Cavco Industries, Inc. (CVCO) Q1 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the First Quarter and Fiscal Year 2019 Cavco Industries Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to your host, Mr. Joe Stegmayer, Chairman and CEO. Sir, you may begin.

Thank you, Bellerin. Welcome everyone to our first quarter conference call. We'll begin with Dan Urness, our Chief Financial Officer providing an overview of our financial results for the quarter. And then I'll make a few comments, we'll be happy to take your questions? Dan?

Thank you, Joe, and good day, everyone. Before we begin, we respectfully remind you that certain statements made on this call, either in our remarks or in 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 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. To our financial report. Net revenue for the first fiscal quarter was 246,000 – $246 million, up 19% compared to $207 million during the first quarter of fiscal year 2018. The growth was from the factory-built housing segment, where net revenue grew nearly $40 million. This is the result of 11.9% growth in homes sold and higher home sales prices. In addition, factory-built revenue includes $6.5 million related to changes made from the implementation of accounting standards, whereby we recognized certain subcontracted pass-through services for retail home sales on a gross basis, rather than net of associated costs as we did in the prior year period. Consolidated gross profit as a percentage of net revenue in the first fiscal quarter was 20.9%, up from 20.3% in the same period last year. The improvement was from – was primarily from home product price increases and operating leverage on higher production levels. We noted also that the gross profit percentage has partially decreased mathematically from the $6.5 million revenue related to accounting change previously noted. Selling, general and administrative expenses as a percentage of net revenue in the fiscal 2019 first quarter was 11.9% compared to 12.7% during the same quarter last year. The improvement was related to fixed-cost efficiencies gained from higher net revenue levels. Income from operations directly benefited in the amount of $1.5 million from unrealized gains on corporate investment, which starting this quarter, are required to be reported on the consolidated income statement instead of accumulated other comprehensive income on the balance sheet. The effective income tax rate was 18.4% for the first fiscal quarter compared to 24.9% in the same quarter of the prior year. The lower effective income tax rate is from passage of the Tax Act this past December, reducing the federal corporate rate to 21%. Further, the current quarter includes the deduction of $1.1 million for tax benefits from exercises of stock options compared to $1.4 million deducted in the prior year quarter. Net income for the first quarter of fiscal 2019 was $19.7 million compared to net income of $11.8 million reported in the same quarter of the prior year. Net income per diluted share this quarter was $2.12 versus $1.28 in last year's first quarter. Comparing the June 30, 2018 balance sheet, to March 31, 2018, the cash balance was approximately $177 million compared to $187 million 3 months earlier. The decrease was mainly from increased commercial and consumer-lending activity this quarter. Total commercial loans receivable increased from higher borrowings under the loan programs offered. Note that the balance at the end of the fourth quarter of fiscal 2018 was reduced by earlier payoffs on several programs as previously reported. Total consumer loans receivable increased from greater home-only loan volume, offset by the continued runoff of the securitized loan portfolio. Accounts receivable increased from sales growth during the period. Lastly, stockholders equity grew to approximately $476 million as of June 30, 2018, up nearly $19 million from the March 31, 2018 balance. Joe, that completes the financial report.

Thank you, Dan. Well, we are, of course, very pleased with the quarter. We are also quite optimistic about the outlook for the home building industry in general. Single-family housing starts are roughly 900,000 units at an annual rate, which is tracking still 15% to 20% below the longer-term average of $1.15 million. Existing home available for sale remains very low at 4.4-month supply. And new home inventory also remains at about 5.7 months, which is the same range as it's been for the past three years, and down 47% from peak levels. For manufacturing housing, in particular, we are seeing more traffic, retailers reporting improvement in traffic and particularly in the quality of the potential buyers visiting the stores. We're seeing, I think, a young adult homeownership rising. We've been speaking about this for quite some time now. We feel there is pent-up demand among the youngest cohort, the millennials, if you will. According to data just released by the Census Bureau, the national homeownership rate continued its recovery, averaging 64.3% in Q2 of 2018, that's about 60 points better than Q2 of 2017, and was the sixth consecutive quarter that showed year-over-year improvement. In absolute terms, our quarterly rate was the highest since Q3 of 2014. The young adults are really, we think, the needle mover, and they are more prone to housing changes as their circumstances change, that is new job, marriage, children and other factors. They happen to be the most cyclical age cohort with homeownership rates contracting more during the average economic downturns and rebounding at above average rate when the economy is on the upswing. In the second quarter, year-over-year increase in homeownership rate was led by the 30 to 34 year olds, 270 basis points better, and the next age is – next four oldest cohorts through 50 to 54 year olds were all expanding at an above average rate. So these are good signs for our industry and our product. The answer, one might say, for obtainable housing, as we spoken before, the medium price of site-built homes in this country depending what number you use are above $300,000, our homes typically will sell for in the $80,000 to $120,000 range. And that's admittedly without land. However, even with the land factor, we still come in considerably below the average for new site-built home. The homeownership rate for 25 to 39 years old peaked at 55.5% in 1980 and 2004. It's now running at above 46%. So as you can see, we have quite a lot of room to grow in that kind of first-time homebuyer. We have a better working relationship with our regulators, HUD, which we, again, have spoken about before. HUD seems more active and interested in manufacturing housing as a one of the solutions to the affordable housing needs in this country. The GSEs, Fannie and Freddie are working on new financing programs that they intend to launch soon. I think these will be fairly modest to begin with trial programs, but we do – we are optimistic that they will grow. And we are certainly grateful that they've taken a look, a serious hard look at the manufacturing housing industry again for financing programs that are on par with financing programs for site-built homes. Consumer confidence levels are very strong, it's certainly a good sign for us, and particularly among the 55-plus-age cohort that we have sold to for many years. Their consumer confidence levels are strong enough now that we're seeing those buyers come out to either buy a second home, or in many cases, buy their permanent and ancestral or retirement home. All in all, we feel very strongly that we're in a good position. Our 20 factories around the country are well located geographically. We expect demand to improve, driven by job growth and modestly easing credit conditions. And we feel we're very well set to capitalize on those growth factors. With that, Bellerin, we'll be happy to take any questions.

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

Good morning or afternoon Jon and Dan. Thanks for taking the questions.

Hello.

Obviously, impressed with quarter, Joe, I think you just outlined more green lights than I've heard in quite a while as far as the industry is concerned. I want to dig into the increased traffic that you're seeing, particularly in younger first-time buyers, is this regional or there's specific areas of even stronger demand than – household formation is on the rise but what do you think is the key drivers in terms of the attractiveness? How are they finding – new buyers finding you, anything that's changed in the last year or two that it seems like we're at a bit of inflection point here?

Right. I think the industry in general, and certainly, Cavco in particular, has been really focused on internet marketing for some time now. And I think we're starting to see the fruits of that for a while, we've been doing it for some time, as I mentioned. But the buyers weren't really ready or in a position to buy. But they were getting familiar with seeing our product on the internet. We invest a lot of time and money and effort in our Internet presence as do several other companies in the industry. And I think that creates just a better awareness of factory-built product as an alternative to other forms of housing. So I think that awareness is helping quite a bit. We really still don't have as many retailers as we'd like to have in the field. And I think we'll see some expansion among the retail and trade in this industry. I think we'll see some growth, some opening of new locations, and that would be helpful as well. But I think largely it's been motivated now by the pricing issues and the affordability and great need for workforce housing. As jobs have been created, I think that's the real key, the job creation has been very positive for industry and the confidence that comes with that job creation.

And any particular areas or regions that you would note?

I don't think so, Dan. I think we're seeing this around most parts of the country, certainly, there are some regions that are stronger than others, Texas, Florida has been very strong, that market, California has come on very strongly in the last year or two. But I think we're seeing that kind of activity in most parts of the country.

Got it. And in terms of capacity, maybe just update us where you are as far as current capacity utilization, progress that you're making on adding capacity as demand continues to grow, and in the interim, can we continue to grow at double-digit rates in terms of units as long as demand warrants? And 1 quick follow-up.

Okay. What is the...

I'll just start there by noting that we're at about 80% as utilization, Dan. That's up from last year this time, we were at 70%, and in that referring to the brick-and-mortar, of course, meaning that we have more space in our factories to build more homes, more capability to do so, but we are up from last year.

And we will look at and have been in fact investing in our factories either through modest expansions, opening up an idle facility we had in Austin, Texas for example. We have a couple other idle facilities that we can reopen. I think the biggest challenge really is, and we've talked about this before, is labor. The 3 Ls in the housing inventory I think that are keeping housing inventory tight and will for the foreseeable future are what I call the 3 Ls: Labor, lots and lending. So land availability, the lending, which we mentioned, and of course, labor availability is a real issue. Not only for us and our industry, but we see that among side fillers, we see it among our vendors, we see it among other industries. So that's really the biggest challenge the – as Dan said, the brick-and-mortar is not really an issue for us. We, obviously, have the capital. We have the land, several of our existing sites to expand and we can open up new plants in other areas. That's not so much the issue as if you build it, do you get the people to help run it? And that's been the biggest challenge and will continue to be, I think, for the foreseeable future.

Got it. And lastly for me, and then I can jump out. But the $20 this year and cash in the balance sheet and continuing to grow. Maybe I guess, you talked about financing starting to put the [indiscernible] there in terms of lending, how is that going in D.C. capacity to increase that investment at attractive rates?

Yes, we do. We think there are opportunities to invest in our CountryPlace Mortgage subsidiary. We're doing that now on a fairly measured basis, but there are more opportunities. And I think we are seeing more cooperation again in the financial marketplace that has more interest in this loan product, and as certain entities look for yield opportunities, and the certain people realize that these loan portfolios that is manufacturing home loans can perform very well when underwritten properly and service properly, and in fact, historically, they have. And we have two securitizations in our company that were done in 2005 and 2007, which are performing admirably with all our investors getting their payments on time and in full. And so we expect it will be a gradually more interest in this product. It's taking some time, I think, the manufactured housing industry is kind of up and recognized, but we're seeing a little bit more interest, I think, that will – if we can find that secondary market for manufactured home loans, I think we'll see more of that Cavco, more involvement in that part of our business.

And I won't make you guess as far as the date, but are we much closer to securitization or secondary market than we were perhaps year or two ago?

Well, thanks for not asking for a date. We certainly couldn't give one, but I think we're closer, there does seem to be, as it say, more interest, we're talking to more people. The problem has been, I think, there has been enough scale in manufacturing housing industry. And in fact, was not really apparent to a lot of potential investors as a vehicle they could use, and since we didn't have the size as an industry, the scale of loan availability I think that also forwarded or attempts to generate some interest, but I think that's changing somewhat now. I don't think we're going to see that market open up next quarter. But I do think we've made some progress and it might – not might be public securitization but there could be private investment in these loan portfolios as well.

Very good. Thank you. Congrats on a quarter obviously.

Thank you, Dan.

[Operator Instructions] Our next question comes from Greg Palm of Craig-Hallum. Your line is open.

Hi. Thanks Dan, Joe. How are you guys today?

Very good.

Great.

I wanted to maybe start with the kind of the demand environment. Some of the traditional homebuilders starting to report maybe slight decreases in traffic and order rates. And I'm just curious to see what you're seeing in your industry specifically from a traffic standpoint, from an order standpoint. Any change in the last two, three months compared to sort of year-to-date?

Not really. We're seeing incoming order rate is still quite strong. And there's certainly seasonal influences on our incoming order rates, but I'm up in Indiana at our facility here this week. And they continue to have a strong backlog in the Midwest region. And I'd say, pretty much around the country, we're seeing the same thing. There'll be weeks certainly that don't measure up. But overall, I'd say that the trend is still upward – steady and upward.

And ASPs were really strong in the quarter, just curious if there was anything unusual to note there, or maybe you're just starting to see some of those recent pricing moves start to flow through the backlog in the P&L, is that right?

Nothing specific to note there, that's right. We're seeing some of those cost inflation motivated price increases come through our backlog into our production. And that's had an impact, modestly improving and optimizing our product mix, and in some case that means larger homes sizes so that can translate into higher prices as well. There certainly can continue to be, and we expect it to continue to be some volatility in that average sales price that you mentioned, because we have such a diverse product mix and that can vary. But yes, generally up for those reasons.

Got it. And just sounds like you're putting a lot more emphasis into increasing the factory production rates, and I know you've got some [indiscernible] facilities and you've got some opportunities and the sister facilities. But what type of investments are you making? Can you make to improve the processes and inefficiencies in the existing footprint to get those rates up? Anything that you're doing specifically now or anything that you might do in the future here?

Sure. We're certainly looking at ways to ease the physical or mechanical process of building home in our factory. That is more devices to ease the physical burden of lifting and moving raw materials, lifting the parts that are made, parts of modules that are made off-line and putting or assembling the model line. These are all things that we're taking a look at to see what kind of automation can we brought. I would hasten to add that we're not talking about robotics that sort of thing. That really don't lend themselves to our industry, but we're talking about more mechanical conveyances and delivery devices to, again, help reduce the physical lifting, and we're also doing things to improve the flow of the product through the line, perhaps building more items off-line and building them ahead of time so that certain departments can move, the people can be flexible, moved to a certain other areas of the production line that are somewhat slower, so we're trying to cross-train people. Finally, we look at actually expanding buildings to create more throughput as we mentioned earlier. So this is not true. I want to say it, it's not rocket science, using a cliché, I suppose. But it's looking at ways that we can just make the product somewhat easier to build in terms of the physical activity. But it's still – building a home is still a physical effort and it will remain so. It's just we're trying to see and find methods that will reduce that. And thus, help us hire and retain more people. It's physical labor to build a home whether it's on-site or in the factory. And so we have the advantage to open a factory of trying to ease some of those burdens and also, of course, provide a much safer environment for the builders of the home inside a factory where they're harnessed when they're up on the roof they're harnessed if they were to slip, they're rested, they can't fall off a home. There are things that we can do that create a much better environment for the worker and will hopefully enable us to have somewhat of an edge in obtaining labor versus some other forms of construction.

Yes, makes sense. And Joe, you've touched upon it a few different times and ways, but I'd love to just kind of get your view on the financing market in general, whether anything's changed here in the first part of the year for the better? And what you're seeing out there from a cost and availability standpoint?

Well, I think the biggest current news is, again, the GSEs, Fannie and Freddie both taking very hard look and even behind the hard look, they actually have programs that they're about ready to introduce specifically for manufactured homes. And so this is a good move, it's the first time we've seen a real move like this in a long time. They seem very interested and sincere about providing financing for this class of home. And certainly, our elected officials seem to be behind this process. There are so many areas of the country where housing is chronically short. And again, where the working families supposed to live? And I think there's great awareness that the factory-built construction can address a lot of that need. So I'd say, back in the finance issue, we're pleased that there's some activity. We are nowhere near where we need to be, our financing is not on par with finance for site-built homes. But I think what the GSEs are doing now is it's stepping in that right direction. And if, down the road, they can also help provide some sort of secondary market for a chattel or personal property loans, that would be a huge step forward too. And we think that would be the next step after they will look at the land home financing and introducing programs there, we're hopeful that – and expect it, frankly, that they will look at providing some ability to do to source personal property lending, which as you know, Greg, is still a big financing method for buyers and manufactured homes, where the home is the sole collateral for the loan.

That’s a great color. I’ll leave it there. I echo my congratulations as well.

Thank you. End of Q&A

Thank you. I'm showing no further questions at this time. I would like to turn the call back over to Joe Stegmayer for any closing remarks.

Well thank you very much for joining. We look forward to reporting to you next quarter. We think the year ahead is very promising, and if you have any follow-up question, we'll be glad to take them. Thank you very much. Have a good day.

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.