Cavco Industries, Inc. (CVCO) Q2 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Cavco Industries, Inc. Second Quarter Fiscal Year 2014 Earnings Conference Call Webcast. [Operator Instructions] As a reminder, this call may be recorded. I would now like to introduce your host for today's conference, Mr. Joseph Stegmayer, Chairman and CEO. Please go ahead, sir.

Thank you, Danielle. And welcome, everyone. Before we begin, I'd like Dan Urness, our Chief Financial Officer, who's with me this morning, to read the required disclosure.

Good day, everyone. Before we begin today, 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. Joe?

Thank you. In addition to the second quarter being a good one for us, it also marks Cavco's 10th anniversary as a public company. In July 2003, CVCO began trading on the NASDAQ global market. At that time, we operated 3 factory-built housing plants here in Arizona and a small group of retail model home centers. We serve a 6-state market in the Southwest. Growth was steady in our first few years. Earnings grew and we strengthened our balance sheet with an increasing cash position. Then the housing bubble burst. And while the manufactured housing industry was not a participant in the sub-prime lending boom, we certainly were adversely affected by the sharp downturn in the general economy and by the excess inventory of new site-built homes and the increasing rate of home repossessions, all of which led to a glut of site-built housing stock. It was difficult to compete with fire sale pricing, and our operations suffered. During those early years, we had been considering a variety of acquisition ideas to expand our presence in manufactured housing, but we just couldn't seem to put together what we felt was the right opportunity. Then in 2009, a company we knew quite well became available. Fleetwood Homes had long been one of the leading companies in the industry, with the most recognized brand name and excellent distribution channels. Unfortunately, a series of strategic decisions at the corporate level over a number of years had weakened their financial condition to the point that the parent company filed bankruptcy. Fortunately, the company ventures to us, manufactured housing, was well run, in our opinion, and respected for quality and service. We won the bid on the Fleetwood assets but we believe it was prudent to maintain a healthy financial condition considering the economic uncertainties of the times. Banks were not lending during this period, and even specialty inventory lenders serving our retailers were exiting the business. We decided to form a joint venture with an investment company to provide 1/2 of the funding to the acquisition entity. And subsequently, our jointly owned company was the successful bidder in a court order auction of the operating assets of Fleetwood Homes. That occurred in August of 2009. The purchase added 7 home-building facilities in 7 states, giving Fleetwood -- providing Fleetwood and Cavco with a nationwide footprint. Then in April of 2011, the jointly owned company formed in 2009, Fleetwood Homes, Inc., purchased certain operating assets of Palm Harbor Homes. Palm Harbor also has an excellent reputation for innovative designs and high-quality homes. This purchase added 5 factories, including a new presence for us in Florida, a dedicated modular home facility that builds higher price point multistorey custom homes and a retail home center business with more than 40 locations. In the related transactions, we also purchased an insurance company, Standard Casualty, CountryPlace Mortgage, an originator and servicer of home mortgage loans. So I say all this to risks to the action we took in the quarter just ended whereby we completed the purchase of the 50% interest in Fleetwood Homes, Inc. that was owned by Third Avenue Value Fund, our investment partner. Now Cavco's shareholders own 100% of all the entities we operate. The impact to this action will be further explained as Dan reviews the results of the quarter. Dan?

Thank you, Joe. In connection with this quarter's noncontrolling interest buyout transaction Joe just described, Cavco paid the purchase price of $91.4 million in Cavco stock. Since Cavco owns 100% of these businesses as of July 22, 2013, the associated earnings are reported as attributable to Cavco from that day forward. Net revenue for the second quarter of fiscal 2014 was $129.8 million, up 17.9% compared to net revenue of $110.1 million during the second quarter of fiscal 2013, primarily the result of increased home sales volume. Net income increased to $4.7 million this quarter from $2.7 million in the same quarter last year. Net income attributable to Cavco's stockholders for the second quarter of fiscal 2014 was $4.3 million compared to $1.3 million for the second fiscal 2013 quarter. Diluted earnings per share in Q2 was $0.50, versus $0.18 for the prior year quarter ended September 30, 2012. The effective income tax rate for the second fiscal quarter was approximately 30% compared to approximately 39% during the same quarter last year. The lower income tax rate this quarter resulted primarily from recording the expected deferred net income tax benefits from the noncontrolling interest buyout transaction completed during the second quarter and certain income tax credits. Consolidated gross profit as a percentage of net sales was 23.0% this quarter compared to 23.4% reported for last year's second quarter, mainly from a lower average sales price per home. The lower average selling price is the result of a larger proportion of smaller homes in the quarter sales mix. Selling, general and administrative expenses in the fiscal 2014 second quarter as a percentage of net revenue, was 17.0%; which compares favorably to 18.3% during the same quarter last year. At September 28, 2013, the company's home order backlog stood at approximately $36 million, up from approximately $22 million at the end of the same quarter last year. The higher backlog is the result of somewhat more consistent housing demand and project work. Comparing the balance sheets for September 28, 2013 to March 30, 2013, cash of $61.7 million was approximately $13.8 million higher, primarily from earnings this quarter, combined with increased accrual levels, including wages and unearned insurance premiums, as well as higher trade payables from increased sales volume. Accounts receivable was $3 million higher from the timing of payments associated with project work at the end of the quarter and increased sales order activity. Current deferred income tax assets are higher by $5.3 million from the reclassification of certain deferred tax assets to current, a result of the noncontrolling interest buyout this quarter. Consumer loans receivable and securitized financings are both lower from the ongoing maturity of the loan portfolios. Stockholders' equity grew 58% to approximately $279 million as of September 28, 2013, compared to approximately $177 million, mainly attributable to the buyout of the noncontrolling interest this quarter. Joe?

Okay, thank you, Dan. Here to date through August, industry-wide shipments of homes is up 6% compared to the first 8 months of 2012. The outlook is still very challenging. Our markets are extremely competitive. And on the consumer side, confidence levels are still languishing, and of course, employment is not increasing fast enough. On the positive side, new home inventories are low, both at the site-built level and in manufactured housing. And competition from repossessed homes is declining steadily, as supply is reduced. Recently, we've noticed and read and heard feedback from many of our customers that there appears to be more interest among the 55-plus age group to consider purchasing a home either for seasonal living or full-time retirement. That's a good sign. And apartment vacancy rates continue to drop to a number not seen in a number of years. One thing we like to point out is that less than 13% of new single-family site-built homes sold are less than $150,000. That's exclusive of land. And only 4% are less than $125,000, and this is factory-built -- the factory-built industry's, really, sweet spot. We can fill that need for moderately priced, affordable housing very well. We think there's going to be -- there will be increasing opportunity in the affordable housing field as people look for homes they truly can afford and as employment increases. That concludes our remarks, and we'd be happy, Danielle, to take any questions, if there may be.

[Operator Instructions] And our first question comes from Brendan Lynch from Sidoti.

My first question is on pricing. Obviously, we saw a huge jump in orders from 1 year to the next. But perhaps, you could give us a little detail on the impact of sales during the quarter.

Well, we had a -- as you know, we have a variety of product and brands that we've built all at different sales prices. An important factor to point out is that part of the sales are retail sales, which carry a higher average sales price. Part of the sales are wholesale sales, which carry a lower average sales price. So quarter-to-quarter, we have variety there, although there is -- there has been a theme this year that continued this quarter, which is a lower-priced smaller home becoming more dominant in our sales mix. But combined with that, the timing of various project work affect -- which can have an often higher average sales price, can also affect the sales mix.

And I would add to that, Brendan, that in recent times, indeed the last couple of years, the trend has been to more modestly priced homes, smaller sized, less amenities. We're seeing that change somewhat. It's still pretty much the case, but we are, again, getting orders and receiving feedback from retailers that, in some cases, customers are looking again for somewhat larger homes and more amenities. So there seems to be quite a dichotomy, I guess, of demand. There's the entry level, or smaller units, and there's some increasing demand for the higher end. There's not a lot of middle-priced product yet, but I think that will gradually phase in.

Okay, great. You mentioned some projects coming to fruition. Can you let us know if there was any significant bulk orders during this quarter that would have led to the substantial gain year-over-year? Or anything like that, that we should keep our eye out for going forward?

No. I think what Dan was referring to is that we do have -- we've supplemented the weak retail demand these last couple of years with whatever projects we could successfully get. And that's been kind of ongoing. It's not a huge portion of our business, and no one project is that large that would influence our numbers greatly in total. So I don't think there's any issue there in terms of any projects dropping off or any new projects coming on. It's kind of an adjunct to our traditional business, and it's been fortunate we've been able to get some of that. When we talk about projects, we mean some small commercial projects from time to time. We might mean some bulk orders from workforce housing or from community operators that buy in bulk. But again, these numbers are not so huge that they would influence overall numbers to any great extent.

Okay. And in terms of your gaining market share, it seems like you're growing shipments at a much quicker pace than the industry as a whole is growing. Can you discuss a little bit your brand penetration initiatives and perhaps more financing or anything else that you're doing, which is allowing you to gain market share?

Right. And while our people, I think, #1, the key to that, our people have been very attuned to coming up with new products, new product designs to fit the divergence of demand out there. We've been very active in presenting these ideas and products to our customers. So I think it's mostly our people. It's also the fact that we have broadened our geographic presence so much, and our product line is so extensive from very entry-level product on up to the higher-end modular product. So we have a full complement of product to offer our customers. And so we like to think it's kind of a 1-stop shop and they can come to us for all their product needs. So that has helped. And I think it's also a function of, frankly, we try to provide excellent follow-up service, and our quality levels are extremely high. So we look for -- to serve, from a customer satisfaction standpoint, we really focus on building it right the first time and following up with service after the sale, which is very important in our industry. And we think that's been an advantage we've been able to offer.

It certainly looks like it's been working well over the past couple of years. My final question is on any development in customer financing. I know from discussions we've had in the past that some financiers are originating chattel loans and holding them on their balance sheet. I just wanted to get an update on you -- from you on any developments in that opportunity for growth.

Right. And thanks for bringing that up because I failed to refer to one other item you mentioned in the previous question, that is the inventory financing. It's something that certainly helped us. When inventory financing disappeared in our industry, and it largely did, not fully, but Textron went out of the business, GE wound down their inventory finance business, both of which were quite large in the industry. We were able, because of our balance sheet, to take a little of inventory financing. That has certainly helped us develop and cement relationships with customers. And then I think now in this question referring also to consumer finance, and certainly, we've been doing that for our CountryPlace mortgage operation and offering consumer lending. One area that we looked at more and more is the home only or personal property lending often called chattel lending, and we have not been offering that through our own mortgage company because there hasn't been a secondary market to sell those loans. Our industry and, certainly, our retail operations, our customers whom we're relying on, again, some specialty lenders in that field. We think the secondary market is gradually becoming interested in manufactured housing loans, and we believe there can be a developing market for sale of those loans. And as that develops, we will be able to offer chattel lending again. In the meantime, we have the origination platform and the servicing platform to do just that already in place, because we're already servicing a fairly large portfolio of chattel loans that were originated before those markets shut down. So we're in place ready to do that, and I think we'll gradually see that opportunity.

And our next question comes from Albert Sebastian from Prospect Advisors.

Joe, could you just talk a little bit about your cash balance and the potential to use that cash maybe to make acquisitions or to buy back stock?

Sure. We have tried to maintain a pretty strong balance sheet through all these times. And as I said, it certainly helped us. The cash position's helped us getting the lending -- inventory lending business, which had been a tremendous help to us. But our business typically generates fairly good cash flow. Our capital spending needs are fairly modest. So as we generate earnings, a lot of those earnings turn into positive cash flow, and we expect that will continue. What we'll do with that cash is, as you mentioned, we'll certainly consider all of what you talked about. We'll consider additional acquisitions, and we'll certainly look at stock buybacks from time to time. From an acquisition standpoint, there's still opportunity, I think, in this marketplace. We are in actively serving, that is Cavco -- well, let me back up with it. If we look at the top 10 states for manufactured housing, the top 10 states account for about 56% of all shipments of manufactured homes. We're in 7 of those states, kind of, fully. And then if we look at the top 20 states, which account for nearly 80% of all shipments, we're in 14 of those 20 states actively and probably 3 states on a partial basis. So obviously, there's room for us to expand our geographic presence, either by greenfielding, that is opening new plants that we build ourselves, or by acquisition, and we continue to look at those opportunities. So while we have a nationwide footprint, we're not in all markets, and certainly not in all markets on a kind of a complete basis. So we'll continue to look at those opportunities.

One last question. Can you just give a little color, Joe, in terms of -- just by geographical perspective, where you're seeing some better market conditions and other geographic areas where maybe it's a little bit sluggish?

Okay, sure. We've seen pretty steady demand from the Texas market and some of the surrounding states: Oklahoma, for example, Louisiana have done quite well in recent times. Where we're seeing an improvement more recently is in the Florida market, which has been an extremely challenged market for a number of years. It's certainly not booming at this point, but we are seeing some improvement in that area from retail demand among consumers and, certainly, both family, fires and that 55-plus market. So we're seeing some improvement there. We're also seeing slight improvement out in the Southwest. Although, I would emphasize the word slight. So Arizona, California is showing some improvement in shipments, but still from a very low base because these states have been so badly affected by the downturn, and we're not out of the woods yet. And then the mid-Atlantic market in the East, likewise, remains somewhat challenged, although again improving. So there's a lot of opportunity for continued improvement. I don't think -- we've certainly not seen wholesale improvement across the board. We do see things getting better in many of these areas, but at a fairly modest pace.

[Operator Instructions] And our next question comes from Howard Flinker from Flinker & Co.

In the past, didn't you list the average selling price for home on that last table? I don't see it here.

Well, we don't list it there because the average selling prices, again, a function of both our retail and our wholesale business. So, the information there is available to get to it. But the net average selling price isn't as informative and so we haven't disclosed that.

Didn't you do that in the past, or am I forgetful?

In the distant past, we did. Before the company grew. We used to show an average selling price when it was primarily a manufacturing company.

Okay, so then it's my faulty memory. And second, a number of -- quite a few buyers of mobile homes are oldsters. Have you had any feedback from your dealers yet about old people worried about the costs -- the rising cost of Obama Care as it enters their budgets right about now? Or is it too early?

We have not heard of any specific feedback along those lines. And so I really couldn't give you any color at all on that. There's certainly a lot of talk among the industry about those potential costs, but I don't think we've heard anyone say it's been an impediment to people looking at buying homes.

And I'm not showing any further questions at this time. I would now like to turn the call back to Mr. Stegmayer for any further remarks.

Thank you. We appreciate you joining the call today, and look forward to talk to you here in a few months. And we'll be happy to answer any other questions, if you care to contact us. Have a good day.

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