back in the past 12 months there, so I predict that we’ll continue to have soft markets there for the foreseeable future Dan.

[Daniel Moore, CJS Securities Incorporated]

Got it. And then lastly I think Keith you mentioned no real tangible benefit yet from – you know in your results to-date from financing from some of the Fannie and pending Freddie programs. Any sense for when we might see a little bit more meaningful benefit?

[Keith Anderson, Chief Executive Officer]

Yeah, that’s a good question. As I mentioned, Fannie Mae tweaked their operational language on their MH advantage product a few weeks ago. That was favorable and well received by the industry. It does take time to roll out these programs. These are a very different distribution through hundreds and thousands of dealers versus financial institutions, so that will take time. We think Freddie Mac will be releasing their similar product MH advantage here before year end.

So I’m really looking into 2019 before we see tangible benefits from these programs, and the program that we’re waiting in earnest on and most enthusiastic about is around chattel financing with the GSCs. We are being told that they are still committed to launching their pilot programs, next year on those programs.

[Daniel Moore, CJS Securities Incorporated]

Got it. Thanks again for the color, and best of luck in the coming quarters.

[Keith Anderson, Chief Executive Officer]

Thank you.

[Operator]

Ladies and gentlemen, we have reached the end of the question-and-answer session. Now I’d like to turn the call back to management for closing remarks.

[Keith Anderson, Chief Executive Officer]

Well, thank you very much for your interest and support and we look forward to updating you on our third quarter results in a few months. Have a good day!

[Operator]

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.