Cavco Industries Inc (CVCO) 2007 Q2 法說會逐字稿

Welcome to the Cavco Industries, Inc. second-quarter fiscal year 2007 conference call. During the presentation, all participants will be in a listen-only mode. Afterward, we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded Friday, October 20, 2006.

It is now my pleasure to turn the conference over to Mr. Joe Stegmayer, Chairman and Chief Executive Officer. Please go ahead, sir.

Thank you, and welcome to our second-quarter conference call. We need, of course, to remind everyone that we are subject to the Securities Acts of 1933, 1934, 1935, et cetera, and that any future-related statements we might make, any statements referring to any future events, are not to be relied on, and we have no obligation to follow up with any other issues on such matters. The full statement on forward-looking statements and disclosure are incorporated in the press release.

With that, again, welcome. Although we broke a string of positive quarterly comparisons, the second quarter was still quite respectable. Sales were $43 million, down $4 million from a year ago. We did react quickly to the market changes we experienced and, I think, controlled costs very well. Earnings were a solid $3.2 million after taxes for the quarter.

Unfortunately, the concerns we expressed on the first-quarter conference call three months ago proved to be well-founded. We witnessed a sudden slowdown in the rate of incoming orders during the second quarter. We worked through our backlogs and have adjusted our production schedules to match current demand. The weakness we have experienced is fairly consistent among the various geographic areas in which we participate. However, California and Nevada have been somewhat more affected by the slowdown.

It's difficult to identify the primary cause or causes of the rapid slowdown. There are no obvious or significant recent changes in the manufactured housing environment. Interest rates have been fairly stable, the employment statistics remain favorable and our industry's distribution pipeline inventories are not significantly overstocked, a factor that would typically trigger a drop in factory orders.

It does seem as if we're caught up in the overall downturn in site-built home sales. All the negative news about the housing market does not help to motivate potential buyers to action. In situations where consumers plan to purchase a manufactured home contingent upon the sale of their site-built home, they could well be having trouble doing that, given the relatively sudden shift from a seller's market to a buyer's market.

Some of the steps we have taken to deal with the challenges include aggressive marketing to develop additional retail distribution, and this is something we were unable to do these past two years because of production capacity constraints -- now we're out there trying to solicit new business; the introduction of more models to our already extensive product line, where we're including design features and price points to appeal to an even broader market; and an increased emphasis on our customer building for developers and planned community operators.

We, of course, will not predict where the economy or specifically the housing market is going. However, we do the feel that our people are facing the challenges well. We continue to adjust quickly as we possibly can to the changing market conditions, and of course, we'll be looking for pockets of opportunity to exploit our home-building capabilities.

With that, I will turn it over to Dan Urness, our Chief Financial Officer, who will summarize some of the financial results and information.

Thank you, Joe. Sales for the second quarter of fiscal year 2007 declined 8.6% to $43.1 million, compared to last year's second-quarter sales of $47.1 million, as our wholesale shipments were reduced during the quarter.

Gross profit for the second quarter was $8 million, down from $9.6 million last year. The gross profit percentage was 18.7%, compared to 20.4% last year. The gross profit percentage was challenged by lower production efficiencies, a less favorable product mix and lower margin results from the new Texas plant during the second quarter of the year.

Selling, general and administrative expenses were $3.7 million or 8.6% of sales versus $4.2 million, which was 8.9% of sales last year.

Interest income was $619,000 for the second quarter, compared to $364,000 for the same quarter last year. The increase is a result of higher short-term interest rates, combined with a higher cash and short-term investment balance, which was $61.2 million at September 30, 2006, compared to $50.7 million at September 30th last year.

The income tax rate provision for the quarter was recorded at 35%.

Second-quarter net income of $3.2 million or $0.49 per diluted share compares to $3.5 million or $0.52 per diluted share last year.

In summary, we have acted quickly in the current downturn to trim costs where it makes sense, and our balance sheet continues to strengthen, with higher cash and short-term investment balances, no debt and shareholders' equity growth this quarter of $3.5 million.

Thank you, Dan. I believe we are ready to take questions.

(OPERATOR INSTRUCTIONS). Paul Nouri, Sidoti & Company.

When we think about increasing the commercial business, how significant is that, and what kind of levels are we at now?

The commercial business has been something we've been involved with for years, and for those on the line who are not familiar with what we are talking about when they say commercial, they are generally factory-built structures that are used for offices, showrooms, sometimes medical facilities. We've built them for all those sorts of things. We've built showrooms, for example, for some of the major site builders that they use in their subdivisions as sales offices and display centers.

So, we have done that for many years. We, of course, are stepping that up somewhat in this environment because, again, we have the capacity and there seems to be a need for commercial product. But it's still a very small part of our business, and will not become a primary part of our business that will become probably increasingly significant in the months ahead.

How quick are you able to ramp that up? When you say in the months ahead, maybe two quarters away, even? As soon as that?

Yes, I would say you're looking at a couple of quarters before -- because, typically, to go out in the market for that product and then to engineer what's needed, you are certainly looking at months, not weeks, to get into production on some of that product. That's assuming we get orders and what the timing of those orders is.

So, it's not something that just happens instantaneously. I don't want to mislead anyone. But it is something we have experience doing, so it's not something that we're unfamiliar with. If there's business out there that makes sense for us and we get it at attractive margins, sometimes commercial business is a pretty thin-margin business, so we will have to see what opportunities there may be out there for us to pursue that business. That's what we're doing right now.

You have a very high cash balance, and from all intentions it will grow over the next couple of years. What is your one, too, three priority? I guess the possibilities are buyback, dividend or acquisitions.

Yes, I would say all those and maybe some other things. Certainly, acquisitions are a primary potential use of our cash and borrowing capacity, if we were to need it. The other issues you mentioned are certainly always under consideration by our Board, and we will continue to look at those.

We have just been public for three years now, and the cash has been building nicely. It's certainly more cash than we need to run this business. However, as I've indicated before, we are not going to rush out to spend it just to employ it. We're going to find good opportunities with attractive potential returns in businesses we understand, primarily manufactured housing and factory-built structures.

What prevents gross margin from eroding further?

Well, I think what prevents it would be moderation and declining business, because capacity utilization will affect margins from an efficiency standpoint. Any pricing competition in the marketplace, if we were to see significant price competition, I suppose that could have an impact on margins.

Dax Vlassis, Gates Capital.

What was your production rate in the quarter, as far as the sections per day go?

We produced just over 25 floors per day.

How does that compare to the first quarter?

It's down from about 29 floors of day in the first quarter.

What is your total backlog? Is it down from the $11 million or down year over year?

It's both. It's certainly down year over year. Yes, it is down from the $11 million. As we indicated, we kind of worked through our backlog. We are now at about just less than two weeks in backlog.

So that is what, in dollar terms?

It would be about $5.3 million at quarter end.

In capacity utilization, with the additional capacity you have in Texas and the slower startup, where would you say that would be in percentage terms?

We are probably running around the 75% range now.

If I look at the industry units, in the year ended 2003, December 2003, 2004, 2005 we have been bumping along 130,000, maybe. Adjusting for FEMA, it has declined a little bit from that, and it looks like this year maybe, I don't know, I guess people are estimating around 120,000? Is that what you have seen for this year?

Yes, I think you're right. Most of the estimates are in the 120,000, 125,000 range.

I thought kind of that the 130,000 was kind of the trough kind of range. We seem to be heading a little bit deeper than that. Do you have any sense as to where we are on an industry basis, currently?

Well, we have been, as you indicated, been in this trough now for several years. As we have indicated before, and we have been pretty consistent on this score, we don't see a catalyst to drive manufactured home business near-term to any substantially higher levels. That's not to say that we don't think there's opportunities for us to do our business and to grow our business.

But the financing is what drives this consumer durable product. There's just a total lack of financing in the traditional specialty financing arena. From a land/home traditional mortgage arena, there is financing available, but the competition for that financing from the site builders is very steep. So, until we attract more financing for the product, and probably until we see less competition from the aggressive financing terms and underwriting of the site-built market, we're going to be faced with this stagnation.

Given that we are kind of trending down further from probably where most people thought this would have bottomed out, has that improved your odds, or improved the potential for employing the capital for acquisition in the past few months?

Well, I'm not sure that it changes quite that quickly. But I do think that the answer is yes, we will see some opportunities to employ that capital, given what is going on. I think that could be maybe an opportunity presented by the slowdown or the continued slowdown. Most of the folks that have survived, now, these six years of downturn in this industry are generally pretty good operators. They are not compelled to sell. However, certainly, another slow year like this might make them realize the potential for teaming up with a company like Cavco, maybe see that as a more attractive opportunity than they once did.

Jeff had a couple questions for you, Joe.

With the slowdown here, is the expansion in Arizona still contemplated, or are you delaying that? In connection with that, what do you expect your CapEx to be for this year and next year?

Our expansion program in Arizona -- again, for those not familiar, we purchased land here in the Phoenix area to build, initially, a replacement plant for one of our other facilities. That is still in process. We are still going through issues with the government authorities on regulation. But we're almost there; we almost have those approvals.

I think, to your point, we certainly will be revisiting the timing of that construction. I think we still want to build the plant, and we have very attractive land to do it, which we have already purchased on a very favorable basis. We're going to go through with the plant. It would be a question of the exact timing. Obviously, we will look at that in light of what's going on in the market currently.

But what would you contemplate your CapEx being for this year or next year?

Well, until we make that decision whether we start that construction here in the next two quarters, we couldn't say on that score. We would say that, ex- that new plant project, our CapEx should be in the range of probably $500,000 to $1 million. We have some expansion projects that are going on in existing plants.

How much was the new plant supposed to cost?

I'm sorry? Say again?

How much is the capital required for the new plant?

The new plant would be a project of in the $12 million to $15 million range. Of course, it would not all be spent in one year. If we started this year, we would probably be looking at spending probably on the order of $3 million to $5 million that would get spent this year.

Your retail sales are up year over year, which is average price, I guess. But was there also inventory liquidation at your retail level, and do you think that was the same for the industry?

Our retail has been doing increasingly well. It did better this quarter than it did last year in this quarter. Yes, we have brought inventories down somewhat. Our inventories have been in pretty good control, though, for some time now. So, there wasn't a lot of adjustment there.

With respect to the industry at large, because we just have a small group of our own stores, most of our distribution is through independent retailers. As I indicated in my comments, we don't see inventory shifting. It hasn't come down; it arguably has gone up somewhat. But we don't see it as having gone up appreciably, to where it has really been a huge challenge. But with sales declining, obviously, some of the retailers probably have a little bit more inventory than they would have typically had over the past year or so.

I think that can be worked down fairly quickly. It's not the kind of balloon or glut of inventory that the industry saw back in the late '90s -- no, nothing of that sort at all. But probably a little bit larger than it needs to be, given current demand.

Any move in repossessions or anything like that?

No. I think most of what we're told by the finance companies, repossession levels are very low, based on the strong underwriting standards of the past six years. There's still some what I would call maybe legacy repossessions from loans that were made pre-2001. But of course, those are declining in number, and when that home is repossessed, it is now generally five, six or more years old. So it's not this competition to new homes that those repossessions once were, when they were new repossessions or very young homes, if you will, that were repossessed.

Kathryn Thompson, Avondale Partners.

The first question is on gross margins. How much of the decline is attributable to lower capacity utilization, other than mix, and Texas?

I don't think we're going to go there, in terms of breaking down our internal gross margin. It is a combination of all those things. Certainly, capacity utilization, and sometimes difficult to put a figure of finger on that. But lower capacity utilization results in somewhat less efficiency. Lower backlog results in less efficiency, because you can't plan your production as well. You can't organize the production lines as well with product, because you do have such short lead times you are working with.

So, it's certainly that. Texas has had an impact, obviously, as we indicated it would in the startup phase. So all three of those issues are issues. But we don't really want to get into trying to dissect.

Let me put it this way. Is it safe to say that a majority of the pressure is just a lower production rate?

Well, I wouldn't say necessarily a safe statement to make. Texas, lower production rate are the two primary reasons.

I know you gave capacity utilization at quarter end. Has there been any change since the close of the quarter?

No. I think the 75% I mentioned kind of reflects our current rate.

Also, if you could just give a little bit more color on your California, Arizona and Nevada markets, what changes have you seen in terms of sales since the quarter end? When did they really start going soft? Any other kind of updates on what you're seeing in those states? Finally, just to remind us, the percentage of your sales from each of those states?

Well, California accounts generally for 15% to 20% of our revenues. We started seeing things slow down through the quarter, actually. It occurred through the second quarter. It happened very quickly. It was a pretty sharp downturn. Not a lot of indication or signs that it was coming, either.

Nevada, the same way. We actually have been making some progress in Nevada, increasing our share of market there. All of a sudden, orders slowed dramatically in that state as well. Some of that may be in Nevada, which is a very small part of our sales.

In fact, it really hasn't been much of a factor for us in recent years, until we have increased our distribution there these past six to nine months. We had expected it to become a more import market for us, and I think it will. But in the short term, I think that state has been affected, again, by the slowdown in California, because a lot of people were migrating from California into Nevada, buying homes, either primary homes or second homes. I think that's certainly affected us.

The majority of our business, of course, is still here in the State of Arizona, which has done reasonably well. It's slowed down, certainly, but not to the same extent or nature that California has.

Arizona is still about 40%?

No. Arizona accounts for about 65% of our business.

Looking forward, I know has been a lot of focus in the Southwest. But do you have any plans for expansion out East? Would it be through acquisition or building on your own? What are your thoughts in terms of expansion, particularly eastward?

Well, again, this is probably a little more specific than I would like to get. We have said in the past, and we still look at, from a strategic standpoint, at expanding our business geographically into other regions. We have a strong position here in the Southwest, and we would like to look at trying to establish a similar sort of position, over time, in another region. That could be the East, but there are obviously some other regions of this country that have been very attractive over the long term for manufactured housing.

Frankly, right now, there's no regions that are particularly attractive for manufactured housing, as you well know. Florida is down as well. But we're not looking at what is going to be happening here over the next quarters or the next year or so. We have been looking to establish a position, a beachhead, in an area that we think has long-term potential. There's certainly a number of those around the country.

Given your experience in the industry, what are you hearing in the market in terms with -- I know that we have all been trying to predict the bottom for the past three years, I feel. What are you hearing in the market right now that would give you some confidence that we are near a bottom now?

Well, I think that this base level of business we are doing is pretty much -- should be somewhere at the bottom. Again, we have been somewhat more bearish than most along here. But I do think that we're running at a level that -- those are attractive buyers from a credit standpoint. They are able to get financed.

What we're missing, of course, is the people who traditionally bought our product because their credit was somewhat more challenged than the average home buyer. We are not getting those buyers bought. So I think we can bump along at these levels for some time, just based on demand from those above-average credit buyers and from land/home transactions.

I think there's also opportunities for us, for example, from a developer's and standpoint and planned community operator's standpoint, were we have been participating for a number of years. Our product lends itself towards developers and community operators, because we do a lot of custom work. We design homes for developers, for their specific operation and development, on an exclusive basis. We do a lot of engineering and design work, both exterior and interior. We will build units designed size-wise for specific projects.

So, I think that custom ability that we have will enable us to continue to pursue some of those niches which are not traditional, necessarily, traditional MH kind of markets; they are not traditionally financed, too, not traditional channel financing. They are either subdivisions or land/home transactions or, if they are in planned communities, they are generally in the 55 and older communities, where the buyer is somewhat more affluent, sometimes even paying cash for the home, and the financing, again, is not a challenge.

So, I think that's what we have been doing. It's what we will continue to do. We can't sit and wait and hope channel turns up based on some new finance company coming into play. I think that could happen over time, but certainly it's not our gameplan.

Michael Corelli, Barry Vogel & Associates.

Congratulations on a pretty good quarter in a tough environment. On your SG&A expense, how did you manage to get that down so nicely in the quarter?

Well, thank you. On SG&A, I think it's something we watch closely every quarter, whether business is good or otherwise. Obviously, as we see things slow down, we try to make the necessary adjustments quickly. Some of that, however, is almost automatic, because a lot of our management compensation is tied to profit, bottom-line profit. So, as we see business slow down somewhat, we have an automatic and immediate reduction in some of these overheads based on incentive compensation. But we look at other things as well.

One thing we don't want to skip on, and in fact we redouble our efforts, from a marketing standpoint. So, that's probably (indiscernible) could be down lower. But we have actually been looking at adding people and spending more effort on the marketing sales side.

As far as the industry, it sounds like it's safe to say at this point that in the short term you don't really see any catalyst for a reasonable turnaround?

I do not, no. I think, again, my feeling is that we have to find these pockets of opportunity that I referred to. I think that it can include doing more with developers, using our product instead of developers building on-site, because of the obvious advantages of using factory-built homes, from the standpoint of time savings and not having to manage contractors, and actually getting a product that is very high-quality and designed the way want it, at a price lower than they can build it for themselves.

But that's a long-term effort, because sometimes the developers have a long term in developing their property, getting the land entitled. Sometimes it's a question of convincing the developer to try factory-built product versus building on-site. So, although it takes a long time, those are areas we feel can be very fruitful for us.

Jay McCanless, FTN Midwest.

You were talking about communities earlier. Have you seen an uptick in any of that business, whether it's retirement or planned lifestyle, any of those?

We have seen that business grow for us in our areas, with our product, pretty nicely over the past several years. I would expect that we'll get a better indication of that this coming quarter. Because in our markets, for example, being here in the Southwest, it is a destination location -- Phoenix, Tucson, of course, some of the California markets are destination locations for the 55 and older communities.

So, for example, the seasonal livers, what we call the "snowbirds" who come here for the warm weather in the winter -- they don't really start coming until later in the fall, into the winter. So we will have a better feeling for that traffic and the buying, I think, into next quarter. But the early indications from some of our planned community operators is that they feel pretty optimistic for those buyers. But again, we don't have any confirmation of that yet.

In the areas that you guys serve, what -- I don't know how much you monitor it. But are you all hearing anything about site-building or site-built lending standards starting to tighten? Are people starting to ask for more down payments, proof of ability to pay, things of that nature?

We are hearing more talk anecdotally, I guess you might say, along those lines. We do understand that Fannie and Freddie have tightened up somewhat there. We have heard about letters that have gone out to loan originators that they need to tighten up.

I think it is going on; it certainly needs to happen. I think the site-built market has been doing many of the things that this industry did back in the '90s. I don't think that's healthy, long-term.

Everyone seems to be focused on site-built inventory and how there's too much out there right now. In the areas that you guys serve, would you say that that has bottomed out? Or do you all see more site-built inventory hitting the market? What is your take on it?

Well, in the markets we see, we don't necessarily see a lot more inventory coming on. There is inventory, excess inventory, in these markets. Of course, the resale listings have risen.

So, I think it's a very competitive market. I don't think there's a lot of aggressive continuation of the building. I'm sure there are some projects that were already underway, the land was entitled and they will go ahead and build out. But of course, we have seen a lot of the site builders back away from options they had on land, so I think it has slowed down quite a bit.

I wanted to ask you about the commercial side of the business. Do you all have any idea of what the potential market size is for the type of structures you all are wanting to build? Also, to add onto that, who would you all be competing against in that? Would it be commercial construction firms that do on-site, or are there specialized modular commercial construction companies you go up against?

Yes, there's a number of companies that participate in that industry. I think a lot of them are privately owned, but there are some publicly traded companies that build commercial product. Again, we would be looking for niches here. We wouldn't look to compete on a national basis with some of those firms. But where our plants are located, there's certainly a big market for those products.

Generally, what they are is office units that some of the rental operators, the leasing companies, buy to lease out to construction sites and for office units in a variety of uses. That's primarily what we would target, the office units and for the leasing fleets. We understand there's sort of pent-up demand or fairly long leadtimes that might provide some opportunity for us to help out and supply them some product there. I can't tell you what the size of those markets are, offhand. I know that they are very large. But again, I don't want to mislead anyone; this is not something that just happens overnight. We've built this over time, and we've made a commitment to be in that commercial business for the long term. It's not something you can hop in and hop out of.

As I said earlier, we have been in it for quite some time. But, as the home-building business was very strong the last couple of years, it wasn't a big part of our business, and kind of took a back seat. Now, what we're saying is we are looking at committing some production capacity to that product, and we'd have to do it as the home-building business picks back up again, too, which we think we can do. With the new facility we will be eventually bringing onstream, we'll have that additional capacity which we haven't had in the past.

Tony Gleason, Neuberger Berman.

Could you talk about financing a little bit more? What kind of rates and terms are buyers of manufactured homes looking for or looking at today, say, versus their site-built counterparts?

I think the rates for a land/home transaction are pretty competitive with traditional site-built rates, just on the face of the rates themselves. Sometimes they are somewhat higher, 50 to 75 basis points higher. The real difference is that we don't have, as an industry, the tools that some of these site builders have been using -- the zero down payment programs, the interest-only programs, the step rate mortgages. We don't have them at all, and sometimes -- or we certainly don't have them to the extent that they have those tools available.

So, that's where the primary difference is. The buyer might have to come and buy a manufactured home and have to put in a real 5% or more down payment, and they might be able to go to a site-built subdivision and pay little or nothing down. That's tough to compete with. That's the primary difference. It's not so much the rate itself, but it's those assistance programs where we really fall behind.

I would presume, then, that -- in the past, it was more the financing companies were offering those variable rate mortgages or no money down. I suppose now it's really the builders offering those terms to clear inventory out. Is that the right way to look at that?

No. I think they have been offering those programs all through these boom times. I think that's certainly a reason that site-built housing -- part of the reason, anyway -- site-built housing has enjoyed such a long, strong run, is that financing has been very attractive and very affordable. I think they've probably brought a lot deeper in the credit spectrum than, certainly, our industry has been buying in recent years.

So, that has been going on for some time. What we would look forward would be some ceasing of that activity, some decline in those programs. I think what the previous question was about was are we seeing some of that tightening. I think we are. I think we, as a nation, we in this market are seeing some decline in some of those programs, although they are still out there.

As you mentioned, I think some of them may even be exacerbated because of the interest in moving inventory -- maybe not so much from a rate standpoint but, again, from some of the incentives they may provide.

What is your hunch in terms of in the important markets that you serve? How long do you think some of the site-built inventory takes to get cleared from the market? Is that a three-month or a one-year proposition?

I'm not sure I'm the best one to answer that. I think probably the people in the site-built world can answer that better than I can, or the analysts. But in our given markets, certainly, probably, there are months of supply of product here -- not years of supply, months of supply of product -- when, in the past, not that long ago, people had to wait in line to get a home.

I'm not talking about the extremely exaggerated stories of some parts of California, but I mean just wait in line to get a home in terms of had to wait to get their home built, and there were no price discounts, that sort of thing. Now, a person obviously can find a home very quickly and can find it with incentives.

But it's not a question of years of supply; I think that they are somewhat overloaded. I would think that they could move that product through, I would guess -- and its purely a guess -- that you look at 6 to 12 months they could move the product through in our markets.

In terms of other services, some other folks in the industry have mortgage operations and insurance companies and those sorts of things. What are your thoughts on those? Do you need or want any of those businesses?

We're not prepared to move in the finance company direction at this point. It certainly can make sense for some companies, I'm sure. We don't have the scale, the size for a finance operation at this point. Frankly, we really don't have the interest. I think we prefer to work with both the specialized lenders and mortgage brokers and the major land/home lenders that work conventional mortgages. I think it works very well for us; it works well for our distribution.

If we had our own finance company -- it works better, really, if you have a captive distribution system, which we do not have. So if you have a lot of company-owned distribution that can feed that finance company, that probably makes more sense.

(OPERATOR INSTRUCTIONS). Stefan Mykytiuk, Pike Place Capital.

The last couple of years, it seems like the seasonality of your business got taken away, kind of overrun by just the strong marketplace. Can you just remind us historically what the seasonality of the business was in normal times?

Sure. Our fourth quarter -- meaning January, February, March -- has traditionally been our strongest. The upcoming quarter, third quarter, has typically been a slower quarter for us, for a couple reasons -- one, because you generally have the vacation shutdowns in December, and then I think it's just -- so you lose one to two weeks of production time.

Then, generally, the housing market seems to be somewhat slower during those holiday seasons. So that's generally -- and then, the first and second quarters are fairly comparable, typically, in demand.

So, it would be a while -- if things were going to get better or resume back to normalcy, if you will, you would probably see the orders later in the year, maybe, for that March quarter? Is that what you would -- in a normal year, is that what you would expect as your orders to kind of build through this part of the year to be produced in the March quarter? I'm talking about, again, not a forecast but what you would have seen historically.

I think that's accurate. The only modification I would make to that statement would be that, as opposed to orders building now, since our orders generally are -- come in as short leadtime orders, that's one of the advantages of factory-built housing. The retail and the consumer can get it faster. So, what we typically see is the rate of incoming orders increase in that January through March period. But yes, your comment on the seasonality portion is certainly accurate.

Then Texas -- maybe can you give us a little bit more? I guess the plan originally was that that would be around breakeven now. Is that pushed off another quarter or so, because it has been a little slower to get going?

Yes. What we're basically indicating in the release is that it takes a little bit longer. We are probably about two months behind schedule there. I would add that it's not an untenable situation. It's just that, with a fairly weak market there and, frankly, with the full employment in that market, it has been more difficult than we expected to build up the workforce the way we would want it. So, there have been, as we indicated, some -- it has been longer than we expected to ramp up production efficiencies, and to ramp up production.

We are actually getting good reception, I might add, from the standpoint of our park models and our cabin line, which is what we introduced in Texas. We've had good reception from distributors and campground operators in those markets. They welcomed us. We have gotten orders. It's more, really, a function of again ramping up production.

I think we will continue to see some improvement on the marketing side. We're not getting any real help from the HUD side. We are not seeing any activity, really, on the housing side. But the park model and the cabin business has gone reasonably well.

Lastly, any update on the Gulf Coast or any signs of -- it seems like the FEMA or the Katrina cottage, if -- is not going to -- the states won't even know what they are going to get funded for probably a couple months. Then it wouldn't be into early 2007 until any money got spent. Any update there, or comments on those?

I think that's accurate. The funding is there, but now they are going through the process of deciding which states will get what funding and for what types of pilot programs. The Katrina cottage -- one of the designs has, of course, been talked about extensively. We have Katrina cottage designs that we have would have submitted, and so we are in the hunt there, if you will.

But it does remain to be seen which states get what, and how they utilize those funds. They can use them not only for Katrina cottage, but they can also use them for a more traditional temporary FEMA kind of unit as well.

Operator (OPERATOR INSTRUCTIONS). [David Bove], Robotti & Company.

I noticed the average price per home was up 6.5% and price perception was up 12%. Can you help us understand -- is that inflation that you see there in raw materials, or pricing power?

You're coming across pretty scratchy, but I think we got your question -- the average selling price of our homes. It's a combination. Certainly, there has been some inflation based on raw material costs. But a lot of that is product mix. It's selling homes with somewhat more features in them. In some cases, it's more custom building, where we charge for design.

So it's a mix of the two. I would say we're seeing a decline in the rate of increase of raw materials. We're still seeing some increases, but not at the pace we were seeing them over the past year or two.

What percentage of your homes sold are financed? Then, can you break out the mix between chattel financing and land/home?

Sure. We don't know exactly how many of our homes are ultimately financed, because we don't control that distribution. We have an idea. Most of our homes are sold in traditional land/home applications, where the buyer is buying a home with land, either through a subdivision developer or they have their own land or they have found their land or they have asked the retailer to find them land. But probably upwards of 90% of our home product is land/home transactions.

The balance, where we use the chattel or home-only financing, is primarily in the communities that I mentioned earlier, the planned communities, the 55 and older and some all-age communities that we sell to as well. There's not as many of those, but primarily the active adult communities that the home has to be financed as chattel, because the person isn't buying land, can't finance the land. They are renting the space. So, that is either a cash purchase by that buyer; or they raise their own financing, maybe with their own bank; or they are using a chattel source, one of the industry chattel sources in this market; such as Origin, 21st Mortgage, U.S. Bank and so forth.

On the land/home financing, are they 30-year terms, or are they the 15 to 20-year?

The land/home would typically mirror any other land/home financing. It could be 20 to 30-year financing.

I was just wondering if manufactured housing, if they are tied to land, if they are getting the 30-year financing like the site-built, or if it's a shorter term?

No, there's certainly a lot of 30-year financing going on with manufactured housing and site-built in land/home transactions.

So, for land/home it's typically 5% down, you pay 50 to 75 basis points more than a conventional site-built, and they can get the 30 years? That's not too bad.

No. As we mentioned, the financing for land/home transactions has been reasonably good. It has been reasonably attainable, and the competitive nature of it is fairly good versus site-built. We don't get quite as much attention because, after all, when you think about our loan balances are lower than a site-built home, because our price points are typically lower.

So, if you are a mortgage broker, and you are paid based on the origination fee based on the loan balance, you are not going to be as interested, typically, in doing a manufactured home loan as you would be in a site-built. Now, perhaps with site-built slowing down somewhat, we will get some more attention from those folks. I think that would benefit the industry.

(OPERATOR INSTRUCTIONS). Mr. Stegmayer, there are no further questions at this time.

Thank you. We will just thank all the callers for their participation, and we will look forward to speaking to them here in three months. Thank you very much.

Ladies and gentlemen, that does conclude the conference call for today. We thank you very much for your participation, and we ask that you please disconnect your lines. Have a great day, everyone.