Cavco Industries Inc (CVCO) 2008 Q1 法說會逐字稿

Welcome to the Cavco Industries, Inc. first quarter fiscal year 2008 conference call. (OPERATOR INSTRUCTIONS). Please be advised, this conference is being recorded, Friday, July, 27, 2007. I would now like to turn the conference over to Joe Stegmayer. Please, go ahead.

Thank you, Tina. With me today is Dan Urness, our Chief Financial Officer. Thank you for taking time to join us for Cavco's first quarter fiscal 2008 conference call. First, I'm obligated to mention that we speak today under the umbrella of the safe-harbor rules. Certain comments we'll make both in our prepared remarks and during our answers to your questions are forward-looking statements with-in the meaning of the number of the Securities Acts. Cavco disclaims any obligation to update any forward-looking statements and investors should not place any reliance on any such forward-looking statements. Our actual results may differ materially from anticirate-- anticipated results or performance. A more complete statement on the subject is included as part of Cavco's first quarter news release, filed with the SEC on Form 8-K yesterday. If you did not receive a copy of the news release and would like one, it is easily obtained on our website: www.cavco.com. The difficult market [of ours] we spoke of during last conference call continued through the first quarter.

Nationwide shipments of manufactured homes for the five months ended May 31, are 30% lower than for the comparable period in 2006. Our largest markets: Arizona and California, are approximately 45% below last year's shipment levels for the industry as a whole. We have seen somewhat better performance on our smaller markets such as New Mexico and Utah, where shipment numbers are flat with the prior year period. Meanwhile, if one has been following the announcements of other housing companies as recently as this week, it is evident that no organization seems to be doing very well. Amid this turmoil, we are relatively pleased with Cavco's performance, we were profitable, our plants operated consistently, albeit at reduced rates of production compared to last year, and we strengthened the companies financial position. Dan Urness will review the numbers in a moment. As to the out look, to say it is uncertain is probably an understatement. At least to us it seems impossible to forecast even a month ahead. Our backlog is up from last quarter, but still a low level that makes production planning difficult and less efficient. The need for more affordable housing should grow, but tangible evidence of that has not materialized so far. Our start up plant in Texas is going as planned, but is not yet profitable. if the resale market for existing homes improves, that should certainly spur sales of our homes. I could go on with the if's, the and's and the but's; however considering the plethora of information on the housing market available to all of you that would put you probably familiar. I don't think there is a need. Markets for housing both site-built and factory-built are challenging.

Before turning to Dan and taking your questions, I want to take a moment to publicly thank our outstanding Cavco team. Our sales production, engineering, and their support people have worked vigorously to enable Cavco to offer quality homes, custom design flexibility and excellent service at values that make Cavco homes attractive choices for a wide variety of home buyers. Even in difficult markets, there are always some opportunities, and we believe that we are well-positioned to search for and pursue them diligently. Dan?

Thank you, Joe. This quarter's results are [at best] difficult comparisons. Since last year's first quarter represent the strongest quarterly earnings in Cavco's history as a public company. Net sales for the first quarter of fiscal year 2008 declined 31% to $37.4 million compared to last year's first quarter net sales of $54.1. Our wholesale home shipments were lower this quarter by 19%. As we shipped 856 units compared to 1,063 units during the same quarter last year. Our product mix shifted somewhat to encompass more single section units and lower end products, which caused the average wholesale sales price per home to move lower to approximately $42,300 versus $48,500 per unit in the same prior year quarter. A reduction of nearly 13%. On the positive side, our net sales were up sequentially, nearly 11%. As home shipments increased close to 15% over the fourth quarter of fiscal 2007. While we are pleased with this improvement, we are still quite cautious based on continued weakness in the market.

Our gross profit margins were down as a result of low production levels. Our gross profit for the first quarter of fiscal 2008 was $5.4 million, or 14.6% of net sales. Off from $10.6 million or 19.6% of net sales for the first quarter last year. Selling general and administrative expenses for the quarter declined 19.2%, to $3.6 million, versus $4.4 million during the last year's first quarter. However, quarterly SG&A, as a percentage of net sales, rose to 9.6% in Q1 '08 versus 8.2% in Q1 ' 07, because of the lower sales volume, compared to last year. Interest income was higher, primarily the result of a higher balance of investable funds in our short-term investment portfolio. The current provision tax rate for Q1 '08 was lower at approximately 32% compared to 36% for Q1 '07. Our tax free interest income was a larger proportion of our earnings, favorably impacting our tax rate.

Fiscal 2008 first quarter income from continuing operations was $1.7 million, or $0.26 cents per diluted share. Compared to $4.3 million or $0.65 cents per diluted share last year. From a balance sheet perspective, liquidity increased as our combined cash and short-term investment balance grew to $68.6 million on June 30, 2007 compared to $63.9 million on March 31, 2007. Our trade receivables were moderately higher, the result of improved wholesale sales activity over the last three months.

Inventory, prepaid expenses, PP&E and trade payable balances were relatively flat compared to their levels three months ago. Accrued liabilities were higher primarily from an increase in wholesale and retail deposits. And we had no short or long-term debt at quarter end. In closing, we're working to improve our margins in this difficult market environment. Fixed cost containment initiatives and active management of production costs are key areas of focus in this process. Tina, we'd like to take any questions now.

Thank you. (OPERATOR INSTRUCTIONS). Our first question comes from Jay McCanless with FTN Midwest.

Hey. Good morning, everyone.

Morning, Jay.

Wanted to talk about Texas if we could. I know you put some language in the press release about that plan approaching profitability. Just want to get your outlook for the coming year in terms of building up your distribution network there and when--when you expect that plan to be running profitable.

Well, I think the plan has gone quite well. The reception of our product line i -- is been good. We're building up distribution. There's still a lot of work to be done. We have not, Jay, really specifically targeted a date at which it will become profitable publicly, but we do think it will become profitable in this fiscal year in 2008.

Okay. I know Texas has been the talk of the town for factory-built housing. What do you -- do you foresee that market continuing at a strong pace? And is the -- is the-- are the sales in that area still weighted heavily toward single section homes?

[There-] you're right. There has been a lot of talk about Texas. And I think some of it well-founded. The-- the market seems to have stabilized quite a bit after a number of very tough years in that market. And-- and really highlighted by an 80% -- an almost 80% drop from peak-to-trough in shipment levels in that state. So we are seeing some signs of life. Shipment levels have stabilized last two years, and they seem to be picking up slightly now. It does seem, as you suggest, that there is more interest in the more affordably-priced product, single section homes and-- and-- and low price point multi-section homes. And that is probably because that's what can compete with site-built in that market. We-- we as an industry, have to be somewhat below the site-built prices and secondly, probably because the repossessed inventory of homes in Texas has greatly diminished and there's not the availability of Repo's for distributors to sell that there once was. And so they're turning toward buying new product to fill their needs.

Okay. And then looking back towards Arizona and California, where-- where would you estimate your backlogs are now? In terms of weeks?

We're at about two weeks out now, in total.

Okay. Is the community business in that area-- I believe this is the time of year when the community business should start to pick up, correct?

Well, somewhat. It actually starts to pick up as we get a little bit later into the summer and into the fall, as some of the people start to shop for-- for seasonal living -- for retirement homes. The empty nesters look at transition from even their site-built home here in-- in Arizona to a planned living community. So, yes. You're--you're approximately right. It-- it-- it should start to happen over the next several months.

And what are those community operators? What is the outlook in the forecast that you are receiving from them?

They're telling us, Jay, that they're getting pretty good traffic, they're getting interest, they're getting deposits, even. But the biggest challenge they expressed to us is that-- that buyers, the potential buyers, are having difficulty selling their site-built home to move into their community. And that could be as a result of just a slower market, taking longer to sell their site-built home, it could be price situation where perhaps the seller of that home expected to get more for their home based on pricing of the last year or two and they're in somewhat of a state of denial and they-- they don't want to accept the fact the market is somewhat lower, and they have to take lower price for their home. Which still may well be above their cost basis, of course, but not as high as their neighbor may have received for their home last year. So I think there needs to be some adjustment in the psyche of the-- of the potential buyer for our product and the seller of their site-built home [such that] they become accustomed or comfortable with the current market pricing, and secondly, obviously, the timing is not as quick. And, last year at this time or two years ago, a person put their house on the market and it would be sold instantly. That is not the case right now.

Okay. Great. Thank you.

You bet.

(OPERATOR INSTRUCTIONS). Our next question comes from the line of Howie Flinker with Flick-- Flinker & Company. Please proceed with your question.

Hi, Joe

Howard, how are you?

Good, you?

Good, thank you.

Could you talk about pricing pressures in general?

Sure. (please) We have not-- we have not Howie, seen a lot of-- of pricing pressure as such. We've seen continued pressure on material costs, which may come as a surprise to some. But maybe not to. You've seen commodity pricing increase in [iron], copper and steel. So we continue to see price increases. Not to the extent we saw them over the last couple of years, but they're still evident. And, so I don't think there's a lot of opportunity for manufacturers to dramatically drop pricing. And we have not seen it in our markets.

But-- but your average price per floor and your average price for home are down, June against June?

Right. And that's really a function of mix. And [in couple ways]. One is that there are -- there is some interest in lower price point homes. Not necessarily dropping price on any given home, but just lower price point homes. So-- home might not be as large, might not have as many amenities, which obviously affects our sales price before-- it also affects our margins. Secondly our mix during this quarter was more weighted towards our park models and cabin units, which by nature are lower price point. They're small units, so they're a lower price point product and that also has some impact on our average selling price.

Okay. Thanks.

You bet.

(OPERATOR INSTRUCTIONS). Our next question comes from the line of Tony Gleason, with Neuberger Berman. Please proceed with your question.

Hi-- Joe, good morning, how are you?

Morning, Tony.

Can you talk a bit about how you are doing relative to your competitors? And maybe even one of the larger ones, Clayton Homes? And just get a sense of how the environment is unfolding and how you're-- how you're-- competitively positioned relative to the rest of your competitors out there?

Well, as you well know, Clayton doesn't publish any numbers any more. Regularly as part of Berkshire Hathaway. But I believe they're doing-- Clayton's doing quite well. They continue to expand and increase [pure] market so I-- I believe they're doing quite well. And of course they have their lending operation which provides lot of stability for them. And they are an extremely well-managed company so I would expect them to do well. They always have through up and down markets. So, I don't suppose that -- even though I've not seen any numbers-- not privy to any numbers, I don't suspect that they're doing anything but-- but quite well. I think it's going to be,Tony, a-- a tough period-- a continued tough period for our industry, in that there is 202 factories that are registered, building homes. For HUD code homes. And you look at shipment levels, which are now running at an annual rate of just under 100,000 per year, and it's evident that capacity is still too high in the industry. We're probably running at utilization rates that are below 50% as a-- as a total industry. And that's not good, obviously. And, I-- I think something has to eventually give. It -- we have to see some increased sales [in] shipment levels, or I would think we would see some further shut downs-- consolidations of plants. We don't anticipate doing that, as it mentioned, we're-- our plants are running on full schedules. We have capacity. We're only running at about 60-- 64-- 65% of our utilization. But, I do think that there could be opportunities for further -- further consolidation in the industry.

Uh-huh. Thanks. How-- how about on the di-- distribution front? Can you talk about what efforts you're doing there to perhaps expand distribution and leverage some of your un-utilized capacity?

Sure. Be happy to. We're-- we-- we think we're doing quite a bit there. We're -- we have-- had some successes in-- in adding new distribution, which is difficult to do in a down market, obviously. The distributors are-- are under a lot of pressure themselves. However, I-- I think we have picked up new distri-- I know we picked up new distribution points. The thing is you pick up a new distributor or distributor adds your line to an existing line that they have, it takes time to get the sales activity, especially in a down market. Because they might-- they might say sur-- yes, they're anxious to carry our products but they're not moving much of right now. Or they may have to move out-- clear out some other product to make room for our product. That's on what we call the street dealer-- the retail distributor. On the side of the developer and the planned community operator, I think we're doing quite well. We've picked-- we have picked up a number of new developers, we've expanded relationships with existing developers that are-- that are adding to their communities, and I think we're-- I think we're doing very well in that regard. The time will tell. Again, as the selling season Jay referred to materializes, and if-- if-- if it's a good selling season for the communities, and developer business, we should start to see that-- some activity in the next several months. And that'll really be the telltale sign. We-- we again, we can get shelf space. But [there's] a product turn based on [is the] consumer out there buying. I think we have-- we've accomplished the shelf space. We've accomplished additional shelf space or inventory out in the field among dealers and-- and new dealers-- new distributors. But we have not seen the pull through yet. Does that make sense?

Yes. I understand. Thank you.

Okay Tony.

Our next question comes from the line of Michael Christodolou, with Inwood Capital. Please proceed with your question.

Morning, gentlemen. You spoke a bit about the utilization rate and I just was curious. Should we assume that the utilization rate for your Texas-- your new Texas facility is below the average at this point?

It is. Michael. And-- Texas when you start a new plan it's a moving target. Because you-- you really can't judge your past utilization until you eventually ramp up to-- to levels. And-- and ultimately test the capacity with [facility]. But, based on our our hypothetical as yet untested production capacity there, yes, we're-- we're-- we'd be running at less than our average production rate.

Okay. And you-- you're-- you had also mentioned about the lack of repossessed inventory in the state of Texas and just not a lot of inventory out there. And that seems to be helping the firmness that you and the other industry players are seeing in Texas. How much of it could also be that there is a little bit of a draw toward the-- toward the Gulf Coast region? I mean, there's no -- there's no big demand yet. But it does seem like it's out there. Could you talk a bit about what you're-- what you're seeing there in terms of demand pull?

Yes, it does seem to be some increased activity in the state of Louisiana, for example. And we are-- we are picking up some new distribution points in Louisiana as we speak. But the rest of the Gulf Coast states I don't think we've seen-- the industry has not seen as-- as much of an improvement as-- in shipments as Louisiana has. But again, that-- that whole market area that was devastated by Katrina is yet to really surface as a strong home buying market. I think it's-- it's still a function of bringing residents back to those areas, the infrastructure needs, zoning issues, where the home's going to be put, what kind of home is going to be rebuilt. So, a lot [of this is] yet to be answered. But-- but I think it's going to -- as we predicted all along, it's been a very slow process and I think that's still the case. We do expect to get some business out of our Texas plant for Louisiana. Possibly Mississippi. And we expect to benefit as-- as that activity increases. But again, I don't think the industry has seen a lot of-- a lot of activity to date.

Would-- would you say-- last question-- would you say that your-- your floor shipments or home shipments were -- to that region-- were at a rate slightly better than the overall corporate average that you just reported? In other words is it-- is it-- is it actually up, by chance? As it is for some of the other participants?

You know what-- it's-- that's not-- that's not a comparison we can make, Michael, cause we-- we haven't been shipping any homes in past quarters to the state of Louisiana.

Okay. Got it.

It's brand new for us.

Thanks very much.

You bet.

(OPERATOR INSTRUCTIONS). Joe, there are no further questions at this time. I will now turn the call back to you. Please continue with your presentation or closing remarks.

Thank you, Tina. And thank you, all, for joining. We appreciate your interest. And, we look forward to talking to you the next conference call. Thank you.