Cavco Industries Inc (CVCO) 2020 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Cavco Industries, Inc. Third Quarter Fiscal Year 2020 Earnings Webcast Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference to your speaker today, Mark Fusler, Director of Financial Reporting and Investor Relations. Please go ahead, sir.

Good afternoon, and thank you for joining us for Cavco Industries' Third Quarter Fiscal Year 2020 Earnings Conference Call.

During the call, you'll be hearing from Bill Boor, President and Chief Executive Officer; Dan Urness, Executive Vice President and Chief Financial Officer; and Josh Barsetti, Chief Accounting Officer.

Before we begin, we'd like to remind you that the comments made during this conference call by management may contain forward-looking statements under the provisions of the Private Securities Litigation Reform Act of 1995, including statements of expectations or assumptions about Cavco's financial and operational performance, revenues, earnings per share, cash flow or use, cost savings and operational efficiencies. All forward-looking statements involve risks and uncertainties, which could affect Cavco's actual results and could cause its actual results to materially differ from those expressed in any forward-looking statements made by or on behalf of Cavco. I encourage you to review Cavco's filings with the Securities and Exchange Commission including, without limitation, the company's most recent Forms 10-K and 10-Q, which identify specific factors that may cause actual results or events to differ materially from those described in the forward-looking statements.

Some factors that may cause the company's results -- may affect the company's results include, but are not limited to, the risk of litigation or regulatory action arising from the subpoenas we receive from the SEC; potential reputational damage that Cavco may suffer as a result of matters under inquiry; adverse industry conditions; our involvement in vertically integrated lines of business, including manufactured housing, consumer finance, commercial finance and insurance; market forces and housing demand fluctuations; our business and operations being concentrated in specific geographic regions; loss of any of our executive officers; federal government shutdowns; and extensive regulation affecting manufactured housing.

This conference call also contains time-sensitive information that is accurate only as of the date of this live broadcast, Friday, January 31, 2020. Cavco undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this conference call, except as required by law.

Now I'd like to turn the call over to Bill Boor, President and Chief Executive Officer. Bill?

Thank you, and welcome, everyone. The message this quarter is one of continuing consumer demand and strong results from our operations for doing a great job focusing on quality, service and profitability. Very good demand stemming from the strong economy and well-documented demographic drivers continue to leave us optimistic about the industry as a whole and our prospects going forward. The big picture for the industry will continue to be driven by over 8 years of underbuilding, particularly undersupply of affordable units as well as by pent-up household formation demand. The long-term need for affordable housing is real and growing, and our efforts are aimed at being part of the solution.

December's industry MH Shipment Data is not yet in. But looking at the second half of the calendar 2019, basically July through November, industry shipments are up nearly 4%. So while the full year shipments will be deceiving because of the first half retail inventory reduction, the year-over-year comparisons are starting to clear up and show growth in demand. We've seen that in our wholesale sales, and we've seen that in our retail operations, where traffic is up year-over-year.

In last quarter's call, we commented that we are expecting backlogs and demand to carry us through the winter into the spring selling season. 3 months later, our backlog has held up well at 6 weeks, and it's enabled us to grow shipments.

Turning to financial services. Our teams had another outstanding quarter. In insurance, there weren't any major weather events impacting our policy areas. However, this shouldn't overshadow how well our team at Standard Casualty is balancing growth and risk diversification. To consider the results as solely driven by weather doesn't do justice to the great job they've been doing through time. Similarly, the lending operation is contributing strong results, not solely due to interest rates and home buying demand, but in large part due to the steady and smart approach to growth and risk management. Paying attention to details is everything in these financial services operations, and our teams are simply doing an outstanding job.

Regarding the broader lending environment, I don't have much to add to what I expect the participants on the call are already following. The GSEs remain constructive through their duty to serve commitments. Having said that, it shouldn't be surprising it takes time for programs like ChoiceHome and MH Advantage to gain momentum. These are very good programs that are making a difference, and we certainly appreciate the level of commitment by the GSEs.

Similarly, investor appetite and the prospect for a more robust secondary market for MH loans is building. All of these developments continue to move in the right direction.

And finally, I'd simply like to add a comment that recognizes the improving regulatory environment. HUD continues to make positive strides on behalf of the industry through reduced regulatory barriers as well as a streamlined process for code updates, and these are important changes. These changes reduce cost, and they result in a much more efficient process to get deserving families into quality homes.

So with that, I'll turn it over to Dan Urness to review the financial results.

Happy to do so. Thanks, Bill. Good day, everyone. Net revenue for the third fiscal quarter of 2020 was $273.7 million, up 17.1% compared to $233.7 million during the prior year's third fiscal quarter. The majority of the increase was within the factory-built housing segment, where net revenue grew approximately 17% to $257 million from $220 million in the prior year quarter. The improvement was from organic sales growth and the inclusion of a full quarter of Destiny Homes operations as the acquisition occurred in August of 2019. Housing unit sales volume increased approximately 12% overall, while approximately 5% of the improvement was from home price increases, which included a modest product mix shift towards multi-section home sales.

Financial services segment net revenue increased 24% to $16.6 million from greater unrealized gains on investments in the insurance subsidiaries portfolio, higher home sales loan volume and more insurance policies in force compared to the prior year. These increases were partially offset by declines in interest income from the continued loan portfolio runoff.

Consolidated gross profit as a percentage of net revenue was 21.9%, up 90 basis points from the same period last year. A higher gross margin percent was mainly from improved earnings in our financial services segment as the prior year period included a large hailstorm event in Phoenix. While smaller storms did occur this quarter in Dallas and Phoenix, there were no significant weather-related events. The factory-built housing gross margin percentage was 19.0%, up slightly from 18.9% during the same quarter last year.

Selling, general and administrative expenses in the fiscal 2020 third quarter as a percentage of net revenue was 13.5% compared to 13.2% during the same quarter last year. The increase was primarily from $2.1 million in amortization of premiums related to D&O insurance as the policies were purchased in December 2018 requiring only 1 month of amortization in the prior year quarter. We also recorded more sales commissions and incentive compensation from higher sales volumes and profits. Expenses related to the SEC inquiry were $900,000 this quarter compared to $1.3 million during last year's third fiscal quarter.

Other income net this quarter was $2.2 million compared to $318,000 in last year's comparable quarter. The company realized $300,000 in unrealized gains on corporate investments versus an unrealized loss of $2.1 million in the prior year quarter, amounting to a $2.4 million positive change by comparison. The current period also includes greater interest income from larger cash and commercial loan balances, offset partially by lower market interest rates.

The effective income tax rate was 15.5% for the third fiscal quarter compared to 21.0% in the same period last year. The current quarter included a $1.7 million benefit for the recognition of certain tax credits from the 2020 appropriations bill, most notably Energy Star credits. The effective income tax rate decline from the prior year is partially offset by lower benefits from the exercise of stock options.

Net income was $20.9 million, up 56% compared to net income of $13.4 million in the same quarter of the prior year. Net income per diluted share this quarter was $2.25 versus $1.44 in last year's third quarter.

Next, Josh will discuss the balance sheet. Josh?

Thanks, Dan. Comparing the December 28, 2019, balance sheet to March 30, 2019, the cash balance was nearly $217 million, up from $187.4 million 9 months earlier. The increase is from net income and changes in working capital, repurchase of securitized debt and cash paid for the Destiny Homes acquisition. Prepaid and other assets increased mainly from the land exchange that occurred last quarter. Property, plant and equipment, goodwill and other intangible balances increased from the Destiny Homes purchase. Certain balance sheet line items were affected by the new lease accounting standard, which was implemented at the beginning of this fiscal year. As a reminder, this accounting standard requires that all leases be recorded on the balance sheet.

The current portion of securitized financings and others declined from the repurchase of securitized debt that occurred in August of 2019.

Lastly, stockholders' equity was approximately $596 million as of December 28, 2019, up approximately $66 million from the March 30, 2019 balance.

Bill, that completes the financial report.

Thank you, Josh. Joelle, I think we'll just go ahead and turn it right over for questions.

(Operator Instructions) Our first question comes from Dan Moore with CJS Securities.

This is Stefanos Crist calling for Dan. So first, could you just maybe talk about the underlying demand trends, traffic at the dealer level and your expectations for backlog going into Q4?

Yes, I can talk generally about what we see. I mean, we've talked in the past that the big question everyone's trying to always keep a finger on the pulse of is the end consumer, the end homebuyer demand. And we don't talk about specific numbers, but we do look pretty closely at our Palm Harbor Village's operation for an indication. Now they're not national, but they cover a pretty big and important region. And as I mentioned in my opening comments, when we watch those year-over-year trends, traffic is up and deposits are strong and conversions are strong. So it kind of just supports the whole thesis that, while wholesale shipments are something we all track as well, when you're really trying to keep a finger on the pulse of consumer demand, all the indications we have are pretty positive.

(Operator Instructions) Our next question comes from Greg Palm with Craig-Hallum Capital.

Congrats on the good results there. I guess maybe just start with a housekeeping item. Could you break out what your organic growth rate was in the quarter and maybe your overall unit contribution from Destiny, if you have that handy?

We don't break it out separately, Greg, but I can -- we had pretty good growth this quarter, as we mentioned in our opening statements. And I would break it down roughly that 1/3 was related to Destiny, and then another 1/3 related to organic shipment growth, and then the final 1/3 related to the higher prices.

Okay. So you're talking about 1/3 of the revenue increase in the quarter, that's what you're talking about, 1/3, 1/3, 1/3?

Yes. That's right. We had a 17% increase and I'm just breaking it down roughly 1/3, 1/3, 1/3. That's right.

Perfect. That's helpful. In terms of the uptick in financial services revenue growth this year and it really accelerated this past quarter, Dan, you talked a little bit about it, but anything to note there in terms of exchange of strategy? It's really been interesting to see how that's accelerated through the year.

Yes, you bet. I'll just mention one thing there. And it's actually in our press release, but we have -- part of the increase is a pretty big spread in just how we have to record unrealized gains and losses on equity investments. So we had a $300,000 unrealized gain in the equity investments in the portfolio in that insurance company. Well, this quarter last year, it was a $900,000 loss. So that's $1.2 million of the increase. And then in addition to that, of course, we had the growth in loans that are being made, loan activities up and then we also had -- have a larger portfolio, larger book of business in our insurance business and revenue growth from that area as well.

Okay. That makes sense. And then just sticking on the financing side of things here. Sounds like a few of your competitors, (inaudible), CountryPlace, have announced some new programs, really aiming at lower FICO scores. So I wanted to get your opinion on how that might improve overall accessibility to financing industry-wide and whether that's something that you expect to follow suit with CountryPlace as well?

Right. Do you want to take a shot?

Yes. And we definitely have noted some of those programs that are coming out, and we're encouraged by it. I think lending has been a constraint. It's pretty well discussed in the industry. So no one wants to see the industry get over its skis on anything like that, but I think we're far from that at this point. So we think it's a good development. And as far as CountryPlace Mortgage, I guess, all I can really say is we're constantly kind of evaluating and looking at where we should focus our origination efforts. That's an ongoing process in the company. And we see some opportunities there. So we're going to kind of continue doing what we always do, look for opportunities in our origination strategy and pursue them. So the loosening up, if you want to say that, of lending programs, I think, is right now at a very healthy pace. It's not something to be concerned of. It's good.

Got it. Okay. Do you have an opinion or maybe I don't want to say a target, but just sort of an own assumption of maybe what the industry growth rate might be calendar year '20 versus calendar year '19 wholesale shipments? You gave a lot of color on sort of first half '19, second half and related growth rates. So I'm just curious if you have assumptions sort of built-in or not.

We don't really have a pin-down projection or assumption. We kind of tend to shy away from doing that and getting too obsessed about trying to predict it. But I do think that without diving too much in the weeds, I think about this a lot and maybe it's time to just let it go into history. But 2019 might be looked at as kind of a flat-type year, but you got to always remember that there are a lot of sales that were pulled from 2019 forward into '18. So that was really what I was trying to get at in my comments that once the dust has cleared on that inventory, a retail inventory situation, which we're all tired of talking about, once that dust is cleared and you really look at year-over-year on more comparable months and quarters, there's a lot of reason to see that right now, the industry is growing in kind of low to mid-single digits, and we don't see that changing.

And how do you view the inventory situation out there? I mean, is it cleared entirely? Is it cleared in most regions? And I mean, how is sort of the level of inventory either at your own stores or from the independents in your opinion?

I'd venture to say it's largely cleared. I think that issue is quite behind us.

I'm not showing any further questions at this time. I would now like to turn the call back over to Bill Boor for any closing remarks.

Okay. Not a lot. I really appreciate people's interest. We're always available to continue the discussion. Thanks a lot for joining us today, and have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.