Cavco Industries, Inc. (CVCO) Q3 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and thank you for your patience. You've joined the Cavco Industries' Third Quarter Fiscal Year 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference may be recorded. I would now like to turn the call over to your host, the Chairman and CEO of Cavco Industries, Mr. Joe Stegmayer. Sir, you may begin.

Thank you, Latif [ph] and welcome everyone to our third fiscal quarter conference call. Glad to you have listening in. And with me today is Dan Urness, our Executive Vice President and Chief Financial Officer; and Mark Fusler, our Director of Financial Reporting. We're very pleased with the results of the quarter and I'm going to begin with having Dan review the financials and I'll make a few comments, and we'll take your questions. Dan?

Good day, everyone. Before we begin, 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 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 fiscal quarter was $202 million, up 11.5% compared to $181 million during the third quarter of fiscal year 2016. Factory built housing segment revenue increased mainly from 8.5% more home sold as there were 3,486 home sales this quarter compared to 3,213 homes during the comparable period last year. Financial services revenue declined modestly from changes made to the recognition of certain seated insurance commissions that took effect this fiscal year as well as continued run-off of securitized loan portfolio. Consolidated gross profit in the third fiscal quarter as a percentage of net revenue was 21.5%, up from 20.1% in the same period last year. The percentage increase is largely attributable to stronger results at our financial services segment as last year's quarter was adversely impacted by higher than normal weather-related insurance claims. Operating leverage from increased home sales also helped improve gross profit as a percentage of net revenue. Selling, general, and administrative expenses in the fiscal 2017 third quarter as a percentage of net revenue was 12.9% compared to 13.1% during the same quarter last year. The improvement reflected better SG&A utilization on higher home sales volume. The effective income tax rate was 28.9% for the third fiscal quarter compared to 32.5% in the same quarter prior year. The current contains certain manufacturing-related deductions as well as research and development tax credits that collectively realized this quarter upon filing the company's tax returns. Net income for the third fiscal quarter of 2017 was $12.3 million compared to net income of $8.1 million reported in the same quarter of prior year. Net income per diluted share for Q3 2017 was $1.30 versus $0.89 during last year’s third quarter. Comparing the December 31, 2016 balance sheet to April 2nd, 2016, cash was approximately $120 million compared to $98 million nine months earlier. The increase was primarily from net income and cash provided by operating activities. For other writings on the balance sheet, accounts receivable increased from overall sales growth during the period. Total consumer loans receivable increased also with more loans classified as current this quarter. A greater number of loan originations are in the held-for-sale category from the timing of regular loans sales and a greater number of securitized loans becoming due within the next year. Inventories decreased in line with reduced finished goods inventory at our retail locations. Accrued liabilities increased mainly from rebate and warranty obligations from increased sales. Other asset and liability accounts remained relatively consistent with prior year levels. Stockholders' equity grew to approximately $384 million as of December 31st, 2016, up nearly $31 million from the April 2nd, 2016 balance. Joe, that completes the financial report.

Many thank you, Dan. As I mentioned we were pleased with the quarter and we're also increasingly optimistic about the time period ahead. Most [Indiscernible] issues looked favorable towards our industry. We're seeing job growth, although, at somewhat modest, there is job growth in non-firm payrolls, which is key we intend to track and importantly, the job growth is in areas that are typical buyers -- or potential buyers of our product. Retail traded a construction among them. We're seeing, of course, the population demographics, and the age of the population is, we think, also in our favor, both from the one yield entering a prime home buying season -- their home buying age and also standpoint of the aging population being prime buyers of our homes. Projections for new household formation seemed to be positive. The high-medium priced site built homes is still a negative, which can cause people to take a look at a much more affordable manufactured home product. And then rising rental rates for multifamily apartments and other rentals units are also a factor that tends to make people think about the purchase of a home. All-in-all we do believe that the unemployment rate, although, it's kind of steady at last numbers, we saw 4.8%, somethings are encouraging that the number of hours worked is increasing slightly. We've always -- we've said before in these calls it's important that the buyers of our homes are working a full week where they are getting a full weeks' pay and perhaps incentive programs that go along with that full-time job and we're seeing more of that. Traffic at retail locations both our company stores and from what our independent sources distribution channels tell us has been generally good, stronger in some areas than others, but generally good and the quality of traffic in many areas has improved, that is the preponderance of people looking to actually buy and perhaps being capable of buying -- being financially capable of obtaining a loan to buy. Those numbers are rising. So, I don't think we're at all out of the woods in terms of housing market in general. The -- for the month of December, new home sales fell 10% month-over-month to an annual rate of $536,000, so that's well below the forecast of most of the analyst had. But again we do think there's a growing need for housing and with the medium price of site the home at $322,000, it makes our product all the more attractive. Finally, we think that the disparity between building a home in a factory and building on-site will only tend to grow. The wage pressures have been -- clearly being placed with new minimum wage laws and other forms of rising wages. Although they haven't really been fully implemented yet, we think that eventually is going to materialize and that should enable more and more people to consider a factory built home. But more importantly, the homes being built in a factory will be saving greater amount of labor dollars and saving more material cost than building on-site. And as material cost go up, as wage rates go up, it makes our product that much more attractive vis-à-vis the cost of construction on-site. With that, we look forward to referring to you on the fourth quarter coming up and we'll be happy to take any questions now.

Thank you, sir. [Operator Instructions] Our first question comes from the line of Daniel Moore of CJS Securities. Your line is open.

Good morning Joe, good morning Dan. And Joe thanks for the color on the macro, it's very helpful.

Yes Dan.

I was wondering if you could give us just a general sense of the impact of the FEMA units on your growth rate in the quarter. And maybe put another way, if you didn’t have those units, would your growth, you think, have been materially different?

Right. And for those of you who might not be familiar with what Dan Moore is speaking about here is that the Federal Emergency Management Agency has ordered some units, particular, for the disasters occurred in Louisiana during the fourth quarter. We don't know -- we have not seen any public disclosures as to how many fee meters [ph] they actually ordered or, in fact, were built. But it certainly must have had an impact on shipment levels for the entire industry, because those units are built to HUD codes that they would be included in the HUD shipment levels. But we don't know really what that total number is. I suspect it had a fairly meaningful impact on the fourth quarter numbers, obviously, a less impact on full year. If we look at the full year numbers, probably shipments for the industry were probably up in the low single-digits excluding any FEMA shipments. And probably for the fourth quarter if we had to make estimate, the shipments were up in the low single-digits for fourth quarter. So, low double-digits for the year, low single-digits for the quarter excluding a guesstimate on our part of FEMA units that were produced.

Got it, and very helpful. And you did mention in the press release winter months, do you expect a continued benefit as we look out into January and February?

Continued benefit from?

Additional FEMA units being ordered and delivered?

Well, we hope so. We think we have some orders in hand now and we think there could be some follow-on orders. So, yes, we'll see some help in the months of January and February perhaps from those orders. So, yes--.

Okay. And more generally, if you look back the last couple of quarters, Cavco's growth has lagged the industry, primarily reflecting geography, what was different this quarter? And going forward, do you expect to continue to keep pace with the overall industry, if not, start to may be outperform a little bit again?

Right. There's couple of issues there that I can to respond in your question. One is that the geography we've said before that we're not in several of the states that had really strong growth, perhaps in details, Louisiana, Mississippi, Alabama, for example, we're not a factor in those States, because of our proximity. There are some of our competitor peers that are closer to those markets and are able to ship a lower cost than we are from Texas, or from Georgia, or from Tennessee. So, those States have had particularly attractive growth in the industry and we have not been participating. So, that's part of the reason we don't track exactly the industry growth numbers. However, I'd point out in the States, we are -- our core States, we're doing business in. We think we're comparing very favorably to industry growth in those States and also overall to industry growth in total. So, I think that's going to be a factor from time-to-time. I'd point out Texas, for example, where we have been a strong participant for some time. We're doing -- even though Texas shipments are down for the year and down for the quarter, we're kind of holding our own in that State. So, I think we're -- in some markets, we're doing better than shipments for the industry in total and some we're trailing somewhat, but usually we're trailing in States where we're not really significant factor to the States I just mentioned, as well as some periphery States that are little bit far distance, we're still participating in, but at a far distance from some of our existing 19 factories.

Okay. And one more and I'll jump back in queue. Looking at financial services, the margins you generated in the quarter, would you consider those more normal and sustainable or were there any sort of unusually favorable items in there?

This is Dan. And I wouldn’t necessarily indicate anything more favorable. That quarter was more regular; this quarter had more of a regular business for the financial services business. So, it was good, we had strong originations at our finance company and the policies continue to increase. Policy count and our insurance company, along with the higher rates that we have instituted during the year. So, it was a good strong quarter, nothing necessarily unusual about it and we expect that it would continue at these levels barring high claim levels, which can happen and we've had certain happening in past quarters so from the insurance business.

Perfect. So, I guess I'll jump back in queue. Thank you.

Thank you. [Operator Instructions]

While we're waiting, I want to add something to Dan's question -- Dan Moore's question that I should have mentioned and that is there's -- might call mechanical issue within Cavco the we finance a number of our distributors, that is we finance our inventory for them through our floor plan company. And when we do that, we cannot recognize the sale of those units until they're actually sold in financing, the floor plan, inventory finance paid off. So, we're going to see fluctuations from time-to-time as our floor plan rises and/or falls and those units sell through. And that can certainly affect on our shipment levels versus the industry and we certainly, in this particular quarter, we did have an increase in our inventory financing levels. The kind of where's picture little bit, but it is -- we feel is a very, very beneficial process for us we've been doing inventory financing now for probably more than seven, eight years and has worked very well to help out retailers develop a close relationship with them and also it’s a good use of our cash.

Thank you. We have a follow-up question from Daniel Moore of CJS Securities. Your line is open.

Okay. Thank you again. Joe as -- in following up on those comments, are you indicating that the current fiscal Q3 that you just reported had an uptake in shipments from previously financed from book shipments from units that were previously shipped, but not booked or that since this quarter was stronger from an inventory finance perspective, we're likely to see more shipments going forward, just trying to understand and clarify that little bit.

This is Dan. And the answer is no, we didn’t necessarily mean to indicate that there is a fluctuation there particular to the most recent quarter into this quarter or in next quarter for instance, but just the fact that it can't very vary thing somewhat. So, the ability to finance and increase our sales, have that extra tool to provide to our distribution base is continuing and it fluctuates and it can vary the numbers somewhat, just more [ph] to report.

Perfect. And lastly just financing and general taking a step back, are you seeing any signs of life or potential changes down the pike that might open up securitization market and/or financing over the next year or two?

I'm sorry. Could you rephrase that Dan?

Just seeing are there -- is there anything -- any additional talk or conversations about potential for securitization market opening up for chattel lending and then just more generally -- more -- what's your view sort of view obviously, financing has remained difficult in challenging, part of it due to Dodd-Frank, part of it due just tight conditions, are you seeing any loosening there.

We're not seeing significant loosening, no, in financing arena. I think there's adequate financing available for traditional land home mortgage where the land on a home or mortgage together as security for a loan. Where the shortage is, is in the personal property law where the person is buying the home, not encumbering land, in a rapt mortgage and that's where the challenge is, there's not enough sources of that capital, there's no sector or market to sell those loans. And if that would open up, that would make a big difference, many of the buyers manufactured homes do not incumbent land. They might have family land or using, they might be buying land-on-land contract separately. They might be placing home in a land lease community where they don't even own the land. So, that's still a big part of our industry. And with not quite the level of chattel financing we really need, it does constrain growth of our business and we haven’t seen much of a change in that. Although there are some signs that there's some people taking some interest in perhaps buying those loan, but it’s a very slow process. Also we hope the GSEs will continue to look. They've talked about looking at programs to get into providing market these chattel loans, personal property loans, if you will, and we're hopeful that something develops there.

Got it. Appreciate the color and congrats again on a solid quarter and we'll talk to you soon.

Thank you, Dan.

Thank you. At this time, I'd like to turn the call back over to Mr. Stegmayer for any closing remark. Sir?

Thank you. We have no closing remarks in particular. We look forward to talking to you in the next quarter. As always call with any questions you might have. Thank you very much.

Thank you, sir. And thank you ladies and gentlemen for your participation. That does conclude your program. You may disconnect your lines at this time. Have a wonderful day.