Cavco Industries, Inc. (CVCO) Q1 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the First Quarter Fiscal Year 2018 Cavco Industries' Earnings Call Webcast. [Operator Instructions]. I would now like to introduce your host for today's conference, Mr. Joe Stegmayer, Chairman and CEO. Please go ahead, sir.

Thank you. Thank you for joining us today for our First Quarter Conference Call. As usual, we'll begin with Dan Urness, our Chief Financial Officer, will provide the financial report, and I'll make a few comments, 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 in comments 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 or -- update any forward-looking statements made on this call, and investors should not place any reliance on them. More complete information on this subject is included as part of our earnings release filed yesterday and is available on our website and from other sources. For our financial report this quarter, net revenue for this first fiscal quarter of 2018 fiscal year was $207 million, up 12%, compared to $185 million during the same quarter last year. Breaking this increase down by business segment, factory-built housing net revenue increased $20.4 million, from a larger proportion of multi-section homes sold and higher home sales volume or higher home sales prices. Financial services segment, net revenue increased $1.3 million for more insurance policies enforced in the current period compared to the prior year period. Consolidated gross profit in the first fiscal quarter as a percentage of net revenue was 20.3%, up from 18% in the same period last year. The improvement was mainly from stronger earnings in the financial services segment compared to last year's first fiscal quarter results, which were significantly impacted by high insurance claims activity. Selling, general and administrative expenses in the fiscal 2018 first quarter as a percentage of net revenue was 12.7% compared to 13.3% during the same quarter last year. The improvement, related to effective costs control efforts as we continue working to increase home production levels. The effective income tax rate for the quarter was 24.9% compared to 35.4% in the same quarter of the prior year. The current quarter contains the benefit of $1.4 million from the required implementation of new accounting standards. These standards require the company to record excess tax benefits realized from stock option exercises as a result, or as a reduction of income tax expense, whereas these benefits were previously recognized in equity. Net income for the first quarter of fiscal 2018 was $11.8 million compared to net income of $5.4 million reported in the same quarter of the prior year. Net income per diluted share was $1.28 versus $0.60 in last year's first fiscal quarter. Comparing the July 1, 2017 balance sheet to April 1, 2017, the balance sheet of Lexington Homes is included in the consolidated balance sheet this quarter. Cash was approximately $130 million compared to $133 million 3-months earlier. The decrease was more loans held for sale at our finance subsidiary based on the timing of regular home sales as well as changes in other working capital accounts. For certain other balances on the consolidated balance sheet, accounts receivable grew from overall sales growth during the period. Inventories increased from the Lexington Homes transaction as well as from higher sales volume. Accounts Payable was up from more home sales as were several accrued liability categories, including warranty and customer deposits, partially offset by decreases in salary and wage accruals. Other asset and liability accounts remained relatively consistent. Stockholders equity grew to approximately $404 million as of July 1, 2017, and that is up $10 million from the April 1, 2017 balance. Joe, that concludes the financial report.

Thank you, Dan. Well, we're very pleased with the quarter, our backlogs are strong, incoming order rate is excellent and demand seems to generally be increasing across most geographies in the country. But we're still faced with some challenges in supply chain, there are shortages in some areas of materials and certainly prices are increasing and there's continued price pressure, upward pressure on raw materials in parts and pieces. And secondly, on labor availability, which we've spoken about in the past, is still a challenge for us and presumably for everybody in the industry and other industries as well as I speak to other companies. It's interesting though in our business these challenges cut both ways for us because as a factory builder in a controlled environment, we can use materials much more wisely, less waste, the supply chain can ship to 1 location in large quantities as opposed to disparate locations in the site-built world. So it's a very efficient business for the suppliers. The same in labor. Labor availability, as I said, is a challenge for us finding enough people, specially qualified people. But what we do offer is people that come to work in a location get at least 40 hours of work a week, get employee benefits, healthcare, paid vacation, 401(k), all those sorts of things they typically would not have working for a contractor. So we have, we believe some advantages that are attracting at retaining labor versus our site-built counterparts. So those are challenges, let's say, that can affect us both ways, certainly in the near-term we're having some impact on our ability to increase production, which we are doing, but we'd rather be doing at a little bit faster pace than we're able to. And of course, we have to be careful with quality, and so we're not going to increase production beyond the capability of our people that handle that production. We continue to try to hire people in most locations. Another point I'd like to make is that if you look at the whole macro picture for demand for factory-built product, we think is very positive. For one thing, the median price now of the site-built home is greater than $350,000. This presents a challenge for many households because data indicates that 25 to 54-year-old cohort, of that only 40% can qualify for a typical mortgage, whereas 80% can qualify for a $200,000 price point home. And 80% of what our industry sells is less than $150,000. So with mobile home starts today, about 9% of all housing starts, and last year housing starts -- single-family housing starts were about 8,30,000 units. And by comparison to that it's to an average of about 1 million annually from that again since 2016, so housing starts have not risen to even their average level, which included some very difficult years. We think that this housing starts improve, we'll certainly grow with that, but also we think there's substantial opportunity for us to increase our shares of new home sales. There 2 demographics, again, we've spoken about it in the past, that our major buyers of our products is that first-time home buyer, first-move up buyer. It's basically the 25 to 37-year-old cohort. And then the boomer market, the 55-plus, which is also a good huge market, and seriously a very good market for our industry. And with some of the trends that while reading about with aging baby boomers, it plays right into the hands of our product, which is very efficient, energy-saving and of the lifestyle people are looking for. So the statistics are pretty encouraging. The median income of households headed by 65-plus -year-olds is about $47,000 a year. And their median net worth, excluding the home equity, is about $66,000 according to Census data. So if you look at that, and you can see that there is an opportunity. We often see this with our buyers. They can sell their existing site-built homes, which they have equity in, buy a factory-built home in a planned community and take cash for it, invest the difference, actually increase their disposable income and improve their lifestyles with, again, a home that's more modern, more suited to their needs, one story, not a lot of steps, is energy efficient and it's going to be an area typically that provides a lot of recreational lifestyle and social lifestyle they're seeking. So we think there's going to be tremendous growing need for that product as well. The markets we're in, geographically, including now most recently the Deep South with our acquisition of Lexington Homes in Mississippi, are strong markets, and we're delighted really to be in the south market. It's a market we couldn't really reach from our existing factories, so it's a kind of square in the middle of that market, which has been a good market for factory-built homes as well as a good market for homes in general. So that will be a work in progress. We have work to do there, its in effect, kind of a new startup for us, so it will take some time to get where we want to be, but I think we're right kind of where we want to be geographically with that acquisition. So with that, Kristi, we'll conclude our comments and be happy to take any questions.

[Operator Instructions]. Our first question is from Daniel Moore from CJS Securities.

Congrats on a very solid quarter. Wanted to start with shipment volumes for the quarter, only up a couple of percent. The industry is still chugging along at low double digit rates. You mentioned, you sold higher mix, higher volume of those multi-section homes. Just maybe help explain that discrepancy. If there's some reason why the total number of shipments didn't increase? And if you think of it in terms of number of floors, what does that increase in the quarter?

Sure. Thanks, Dan. And that's right, we of course have variability in our mix each quarter. This quarter, we did have a higher proportion of multi-section homes and that is actually the reason that you'll note the average sales price that you can calculate there, will be higher as well. If you did look at on a floor basis, it is substantially higher. We don't break that number out separately, but a good point you raised. And so that would be substantially higher if we broke it out that way. So I'd also note that last year's quarter was a strong shipment quarter on a unit standpoint, so by comparison, it was a tough comp, I guess, to of somewhat different mix, if you will, with fewer multi-section homes last year. But in general, we're increasing production and shipment volumes, but as Joe mentioned, also remaining focused on our profitability.

And stronger demands and your increased capacity utilization allow you to be a little bit choosier and sort of taking on or selling larger multi-section homes? Or is this more just a function of what the demand looked like this quarter?

Well, we tried to be, Dan. I think we have to kind of balance that with an ease of our distributors, our customers, wholesale customers. But yes, we can be a little more selective on the product, and for good longstanding customers what they need, but for newer customers or customers there's on high-volume, we can be a little bit more selective. So we'll watch that carefully and try to make maximum use of the production capacity we have. Every home takes up a space on the production line, every section of the home, and so if you're building a home that's 46 feet long and 16 feet wide, section of a home versus a home that's 16 feet wide and -- sorry 6 feet long, obviously, you're getting more square footage in that same production space and we sell square footage basically like any other site builder. So as Dan has indicated, the larger the home typically our revenues can improve and our margins can improve. And then typically to the larger homes you might have -- you might tend to have more upgrades and amenities. So yes, we'll try to pursue more of that business. And we're more [indiscernible] obviously, in our recurrence in profitability to factories [indiscernible] volume. That's -- it's not a strategy we have ever pursued. So we have to have a certain amount of volume to make the plant efficient, but we're not just trying to build as many homes as we can, we're trying to build good homes as can and make a reasonable return on those homes.

Vary helpful. Looking for financial services margins clearly rebounded against the near the top. Would you describe this quarter as being largely normal? Or was there still may be a slightly elevated level of claims activity?

More of a normal quarter, Dan. In fact, as you know the business has been a good returning business for us in general. So this quarter, was the quarter where you typically have higher levels of storm activity seasonally, in Texas, which is another larger state where we underwrite. And yes, this was a more normal quarter. The company also has taken some other actions in improving -- or opportunities for improvement such as rate increases that came about largely as a result of the excessive insurance industry losses in Texas last year. And so along with our competitors, we've raised rates in that area and also diversified further in other states. And then also made modifications to our coverage to improve the alignment we have for exposure goals. So all those things working together, in addition, having more normal quarter from claims standpoint, provided a good positive contribution from that business this quarter.

Got you. And last one from me and I'll jump back in queue. The increased loan balance, are you making more loans as a percentage of the homes that you are selling? Or is that increase more is a function of timing?

No. It varies as a function of timing. So we are internally making more loans, but not out of step with the general increase in volume in the industry and with the company in general.

Our next question is from the line of Howard Flinker from Flinker & Company.

This was always in my head. Please explain your taxes. The rate went down, is that because of the shift in insurance income?.

This is Dan. Howard, no, it was really the result of a new accounting standard that was required. If it wasn't for that, we would have had more normal tax rate this quarter. That new standard requires us to take the tax benefits that have always been realized from stock option exercises and include that as a benefit to our income tax expense line on our P&L. In the past, that was traditionally properly recorded as a benefit straight to equity and it did not run through our income statement.

I don't remember that. Yes.

Now with our fiscal year starting, this new accounting standard kicks in to place for us and certainly for other companies as well.

For you now, for other people January 1st?

That's right. And this is a requirement -- it's a required change.

Okay. Thanks for that. And just to clarify, last year's financial loss was property and casualty?

Yes. It was primarily created by the insurance business.

Our next question is from Alvaro Lacayo of Gabelli.

Just a quick question, Joe, regarding financing within manufactured housing. At the beginning of the year, there was some talk about duty to serve and getting the GSEs involved in helping financing for chattel loans. Can you provide us an update on what you're seeing there? And then if there's anything on the horizon that we should think about that could potentially help accelerate demand within manufactured housing?

Sure. Well, the GSEs, strictly, specifically, Fannie and Freddie, having indicated a strong desire to include manufactured homes in a larger sense, and larger way in their duty to serve obligations. However, they're very deliberate in their considerations, and they certainly do a lot of studying. We've been cooperating with them, supplying them data on our loan portfolios, the performance data, I think they're getting some data from other sources as well. They prefer to reviewing that data and they do have an intention of providing some type of program for chattel loans. We don't know that will be, we don't know what the size of it will be, there have been some early indications that it'd be fairly modest, we hope it would be somewhat larger. And we don't know how it will happen, whether they'll actually purchase loans if we originate or they'll provide some sort of insurance or something for those loans. We're not certain, but they intend to provide some sort of ability for us to -- or lenders like us to have a secondary market for those loans to be able to sell them off our balance sheet. And that's what's really needed, not only for us, but for other lenders and to bring in other lenders in the industry, I think we're hopeful, but we're certainly not holding our breath for that to happen, we're doing our own internal expansions. We're finding other sources for these personal property loans, that is, regional banks, community banks to have an interest in getting a more effective deal than they're able to get otherwise and a very good investment. For these loans, I've said before, but I think it's worth noting, these manufactured home loans performed very well. They have historically, and they do today. The 2 securitizations that our mortgage company did, CountryPlace Mortgage in 2005 and 2007 are performing admirably. All investors are getting their payment, their yields, we've had interruption, all through the time period of the Great Recession. And we as, in fact, as the equity piece holder, although at lowest trench -- tranche, I should say, of those portfolios, we're getting our cash flows as well. So loans will perform if underwritten properly and are serviced properly. We do both very well, as do some of our competitors. And when that's done, the loans will perform. The people buy our homes to live in them, they don't buy them to give them back. And clearly, the alternative is, if they can't make their house payment, they have to go back to some rental, and they don't really want to do that. They have their own home, their own space. They have more room, and often times the apartment rental would be more expensive than their payment. So they generally will find a way to pay for the home, the exceptions being some serious change in life event, a death or divorce or something like a loss of job. But generally speaking, the payment patterns are very good for these loans. So I think that's what the GSEs are seeing, and hopefully, they'll be able to step in and provide a market. But certainly they fulfill a large portion the duty to serve requirement because of the customers we serve in the affordable homes spectrum. So we're optimistic and work with them, but also going down other paths.

Our next question is from Daniel Moore of CJS Securities.

Is it possible, Dan, to quantify or maybe at least give the, in scripted terms, the impact of rising raw material costs and/or labor as far as your gross margin in the quarter is concerned?

Well, we really couldn't quantify that. Of course, I'll put it in the context of Joe's comments in his initial presentation, but one thing that I could mention is that we're able in our business model to pass through rising costs, whether they be materials or labor or otherwise, to the product in a fairly efficient manner because our build time is short on a home. There can be a little delay related to backlogs, and our backlogs currently are a little larger than typical, on average anywhere from 6 to 9 weeks. And in that period, we may not be able to pass them along immediate price increases, so there can be some delay, but generally, it's pretty efficient in that regard.

And it varies, Dan, by plant location, geographic area, number of suppliers in that area to those plants, so sometimes some markets have a little bit more competition, some have very little competition, so you might have a door supplier that kind of monopolizes the market, and you don't have a lot of choices, so you have to take the price increases. In other areas, you might have more competition. So if there is, we wouldn't really want to quantify it by the measures we talked about, I think, again, we have to be a little careful of all of our -- detail of our disclosures since we're one of the two companies in the industry that provides that kind of information [indiscernible] .

I understand. My question, in terms of Lexington maybe, you know, I was going to ask about accretion or dilution that contributed to the quarter, but short of that, maybe just update us on the progress you're making there?

Well, we'll be succinct in our answer to that, it's not an accretive acquisition at this point in time. But our intent, obviously, is to get it turned, so it is a contributor. I think our evaluation, and the purchase price, we faced in our due diligence on that entity reflected the fact that we have some work to do to get where we wanted to be. But to have a good location, have a good core group of people, a good facility and to build a good product, we just have to get distribution wider and we have to produce more units from a volume standpoint. So we're making those changes, and I think we're making good progress, but it's not a contributor at this point and in the short term, and in the immediate future, I'll expect it to be a contributor. I think, we'll make that progress as we go through this fiscal year.

I'm not showing any further questions. I'd like to turn the call back over to Mr. Joe Stegmayer for any further remarks.

Okay. Thank you, Kristi, and thanks all for joining us today. And we look forward to continuing to communicate our progress to you. Have a good day.