Cavco Industries, Inc. (CVCO) Q3 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Cavco Industries Third Quarter Fiscal Year 2013 Earnings Call Webcast. [Operator Instructions] I would now like to introduce your host for today's conference, Joe Stegmayer, Chairman and CEO. Sir, you may begin.

Thank you Sam and good morning, everyone. We'll begin with the financial reports, so I'm going to turn it over to Dan Urness, who joins me on the call, for the disclaimer and the financial report.

We respectfully remind you that certain statements made on this call, either in our remarks or in our responses to questions, may not be historical in nature and, therefore, are considered forward-looking. All statements and comments made today are made within the context of Safe Harbor rules. All forward-looking statements are subject to risks and uncertainties, many of which are beyond our control. Our actual results or performance may differ materially from anticipated results or performance. Cavco disclaims any obligation to update any forward-looking statements made on this call, and investors should not place any reliance on them. More complete information on this subject is included as part of our earnings release filed yesterday and is available on our website and from other sources. For our financial report this quarter, net sales for the third quarter of fiscal 2013 were $114.6 million, essentially equal to net sales during the third quarter of fiscal year 2012. Income before income taxes, however, increased to $5.3 million this quarter, an increase of 10.4% from $4.8 million in the same quarter last year. Income tax expense in the third quarter of fiscal 2013 was higher at 43% of income before income taxes compared to 38% during Q3 last year. The higher effective tax rate this quarter was primarily a result of a requirement to adjust deferred taxes for income tax law and other changes in certain states. Even though we recorded a higher effective tax rate, net income was slightly higher in the third fiscal quarter at $3.02 million versus $2.98 million in the prior-year quarter. Net income attributable to Cavco stockholders in the third quarter of fiscal 2013 was $1.5 million compared to last year's third quarter of $1.7 million with diluted earnings per share of $0.21 versus $0.24 per share last year. The average sales price per home in Q3 of fiscal year 2013 was $50,100, 5.8% lower than the prior year quarter. It is normal for the average sales price to fluctuate quarter-to-quarter based on product mix variations inherent in the wide array of homes we sell. The quarterly average sales price per home during the current and most recent fiscal year has been within $55,700 and $47,300, a 17.8% price range. During that time though, a modest decline in average sales prices has occurred, mainly attributable to market demand skewed towards smaller and lower price point homes, as well as competitive pricing pressure. However, unit sales increased to or 2,065 homes this quarter, a 4.7% rise versus 1,972 homes in the same quarter last year. Consolidated gross profit as a percentage of net sales this quarter of 23.2% was comparable to 23.5% reported for last year's third quarter. And selling, general and administrative expenses in the fiscal 2013 third quarter of $20.3 million were slightly lower than the $20.5 million recorded in Q3 last year. At December 29, 2012, order backlog stood at approximately $15.9 million, up 46% from $10.9 million at the end of the same quarter last year. The improved backlog is a result of somewhat more consistent housing demand. Comparing the balance sheets, at December 29, 2012 to March 31, 2012, cash was up approximately $1.4 million from net income, partially offset by net uses of cash, including the full repayment of third-party construction lending lines previously utilized on our mortgage subsidiary. Consumer loans receivable and associated securitized financings were both lower, in connection with the ongoing runoff of the underlying securitization loan portfolios. The current portion of the inventory finance notes receivable grew approximately $2.0 million from the current continued maturity of the loan portfolio and expansion of our wholesale finance initiatives with our retail distributors. Assets held for sale is lower, primarily from planned sales of idle factories obtained during prior acquisitions. No significant book gain or loss has been realized from these disposals. And retained earnings grew by Cavco's applicable portion of net income. Joe?

Thank you, Dan. Business conditions continued to be approximately stable, as they've been in the past months. Total industry shipments for the month of November, the latest month available, were down 17.9% from November 2011. However, that comparison is somewhat skewed because in the fourth quarter of 2011, FEMA ordered more than 1,700 manufactured homes for emergency use purposes. And so, we didn't have those orders in fourth quarter 2012 as an industry. So that accentuated the decline in shipments. It's interesting to note that the multi-section homes are -- seem to be increasing in recent months for the beginning of the calendar year of 2012. Single-section homes were outpacing, in shipments and sales, the multi-section homes in terms of its growth. That seems to have reversed over the last several months. And multi-section homes are increasing at a faster pace than single-section. In fact, in some markets, single-section shipments are down. That may be a good sign that more affluent customers are coming to look at the product and looking for manufactured housing as a form of their housing needs. We're also seeing continued improvement in the rental market, which is a good thing for us. That is rental rates in most markets for apartments are rising. Occupancies are declining. And we typically get many of our buyers coming out of apartments, they're first-time homebuyers. So to the extent rates continue to rise, it should be a good sign for us. So you might be aware of, especially those of you in the East, the Hurricane Sandy issues and the move to try to get replacement housing, and the government -- the federal government finally came through with some financing. We are seeing some interest in our product. We've signed up several new builders up in the New Jersey market that we did not have signed up with our modular home manufacturer, Nationwide Homes, previously. We've actually gotten a couple of orders in hand that we have many quotes outstanding. So we think there may be some opportunity for us to help provide replacement housing for victims of Hurricane Sandy. Our markets continued to be most challenging in the Southwest and the West Coast. We're seeing good activity in South Central states and in Texas. And we're even seeing some improvement in the East Coast in the Florida market, which has been one of the hardest hit markets for our industry and housing in general in recent years. We're seeing some return of the buyer in that market. With that, and given the fact that I have a cold and my voice is not going to hold up, we'll turn over to questions. I'd be happy to answer anything you might have on your mind.

[Operator Instructions] Our first question comes from Howard Flinker of Flinker & Co.

Other than a few orders from Sandy, is there any chance you guys could get, say, hundreds of orders, or you don't really know yet?

We don't know yet. FEMA is hosting a Industry Day here in a couple of weeks, February 19, in Washington, D.C., to discuss the requirements, design concepts, installation and the maintenance of these units and even deactivation, what they do with the units after the housing situation is resolved. [indiscernible] That's always been an issue for FEMA, what they do with them afterwards. So they're hosting a big conference. We're obviously going to attend. Our engineering people will be there. So we'll see. It's -- they're very unpredictable to deal with, to put it that way...

You're very kind. We still have thousands or tens of thousands of homes in Mississippi or Louisiana, I forgot where. I don't know if they're worth anything, but they, in name, they have them. They're probably decayed beyond the habitation by now. Is the main force that we have to await before there's a big upturn in industry-wide sales, a change in the mortgage market or financing market, is that the main driver that we have to observe?

Well, the mortgage market improvement would certainly help. We still believe the biggest issue for our industry is employment; unemployment and underemployment because, of course, many of our buyers are working-class people, who have been hardest hit by the recession in terms of job availability and pay. And so, these first-time homebuyers and the first-move-up buyers, who comprise a lot of our market, have been impacted, obviously. And until we see employment figures improve and underemployment, people getting more pay and overtime hours, I think we'll have that challenge. Secondly, we think consumer confidence is an issue, particularly with the 55-plus buyer. Those in that age category, which have very large demographic and also one of our largest markets historically for manufactured housing. And particularly, it's been a very good market for Cavco because we're in Sunbelt areas like Arizona and California and Florida. Those markets have been quite slow. And of course -- in that case, not generally because the people don't have the wherewithal, they generally have at least sufficient wherewithal to buy a home. But they seem to be hesitating because they're unsure. They don't have the confidence in social security or maybe their 401k or confidence in the economy in general. So we found that a lot of these people are still coming to the Sunbelt, but they're renting, and they're not buying homes yet. But we think, eventually, those people will turn into buyers. The biological clock is ticking. They want to change their lifestyle. They want to move out of the cold weather and maybe go to a modern home, energy-efficient home that we've built. But there is holding off, and they can hold off for awhile but eventually, we think that, that market comes around. Financing is an issue, certainly. But for a reasonably good credit quality, people can find a home, and we finance our homes in traditional mortgages with FHA and other entities, and so a good quality credit can get financing. It's the people who might be somewhat more challenged, not a terrible credit, but even the more challenged credit is having somewhat more difficulty from a financing perspective.

[Operator Instructions] Our next question comes from Greg Cole of Sidoti & Company.

Just the first question, kind of technical on the tax rate. So this is just truing up for the, I guess, the deferred taxes. Is this -- I mean -- but can we use this as a run rate going forward, or is this just a one-time event?

This is a one-time event, Greg. So you would not use this as a run rate going forward. More traditional 39%, 40% rate, is typical going forward. And you're correct, this true-up is deferred taxes, as mentioned. Particularly, there were some tax law changes in California and then -- related to some provision work related to other states and allocations that caused this one-time higher tax rate.

Okay. And then, as we're looking at shipments, have you seen a material increase from communities and the -- specifically, the larger communities that are national? Or is this mainly, I guess, an individual buyer?

The communities are active in purchasing homes, some of them for their rental fleet, so to speak, and some for resale. So, yes, they've been an active buyer, particularly the larger REITs. And they're seeing this as a way to again get people familiar with their -- the lifestyle and their communities. Even if they rent the home to them, they feel that if they get them in there long enough, the people will want to move in permanently, and we'll move them over to buyers. And they're having, we understand, very good success, actually in converting renters to buyers over time.

Okay. And just from a -- if we don't see too much improvement in the economy over the next 2 years or so, do you think that this can help drive shipments over the next couple of years to basically kind of prove as a catalyst?

We do. We think communities are continuing to expand their needs. And again, we think that the apartment vacancy rate declining will also move a lot of people who are working employees and they're renting, could move them to the affordability of a manufactured home. So as the rates continue to rise and maybe as their families expand, most -- it's very difficult to find a 3-bedroom apartment, for example. There's not that many in the pool, yet many of our homes are single-section homes and are 3-bedroom, 2-bath homes. So a person get more square footage, more space and more privacy, often times, a lower monthly payment than they're paying in their apartment. So we think we'll continue to see some benefit from those higher rental rates.

And at this time, I'm not showing any further questions on the phone. I'd like to turn the call back to management for any further remarks.

Well, we appreciate everybody joining. We think we -- we're obviously have a ways to go, but we're pleased with where we're positioned. We think we're in the right markets. These markets out in the West Coast are, as I said, difficult today, but they're in the right place to be. There have always been large demand for manufactured homes in these markets. Inventories are declining. Eventually, we'll see improvement in these West Coast markets. And meanwhile, some of our other markets are picking up some steam. So we think, with our solid balance sheet, the locations were -- and geographically, the broad product line we have, everything from an entry level price point home to a higher end modular home, positions us uniquely in the marketplace. So we look forward to reporting our progress. And feel free to follow up individually here at Cavco with us. Thank you for joining.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.