Cavco Industries, Inc. (CVCO) Q1 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Cavco Industries Inc. First Quarter Fiscal Year 2015 Earnings Conference Call and Webcast. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Joe Stegmayer, Chairman and CEO. Please go ahead, sir.

Thank you, Danielle. Good morning, everyone. We'll begin today with Dan Urness, our Chief Financial Officer, providing the financial review. I'll make a few comments on the industry, what we're seeing currently, and then we'll be happy to take your questions. Dan?

Good day, everyone. Before we begin, we respectfully remind you that certain statements made on this call, either our remarks or 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 anticipated results or performance. Cavco disclaims all 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 first quarter of fiscal 2015 was $139.2 million, up approximately 33.9% compared to net revenue of $134 million during the first quarter of fiscal year 2014. The increase was mainly from higher home sales activity during the quarter. Consolidated gross profit in the first fiscal quarter, as a percentage of net revenue, was 22.8% compared to 21.9% for last year's first quarter. The increase is primarily from construction leverage on additional sales volume. Home sales in Q1 increased 3.4% to 2,439 units versus 2,358 homes sold last year. Selling, general and administrative expenses in the fiscal 2015 first quarter, as a percentage of net revenue, was 16.0% compared to 16.8% during the same quarter last year. This improvement was from greater SG&A utilization on higher sales volume. Net income attributable to Cavco stockholders for the first fiscal 2015 quarter was $5.8 million compared to net income of $1.8 million reported in the same quarter of the prior year. However, the prior year quarter was after a deduction of $2.0 million of net income attributable to redeemable noncontrolling interest, which is approximately half of the difference. As previously reported, Cavco purchased the noncontrolling interest during the second quarter of fiscal year 2014, whereby Cavco has since owned 100% of its consolidated subsidiaries. Therefore, all of the fiscal 2015 first quarter consolidated net income is attributable to Cavco stockholders. Net income per diluted share for the first quarter of fiscal year 2015 was $0.64 versus $0.26 during last year's comparable quarter. Comparing the balance sheets for June 28, 2014 to March 29, 2014, cash was approximately $74 million at the end of the fiscal quarter compared to approximately $73 million, 3 months earlier. Accounts receivable grew $4.3 million from increased overall sales volume. Inventory also increased seasonally by $3.9 million in connection with higher sales and production levels. Current deferred income taxes are lower, mainly from the utilization of NOL carryforwards in the quarter. Also, stockholders' equity grew approximately 65% to $296.9 million, as of June 28, 2014 compared to $179.8 million 1 year earlier on June 29, 2013, primarily from the buyout of all noncontrolling interests during fiscal year 2014 and supplemented by earnings from operations. Joe, that completes the financial report.

Thank you, Dan. Well, certainly, we're pleased with our performance and the results of operations for the quarter. It's a good start to our fiscal '15 year. And while we'd like to see greater health from the general economy, we're glad to see that consumer confidence levels have been improving, which is a key indicator for our business, we believe, longer term. Job creation remains a major challenge in many markets, and it's quite obvious, as we look at shipment and registration of new homes in various states, the states with more robust economies, such as Texas, where jobs are plentiful, are doing quite well. Texas shipments, for the industry, are up 24% for May of this year, and likewise, we're doing well in Texas. Other states are more challenged. New Mexico's shipments are flat from previous year. California is up somewhat, but still from a very, very low base. So we need to see more job creation, more uniformly across the country to really impact our -- the shipment numbers more profoundly. We do believe that, as one analyst put it, it's not a question of whether manufacturing housing shipments will increase, it's a question of when. We believe that all along and we still believe that to be the case. We thought 10% increase in shipments was achievable for calendar '14, and we still have 7 months to ago, but it seems unlikely we'll reach that goal as an industry, given the fact that we're up 5.2% through May on a calendar year basis in total industry shipments of homes. We could see considerable more improvement through the balance of the year, but it -- again, it looks like it might be difficult to get to that 10% number. Some of the larger factors, though, that we do feel bode well for us, of course, is demographics, as we've discussed before. The percent of 25 to 34-year-old individuals living at home is approximately 13.9%. That's compared to a 1980 to 2012 median average of 11.5%, the difference being about 785,000 people, and those additional people at 25 to 34-year-old age group that are now living at home moved out they created 320,000 households. And the percentage of 25 to 34-year-old married couples that reside in traditional apartments is at historical high of 19.3% versus 15% to 16% range in the period from 1992 to 2008. Arguably, this could be the result of the recessionary impact on individuals. As the economy improves and that percentage drops to more normalized levels, that could create another 300,000 single-family households. That combined with general population growth, the fact that new single-family home and existing home inventories are at 30-year lows, and therefore, the price of existing homes and new single-family homes is generally on an upward trend, these are all good signs for the demand equation for new manufactured homes. In many of our markets, in fact, the top 25 real estate markets in the country, many of which we're involved in, the inventory of homes available for sale is at historical lows, 4 months actually in June, in those top 25 markets, and that's down from -- that's compared to a national average of about 5.5 months. So most of these factors worked in our favor. We feel very good about where we're positioned, the products we have, the locations we have geographically. We'll continue to look at expanding geographically and adding some locations where we have gaps and where we are not participating, but we feel in the major markets we are now involved in, gives us quite a bit of operating leverage and sales volume increase potential. Some of the immediate challenges we face, labor availability. As we've tried to ramp up some plans in some of our better performing markets, we find sometimes it's difficult to hire the numbers of people we need, and so we continue to work on that, continue to work on programs to recruit and retain people within the factories. Price competition is still -- could be termed aggressive in the marketplace. It's certainly still a buyers' market, it has improved somewhat over the past year or so, but it's still a factor, which will certainly improve as production rates increase for the industry as a whole. And the Dodd-Frank Act and the SAFE Act, as we've discussed in previous calls, probably has tempered demand somewhat, especially for lower price point entry level homes. Still on all, we feel again that we're in good position. We feel very positive about the balance of the year and certainly, the outlook for the calendar 2015. With that, Danielle, we'll be happy to take any questions.

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

I wanted to dig a little deeper into the volume growth year-over-year. It was a bit weaker than I had been anticipating. Do you attribute this in part maybe to a tougher comp? Or you mentioned some -- about weakness in the industry. I'm just trying to gauge what we can expect going forward. And I would've thought with your exposure to Texas, which you mentioned is -- was particularly strong for the industry, that we would've seen more growth. So if you could just give us some more color on that, that would be helpful.

Sure. We'll be glad to. Well, Brendan, I think your first comment hit the nail on the head. It's really, we were expecting better volume growth ourselves internally. It's really a function of industry shipments, not being where we thought they would be, and we believe we're getting our share. In fact, we track market share as closely as we can, the statistics aren't tremendously accurate at times, but -- and certainly not timely, but we believe our market share is improving in most markets, so we're doing well from that standpoint. We've acquired new points, what we call new points of distribution, so we're expanding our distribution base in a fairly challenging environment. That is our new distributors being added, yet we have been able to increase our penetration of existing distribution. So it really boils down to overall demand. You're right about Texas. Texas has been good and we've been doing very, very well in Texas. Our plants there are performing better than our combined average in terms of utilization. Our -- certainly, their sales volume is quite brisk there, and also happens to be a state where we have the greatest number of our own company-owned retail stores, which are -- have also been improving their performance.

Great. And then in terms of the operating margin expansion, that was fairly significant on a relatively modest increase in revenue. Is this just fixed cost leverage? Or are there other components that are contributing to the margin expansion?

Well, the fixed cost leverage in our business is certainly real. But if you look back over several quarters, it does fluctuate from time to time, lot to do with product mix. So this was a relatively strong quarter, but not our strongest from a margin standpoint. But the continued expansion in revenue growth generally improves that trend, yes.

Great. And then just one other question on pricing trends. Are you seeing buyers choosing more options or choosing larger homes at this point? Or are you still experiencing -- kind of on a separate issue, are you still experiencing a lot of competition in terms of pricing from competitors in the market?

Right. It's a combination, really, Brendan. That's a tough one to answer because it depends on the market. We have seen some improvement in an average selling price in certain markets. For example, in Florida, we're seeing demand improve gradually for a somewhat higher-priced, more amenitized home. That has been the case in the last couple of years. Still, the bias is towards a truly affordable price point, in general, across all markets. Again, we're seeing some pockets of improvement in certain areas, so it's a mixed bag, but I'd say, it certainly is not decidedly towards higher price point at this point. We think that will improve again with improving employment picture and as consumer confidence continues to increase because the 55-plus age group demographic is one that will tend to buy the more amenitized home in the Sun Belt areas, Florida, Arizona, California, Southern Texas, the Carolinas, if they feel confident or if they are able to sell their existing site-built home back in their home state. So that generally drives higher price point product, and we're seeing some of the community operators who cater to that 55-plus age restricted community buyer, we're seeing them start to order some more elaborate or more amenitized homes and somewhat larger homes.

Our next question comes from Daniel Moore from CJS Securities.

Just looking at SG&A, your expense controls were even more so than typically exceptionally strong. Can you keep SG&A essentially or roughly flat year-over-year if industry shipment volumes do not improve into the back half of the year?

Yes, Dan. I think the answer is yes, generally. We think we're going to get economies of scale in SG&A as business improves. We certainly have a lot more capacity to utilize, and as that happens, our SG&A will go up in tandem. One mitigating factor, that is, we compensate most of our people based on the profitability of the business. So SG&A is somewhat variable on the upside. As business improves, the profitability improves. But that is largely mitigated or defused by other improvements in SG&A. So in some sense, we won't necessarily see it drop substantially, but I think you will see economies of scale as we improve. Dan, you want to add any specifics to that?

And just as a reference point, our SG&A as a percentage of revenue was 16% this quarter, as we mentioned. That's almost our lowest in recent quarters. We were at 15.9% in earlier quarter. Again, we're going to have some fluctuation in that number due to some of the factors Joe described. Just for a historical reference point, if you go back to when our company was only a manufacturing concern, we were below 10% in the best years, and that was in the '05, '06 time period. We don't expect to get to those levels again, Dan. We've added, since that time, retail business, which is a higher SG&A component of the consolidated financials, and the financial services group, the finance company and the insurance business also have higher SG&A as a percentage of revenue. So while we don't expect to get down to those historic lows for the company, we think that there is room for improvement with higher sales volume.

Very helpful. Focusing a little on financial services, you still grew 10% year-over-year. What's driving that, given the slowdown in volumes and shipments? And can you continue to generate that type of growth if unit volumes are tempered a bit, say, more like mid-single digits?

We've been able to increase market share in our insurance business. We've entered new geographic markets with our Standard Casualty Company. And this business, for those of you who are perhaps new to Cavco, is a business we acquired about 3.5 years ago now and primarily ensures manufacturing homes, typical property coverages. And we have a concentration of business around the Southwest, where we've been expanding that stretch into Arizona, for example, and we've acquired quite a few new policies in Arizona and a couple of other states. So we do think there's more to grow that business. We do it very cautiously and conservatively. Our underwriting standards are quite high, we avoid -- try to avoid concentration of risk in any one geographic area. Obviously, we do that through a variety of mechanisms, looking at zip codes and concentration of business in any given community or any given town. So we're going to be careful about expanding that business, but we do think there's significant growth potential there. The finance business itself, the mortgage company, frankly, has had some headwinds recently. We think that's because of, again, the rising interest rate environment we saw at the tail end of last calendar year and then, perhaps, to some extent, some of the Dodd-Frank and SAFE Act implementation that occurred at the beginning of this year. When we're starting to see are backlog, so to speak, of loan volume improve, and so we think we have some further growth potential in that business through the balance of this year. And long term, we feel very positive about that finance business. It's a great business. We have a large servicing portfolio, and we have a good origination platform and an excellent servicing capability, so we think there's room to grow that business in the longer term.

That dovetails into my last question. You mentioned Dodd-Frank in the prepared remarks as well. It's been 6 to 7 months. What are you hearing from dealers, both your internal dealers and your dealer partners? And how significant an impact is that having on their sales capabilities and buyers' ability to get mortgage?

Right. Dan, we only got kind of anecdotal, there's no statistical information that I've seen at this point. Some of the mortgage companies might have it internally, but haven't published anything that I've noticed. But it's certainly, what you hear is that it certainly has slowed things down, but in the end, I think retailers will adjust to this. They need to -- their sales approach, their marketing approach and their guidance of the customer to lenders has to change in the new rules. In fact, they can't direct consumers anymore to any particular lender. They have to leave that up to the consumer, which makes it a little bit more difficult for the consumer. That's an unfortunate law, in that respect, actually, because now the consumer has to kind of fend for themselves to try to find finance companies and try to talk to them before the retail operator could help them navigate through that field of finance companies. It wouldn't necessarily -- wouldn't need their own finance company, it could be an independent finance company, but at least they could direct him and give him some estimates of what their payment may -- might be on a given home. Now they can't do that. So it kind of slows the sales process, but again, I think most good retailers will accommodate that over time. It's a training issue with their people. So ultimately, I don't think it's going to be an obstacle that will dramatically change the equation for our business, but it certainly is a hindrance and I don't think it's a benefit to the consumer, and it will be good if we can could get some relief from the SAFE Act, particularly for manufactured housing, which we're certainly trying to do with the House Bill 1779.

Does it make it more difficult for consumers to find you from their mortgage companies' perspective?

Possibly, but what most lenders are doing -- certainly, we're doing is we are providing a lot more point-of-sale pieces at the retail locations, so they can post that for consumers to look at it. The salesperson, home salesperson, can't just direct them to call any one company. They can just show them what's available. And so yes, I think from the standpoint of our marketing, we're trying to be more diligent about materials at those sales centers, posters, banners, that sort of thing. And obviously, be very responsive when it comes to people calling us and guiding them through the process and giving them ideas on what price -- any given price point home might be in terms of monthly payment, which the lender can do. The lender can still quote all those numbers and estimate them for the buyer. So it's a question of trying to make sure that your flag is out there, so to speak, and very obvious to the buyer, and we're certainly doing that.

Got it. I'll ask one more. Housing starts have picked up a little bit recently. How well does that typically correlate to future demand for manufactured housing? And you talked about in your prepared remarks, things have slowed a bit, 10%, probably a challenge. Do you think we can get back to a 10% growth rate, if not -- in the back half over the next few quarters, if not for the full year? Or do you see sort of the mid-single digit is probably winning the day for the next quarter or 2?

Well, for the next quarter, I think we're probably in the single digits. We don't see anything changing short term. But can we see that 10%-plus improvement in the latter part of the year? Possibly. It's just been very difficult obviously to predict. And obviously, most of the factories we have, they are outside of our control, but we do believe we'll continue to increase our penetration. We think shipments can improve somewhat. So I think the short answer is yes. On the balance of the year and the next couple of months, I don't see things changing much from this mid-single digit kind of range. Housing starts, to your point on housing starts, that should be a good indicator. Obviously, if the housing starts lead to home sales, the site builders are actually predicting what their sale is going to be and starting a house construction on that basis. If it comes through to fruition in terms of home sales, it certainly will be good for us too. I never don't -- I never looked at housing starts as a key indicator. It's -- obviously, it's a leading indicator, but really in the end, depends on home sales and new single-family home sales.

Your next question comes from Wyatt Carr from Monarch Bay Securities.

Just a couple of questions. You mentioned that you were having some labor availability difficulties, and yet Bill Gross is commenting on wages being stagnant or people being underemployed. Are you seeing that? And what can we look for in wages going forward?

Right. Good question, Wyatt. We think there'll probably be -- there is and probably will continue to be some upward pressure on wages. We'll certainly be looking at that across the board and our companies have been increasing either base wage or incentive compensation arrangements to some extent. However, I would quickly add, I don't think that's going to be a major factor in our business. We control labor very well. And in fact, one could argue that it might be a factor in our favor because since we do control labor much better, the use of labor hours is much better in our factory than on the construction site. As labor rates increase generally across the country and across the spectrum of jobs, we'll have an increasing advantage vis-à-vis other users of labor, that is we use it again better and more efficiently. So we're not concerned about modest improvement -- modest increase in labor rates. We do need to watch it, so that we make sure we're competitive and can attract people, but I don't think labor, as a percent of our revenues, for example, you're going to be severely impacted. It might move up somewhat, but I think it will -- pricing of our homes will move up in tandem. So I don't think we'll see a significant increase as percent of sales over time.

Okay, great. And then just some color on the number of independent dealers and company owned. I notice that the number of homes sold for company-owned centers was virtually flat year-over-year, and independent retailers moved up nicely. Obviously, the selling price had to move up among company-owned retail centers to get to your kind of revenue number you got to. Do you have any company-owned and independent?

We've had some increase, Wyatt, in the independent side. We've always worked to maintain and then even improve our market penetration and our market share there. So there has been some improvement. We've stayed fairly flat on the company-owned retail sales center side. The interesting thing that you mentioned was to get to these volumes and then you maybe even been thinking about the average sales price. And I would just point out that the average sales price for the company-owned retail sales centers is going to be higher because that's going to be the retail price of the home versus the volume that you see going to the independent retailers, builders, communities and developers. That's wholesale. And the wholesale price is going to be, obviously, lower without that retail markup. So we get both in markups actually, one of the benefits of having a retail group is that we get the markup, in addition to the wholesale price for each of the homes. But that, I guess, provides us a little bit of color on how that works out and addresses a little bit about what you're seeing.

Okay. And then on a macro that you're talking about, the overall growth of the industry, looking more like 5% versus 10% that you had been hoping for, but it also looks like you've been taking some share. Are there any markets that you feel that you haven't taken share and/or that you can -- that there's a share availability?

Sure. There are certain markets in the country where we're not really participating or not effectively participating, and by effectively participating, we refer to the fact that we might be able to shift to certain states. But if there's competitors that are closer to us in significant number, that is, they'll have a freight advantage. So for example, we have operations in the mid-Atlantic states in Virginia and then down south through Georgia and Florida, we don't have operations in the Northeast, we ship into New Jersey, we ship into some of the New England states from time to time, but there's other manufacturers that will have facilities in Pennsylvania, even New York, who are closer to us. And so that's a market where we don't get a very good penetration in. The Midwest, similarly. We have a plant in Tennessee. We can ship into some parts of the lower Midwest, you might say. But when it gets to the upper Midwest and then the central Midwest, but further out west, we're not a significant factor again because we're not freight-competitive. So they are markets where we looked at from time to time and we'll continue to look at. In existing markets, yes, there's still opportunity to gain share, certainly. I mean, we think there's significant opportunities in markets, in our prime markets, California, the Northwest, Southeast. So I think we have a combination of opportunity in existing markets, as well as a few markets we've been looking at.

Okay. And lastly, plant utilization, have you maintained the number of shifts added, shifts or much change there in utilization?

We've improved somewhat our utilization, still we're a far cry from where we really need to be. It varies, of course, by plant. Texas utilization, as I mentioned earlier, is a little bit better. Here in Arizona, it's somewhat lower. California is lower. So it certainly varies, but we've improved that. Our business and our industry generally operates on one shift. There's not any one -- clearly, no one in the industry, substantially operates on more than one shift and hasn't, not historically. Lot of reasons for that, which I won't go into here, but -- so most of the time, utilization numbers are characterized by one shift 5-day week kind of model. And we're-- we have quite a lot of room to grow yet in that respect, as does the industry, as evidenced by the fact that there's 123 factories, and those factories are probably operating at 50% or less of their actual production capacity.

[Operator Instructions] Your next question comes from Albert Sebastian from Prospect Advisors.

Just a question on the cash. I got on the call a little bit late, so apologies if you've already addressed this. But it doesn't seem like you generated much cash in the quarter. Can you give a little detail on that and what your outlook might be for the remainder of the year on your cash generation?

Sure, Al. Looking at the balance sheet, its -- the balances of accounts receivable and inventories, where you'll see that cash going. So it's a seasonally higher quarter this quarter, and it's typical for us to increase our inventory levels in our company-owned stores. That sort of transcends down to the factory level, where inventory levels will increase as well to accommodate those higher order levels. So it's common and typical for inventory balance to increase during this quarter, and it certainly did this quarter, and that's part of the use of cash this quarter. And then the accounts receivable balance increased just in tandem with sales increases. So those are kind of common themes that you'll see this time of year, and they certainly took place this time. As far as cash generation, our cash generation remains strong as a company. The expectation is that we'll continue to have that happen throughout the rest of the quarters for the year. So while you see that kind of seasonally tail off this quarter or have those adjustments related to inventory and accounts receivable, that's just a seasonal impact and not a long-term effect on cash.

And just to add to that, folks, you will see our accounts receivable number move from time to time. We participate and offer a number of inventory finance programs for our customers, and so that could swing. The customer pays down their inventory line or we add a new customer or a new customer that we finance. That could improve, that could increase. But all that goes into a very productive avenue that we're generally doing business because we're offering finance and so we're increasing our sales, and we get a margin on that loan, if you will, that inventory finance loan to the customer. So it's a good use of our cash, so that's a positive thing when you see our -- generally, you see our accounts receivable increases. Not an issue of accounts receivable stretching out, in which you would consider it normal or a typical fashion. Our accounts receivable terms are very, very short, and return our receivables very quickly. It's only when we make these specific programs, which are profitable programs for us, to finance inventory on a medium term basis, we will move up.

We do have a follow-up from Dan Moore from CJS Securities.

Dan, do you happen to have operating profit by segment? If not, we can wait for the Q, but I just want to see if you have that available.

Yes, we do, and we're going to be issuing that quarterly report next week. So in the meantime, what we expect that we're going to report into the -- again, this is excluding general corporate charges, so it won't entirely add up more factory-built housing, $10.7 million is what we expect, and then about $1.5 million for financial services.

I'm not showing any further questions. I would now like to turn the call back to Joe Stegmayer for any further remarks.

Thank you, Danielle. Thank you, everyone, for joining. We'll be available for any follow-up questions. Please feel free to call us or contact us, and we look forward to talking to you again in a few months. Thank you. 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.