Cavco Industries, Inc. (CVCO) Q3 2014 Earnings Report, Transcript and Summary

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

Thank you, Kevin. Good morning, everyone. We'll begin with Dan Urness, our Chief Financial Officer, reading the required disclosure statement and beginning with the financial report, and then I will come back and make a few comments and take your questions. Dan?

Good day, everybody. 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 today are made within the context of the 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 the 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. Net revenue for the third quarter of fiscal 2014 was $138.3 million, up 20.7% compared to net revenue of $14.6 million during the third quarter of fiscal year 2013, primarily the result of increased home sales volume. Sales this quarter included $4.4 million pertaining to the finalization of a multi-unit housing project the company produced mainly during the second fiscal quarter. Net income attributable to capital stockholders for the fiscal 2014 third quarter was $15.9 million, compared to net income of $1.5 million reported in the same quarter of the prior year. The prior year amount was net of $1.6 million of net income attributable to redeemable noncontrolling interest. As previously reported, the noncontrolling interest was purchased during the second quarter of fiscal year 2014, such that Cavco now owns 100% of its consolidated subsidiaries, thus, all of the fiscal 2014 third quarter consolidated net income is attributable to capital stockholders. Net income was also positively affected this quarter by $0.4 million from a business interruption insurance settlement related to a prior quarter insurance claim. Net income per diluted share for the quarter ended December 31 -- or December 28, 2013, was $0.66 versus $0.21 during last year's comparable quarter. Consolidated gross profit as a percentage of net revenue was 22.8%, which closely approximates 23.2% reported for last year's third quarter. Selling, general and administrative expenses in the fiscal year 2014 third quarter as a percentage of net revenue was 15.9%, compared to 17.7% during the same quarter last year, primarily from SG&A leverage on higher sales volume. The effective income tax rate for the third fiscal quarter of approximately 31% was positively impacted by adjustments arising from manufacturing-specific deductions and certain income tax credits. The effective tax rate for the third fiscal quarter last year was 43%, which was adversely affected by changes in applied tax rates and tax loss in certain states, as well as the absence of income tax credits that were not enacted and filled the fiscal 2013 fourth quarter. At December 28, 2013, the company's home order backlog stood at approximately $25 million, up approximately $16 million -- up from approximately $16 million at the end of the same quarter last year. The higher backlog is the result of a more consistent housing demand. Comparing the balance sheets for December 28, 2013, to March 30, 2013, cash was approximately $59.5 million at the end of the quarter. Accounts receivable was higher by $8.3 million, which included approximately $6 million received during January 2014 related to a multi-unit housing project that was produced mainly during the second quarter. Current deferred income tax assets are higher by $3.5 million from the reclassification of certain deferred tax assets to current, a result of the noncontrolling interest buyout during fiscal year 2014. Consumer loans receivable and securitized financings are both lower from the ongoing maturity of the loan portfolios. Accrued liabilities are approximately $6.2 million higher pertaining mainly to accrue wages and benefits, unearned insurance premiums and volume rebate accruals at calendar year end. And in conclusion, stockholders equity grew 61% to approximately $285.5 million as of December 28, 2013, compared to approximately $176.9 million on March 30, 2013, mainly from the buyout of all noncontrolling interests during fiscal year 2014 and supplemented by earnings from operations. Joe, I'll turn it back to you.

Thank you, Dan. We are pleased with the quarter. Business conditions remain fairly similar to the way we discussed them the last quarter. We're seeing some slight increase in shipments industry-wide. Industry shipments year-to-date were up 9.4% for HUD Code manufacturing housing shipments and up about 5% through September for the latest date in which we have data for the modular housing segment of our industry and of our business. So we're doing a little bit better than the industry is doing. We are gaining share somewhat, which is a good thing. Our plant operations, our 15 factories did well for the quarter compared to last year. So we're, I think, making continuous improvement in basically all the locations. Obviously, some geographic areas are stronger than others. Texas and the contiguous states, being one good example, continues to be a very strong market for us and for the industry as a whole. Up Florida, we're seeing some improvement in demand in Florida. Not by leaps and bounds, but certainly a steady improvement. It's interesting to note this -- during the quarter, there was an article in The Wall Street Journal that the Carlyle Group, a private equity firm, which has interest in everything from oil refinery -- refining to vitamin makers, purchased 2 Florida manufactured home communities from private sellers. And although they didn't comment, I think the deal is evidence that big investors are betting on the demand for low-cost manufactured housing and that, that demand will rise as other housing alternative become too expensive for a number of Americans, especially senior citizens. In fact, some other data that we've acquired is that the 35% of the Americans over the age of 65 rely almost entirely on Social Security payments alone for income. And the average monthly Social Security payments for a retired worker in 2011 was about $1,177. So it's long been the case that the 55-plus market has been a big market for us. As we've mentioned before, it also happens to be one of the largest demographics and a fast-growing demographic. And then the millennial, the second fastest growing and the largest demographic in population is also a big market for us. Those people in their -- in the 25 to 34 age group. And it's -- some of the information we recently saw from the bookings institution talking about the primary migration of seniors and millennials into metro areas. Interesting to note that of those areas they identified, Cavco happens to be in most all of them. The #1 destination for seniors is the Phoenix, Arizona market metro area. Obviously, we're here. We've been based here for nearly 50 years. Then Riverside, California, Southern California area is the second-largest destination site for migration of seniors. We have a facility in that location as well. And we go on to Florida, Atlanta and in some extent, in the Denver market, and we happen to be in all those markets as well. And for the millennials, the younger people coming up, likewise, the primary destinations are in: the Northwest; Texas, where we have a strong presence; again, Denver; and the Washington DC corridor, where we have a presence with our Virginia operations. So we feel we're well-placed strategically, and we continue to look for other areas to grow our business geographically. We certainly could use some help. The consumer confidence levels are still -- really haven't improved much. They're flat with last year at about 70% and an index value of 100%. So that's no better than it was this time last year. And unemployment as we all know has improved modestly, but still is at high levels. Those will be very important to the first-time homebuyers and the people trying to move out of an apartment and get a home. If they have a job, they're fully employed, it will be much better shape, obviously, to be able to afford another monthly payment. So we continue to look for improvement in those areas. Dan indicated our balance sheet remains very strong. Our cash flow is good. Cash flow last quarter was $6.9 million, so we continue to generate cash. Our capital spending needs are fairly modest. So that should continue to be the case. With that, we would like to open up to any questions, Kevin. So I'll be happy to discuss any issues that people may have on their mind.

[Operator Instructions] Our first question comes from Brendan Lynch with Sidoti.

I got a couple of questions for you here. It looks like the average selling price per unit was about $53,000 in the quarter, on the higher end over the past couple of quarters. Do you attribute this gain to fluctuation between wholesale and resale shipments, or are you seeing more orders for larger homes with more option upgrades?

Yes, good question. In the past, we've seen fluctuation in that average sales price, and we continue to see it. And just as a reminder, it's made up of a couple of components that are quite different: one is the bulk of our revenue, which is wholesale invoices, and therefore, lower wholesale prices; and then, another component is the retail, or somewhat larger average sales price per home at the retail level. And so those will fluctuate quarter-to-quarter. And then added on top of that, we have a some light commercial projects that go on from time to time, quarter-to-quarter, multi-unit housing efforts. And so we see this fluctuation from quarter-to-quarter, and this one is really, really not much different. It will just skew the average sales price. And so I wouldn't really attribute it to anything other than that regular quarterly fluctuation.

Okay, great. Thanks for the color on that. Another question, the Census Bureau has suggested manufacturing housing shipments for the industry, were up about 9% in 2013, while your shipments were up about 16% for the calendar year. Can you comment on your ability to continue growing market share?

Well, first, we do think we'll have a continued opportunity to grow market share. But we'd also add that, that number is -- the comparison you just mentioned is probably not totally clear. That is -- we're not comparing like numbers sometimes, because we have a mix of business in addition to the HUD Code shipments the increase you referred to, the 9%-plus are strictly manufactured housing or homes built to the federal HUD Code. We're also, as you know, Brendan, built homes to modular or state local codes. We built park model homes and cabins that are built to RV Code, not covered by the statistics that we referred to and you just mentioned, as well, from the U.S. Census Bureau. So although our HUD Code shipments are up above the industry shipment level, the comparison is not the 16% you mentioned to the 9%, it's a lesser number than that. But still, we are exceeding our shipment levels and we are gaining share in the HUD Code market.

Great. I understand it's not an apples-to-apples comparison. But can you just go into a little bit more detail on your ability to continue growing market share and some of the initiatives that you have in place to do so?

Sure. I think that the key is the things we've been used to doing for a long time now, and that is to continuing to introduce new product, be flexible to be able to accommodate customers' needs. And when I say customers, it's not only the individual consumer, but a lot of business in this industry today is being done with manufactured housing community for operators who lease land, land-lease operators, lease the land to consumers, consumer buys the home. Well, those operators are buying sometimes in bulk, but they need -- they have different requirements depending on the area or the country they're in, depending what price point they're trying to hit, depending on the size of the lots they have, whether they are developing in their communities. And so a manufacturing needs to be very flexible to design product that fits their particular needs, to do it quickly and to do it efficiently. And so we've been stressing that considerably and we have very good position with manufactured housing community people. But that's not to say the same isn't true for the individual homebuyer that comes to a retail sales center and buys a home. They tend to be more specific than has been the case in the past; they need a home that might be custom-designed. And so customization is becoming more common in our business. And we've always been quite good and flexible, at least in the Cavco operations. And we're obviously trying to spread that approach throughout the organization as we've acquired other entities, and there's a great need for that. So that helps. The other thing, of course, is we've offered inventory financing, floor plan financing to retailers and community operators. We've been, I think, accommodative and creative in that respect. That's helpful to them. I think that's helped us maintain or even grow share among some customers. It's also likely being out there, and we have very good sales force. And I think we have a calling providing support services to retailers, community operators to help them market the homes. We have very good website presence, and we continue to work on that. So it's a combination of things. But I do think we're in a position, too, from a geographic standpoint, to offer customers to buy from multiple in multiple geographical locations. We can be the one-stop shop. So we can supply their needs in Florida, supply their needs in the Southwestern market, Arizona, California. And there's many operators who have facilities in both locations. So that can help as well.

That's great. That's great. Another issue that's been -- that come up significantly over the past couple of years is in regards to consumer financing. From a distance, it seems that the situation is improving marginally. I was wondering if you could give us an update on what you're seeing on the ground?

Brendan, that's -- that continues to be a somewhat of a mediating factor in the industry's growth. That is -- we don't have the lending base that this industry really needs to provide homes to consumers. And by that, I mean, we've traditionally had -- historically had, a number of lenders who specialize, who have operations within their businesses that specialize in manufactured home loans. We have, today, a couple of sources to do that, but not nearly the quantity we once had or that we need today. We keep hearing and sometimes talks of folks here look in getting into this lending. But to date, we don't really have many, or any, new entrants in the retail lending sector. And I would say until that happens or until the existing lenders perhaps grow, become more even robust than they are, then that's going to be a factor that's going to hold back sales to consumers. Most of our buyers, as you can imagine, need financing. They're not cash buyers; some are, particularly the 55 market, if they're selling their site-build home, they might come in and pay cash for a home. But most buyers, of course, are -- especially the millennials, those first-time and first move-up buyers, they need financing. And we use FHA financing for a lot of land home transactions. That works quite well, we're competitive with site-built mortgages as an industry. But when it comes to individual home loans on the home only, or what's often called chattel lending, that's where the capacity is constrained, and we need to see that grow, I think, to see more overall growth in the industry. I think we'll see that these loans performed quite well if they're underwritten properly and serviced well. And historically, I think there's evidence of that, including the 2 portfolios of securitization that Cavco owns, that we acquired from CountryPlace Mortgage. We made those acquisitions about 3 years ago. Those securitizations done 2005 and 2007 are performing quite well. Investors are getting their funds back. Consumers are paying for their homes. So -- and we're not the only one. There's other mortgage lenders that can show similar performance. So the loans do well, the yields are attractive for investors. I think we'll eventually see a secondary market develop for those loans, but we have not seen it yet. And that's a problem.

Okay, great. A couple of quick modeling questions. The gross margin contracted slightly year-over-year and sequentially. Can you comment on material and labor pricing that you're experiencing?

Well, yes, we can, Brendan. Material pricing is certainly a moving target. We saw it stabilize somewhat and we saw some of the elements of commodities stabilize in our recent quarters. More recently, we've seen price increase pressure, particularly in anything, again, related to petroleum, insulation, for example, gypsum, that in their production process use a lot of energy. We're seeing price increases and price pressure in those elements -- carpets, vinyl flooring. We're not sure how that's going to shakeout, but we're seeing some indications as we go into the new calendar year, where we typically see these price increases attempt to be made. We'll probably see some price increases, and we're not sure how much yet. Basic commodities. Again, lumber, panel products, OSB and plywood tend to fluctuate, but they've been manageable in recent times.

Okay, great. And just one more quick one. Can you give us a little guidance on what your tax rate will be going forward?

Sure. And as you know, it's been a little bit fluctuating here in last few quarters. But largely, that's been because of the, number one, with the buyout transaction, the noncontrolling interest that had a downward pressure effect on our tax rate. This quarter, as I mentioned in my earlier comments, we were accounting for the availability of production, domestic-production-related tax deductions that are afforded into the tax code. And then in addition, the tax credits that come to us in the way of Energy Star and workers opportunity tax credits. Those, by the way, expired at the end of the quarter, so those won't be available going forward. But what will be available going forward is the ongoing domestic production activities deduction. And as we become more profitable, that will continue to be a component and an element that decreases our effective tax rate. So to answer your question, taking that into account, we're expecting a little lower tax rate now that our profitability is up at the level it is right now, probably in the 36% to 37% effective tax rate range going forward. Now if there were to be a renewal of the tax extenders I mentioned, which are the Energy Star credit and the workers opportunity tax credit and potentially, others, then we may get the benefit of that in the future. But based on the current tax laws it stands right now, 36% to 37% going forward.

Our next question comes from Albert Sebastian of Prospect Advisors.

Just 2 questions. First, on the SG&A line. I see that there was a substantial improvement in SG&A as a percentage of revenue at 15.9% versus 17.7% for the quarter year-over-year. And historically, if you go back, and of course, this is before the Palm Harbor acquisition, that you have SG&A as a percentage of revenue sort of in the mid-part of the decade and you're up until about 2008, 2009, around 10%. What can we expect in terms of SG&A as a percentage of revenue going forward as you ramp up your volume?

Well, I think, again, we're -- if you look back historically and we're not really comparing similar numbers and a similar company. When we had the lower SG&A, we always had the lowest SG&A percentage in the industry from what we can tell from the public companies that were public at that time. But with the new components of business we've added, the new segments, we're doing retailing now. We have homes that are nearly 50 retail stores, which by its nature, has a higher SG&A percentage. And then, we have our financial services business, which is generally a higher-SG&A business than our other business. So that's going to change the situation considerably on its own. We do feel we managed sales, general and administrative expenses very closely. We're very keen on that number. Our people are motivated. Our operating people are as motivated to keep that number down. So I think we have a fairly conservative numbers on those lines. But we don't make forecast or projections. I also -- well, we're not going to do so here, but I think the number you're looking at is going to move around that range, that 16% to 17% range. Probably, it might dip down below that. It's probably going to be in that range in the foreseeable future.

Okay, and just one last question. With regards to CapEx, I see for the third quarter and also for the 9 months, that CapEx is up quite a bit, $839,000 versus $177,000 for the quarter last year. What can we expect in terms of CapEx going forward on a sort of an average quarterly or annual basis?

Sure. That's a good question. And really, we don't anticipate the significant increase there. It will be around $2 million to $2.5 million a year going forward. As we -- even as we increase utilization of our capacity, we'll have what we call maintenance CapEx kind of ongoing and some smaller projects. But we think that's a reasonable estimate going forward, $2 million to $2.5 million per year.

And I'm not showing any further questions at this time. I'd like to turn the conference back over to our host for closing remarks.

Thank you, Kevin. Thanks for joining us, folks. I know some of you are living in the colder areas in the country, and I guess, just one comment there. We -- I think January, we'd certainly been impacted in some parts of the country by not being able to ship homes, that sort of thing. But I think, given that it's the first month of the quarter, we should be able to make that up. So we don't expect the cold arctic freeze to be a real major impact on our business, although it has been a temporary impact in some regions. Well, with that weather report, we'll close this meeting, and we look forward to talking to you again. Thank you, very much.

Ladies and gentlemen, that concludes today's presentation. You may all disconnect, and have a wonderful day.