Cavco Industries Inc (CVCO) 2008 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Cavco Industries' second quarter conference call.

During the presentation all participants will be in a listen-only mode, afterwards we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS) Please be advised this conference is being recorded Friday, October 26, 2007.

I would now like to turn the conference over to Joe Stegmayer. Please go ahead.

Thank you, Alana, and welcome, everyone.

Before we begin the second quarter conference call we are obliged to inform you that certain statements that we may make today in our comments or in response to your questions are forward-looking statements within the meaning of certain sections of the Securities Acts of 1933, 1934, and 1995. In general all statements that are not historical in nature are forward-looking and those 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.

We expressly disclaim any obligation to update any forward-looking statements contained in this presentation whether as a result of new information, future events or otherwise. You should not place any undue reliance on any such forward-looking statements. We have a complete statement on this subject incorporated in our press release for your reference, and that press release was issued yesterday after the market close and is available on our website Cavco.com as well as many other sources.

With me today is Dan Urness, our Vice President, Chief Financial Officer and Treasurer and I will just open up with a few comments on the industry and then Dan will cover some of the financials and we'll take your questions. This quarter represents the one year anniversary of the sudden slowdown we experienced in the rate of incoming orders last Fall. Industry shipments in our largest markets, Arizona and California, are down 42% and 43% respectively for the first eight months of 2007. Of note is that shipments have been holding steady at these reduced levels for each month of the calendar year. Unfortunately we see no signs of improvement from these depressed levels in the short term.

Arizona and California will probably record in 2007 their lowest annual manufactured housing shipment levels in more than 12 years. The frustrating part is that these conditions really should not exist. When one looks at Arizona, the population is the fastest growing in the United States. California is the most highly populated state by far and there is certainly need for affordably priced homes in these markets. In addition, there's a good market for replacement of very old housing stock, particularly in California.

So what are the problems? One is the lending environment. The loan markets are in disarray with declining numbers of mortgage originators and constantly changing underwriting requirements. Next there is the weak home resale market.

Our retailers and community developers report to us that they have strong interest in deposits from people who are trying to sell their site build homes before closing on a new manufactured home. Third is the oversupply of new site built homes. Although we don't believe this is one of the more significant issues except the effect on resales that I just mentioned, because the price points of our homes are still more attractive than even the reduced prices of site built homes.

And fourth is the consumer sentiment issue. There are virtually nothing but negative stories about the housing market in both the print and broadcast media. Nothing is being said that would motivate would-be buyers to act. So these four issues are the primary reasons why we in the industry cannot seem to get any traction, and while it may sound boastful I can't fault our people, we are building high quality homes in a wide variety of sizes and styles and we have an excellent reputation in our markets for value and for service after the sale.

So what now? Well, we'll continue to introduce new models, to be sure we're covering a wide spectrum of housing need. We'll manage costs very carefully and we'll seek additional market niches. There's no question that the months ahead will be very challenging. Winter is typically a seasonal low point for housing and the current conditions could make it even tougher than usual. While these challenges are significant, we truly feel that we're well positioned from the standpoint of our product offering, the geographic markets we serve and our financial strength to weather the current storm and to prosper as housing demand improves.

Dan, would you cover some of the financials, please?

Sure, Joe.

Net sales for the second quarter of fiscal year 2008 declined 11% to $38.4 million compared to last year's second quarter net sales of $43.1 million. Our wholesale home shipments were lower this quarter by 9% as we shipped 823 units compared to 905 units during the same quarter last year. Compared to last year's second quarter, our product mix encompasses more single section units and lower priced products which caused the average wholesale sales price per home to move to offset the approximately $42,700 versus $45,700 per unit in the same prior year quarter, a reduction of nearly 7%.

Lower production levels have adversely affected our gross profit margins which was $5.5 million or 14.4% of net sales off from $8 million or 18.7% for the second quarter last year. Selling, general and administrative expenses for the quarter declined 4.4% to $3.6 million versus $3.7 million during last year's second quarter. As a percentage of net sales, SG&A was 9.2%. In Q2--or second quarter of '08 versus our 8.6% in Q2 '07 because of the lower sales volume compared to last year.

Interest income was higher primarily the result of our larger balance in investable funds in our short term investment portfolio. The current provision tax rate for Q2 '08 was approximately 30% compared to 35% for Q2 '07. Our tax free interest income was a larger proportion of our earnings favorably impacting our tax rate. Fiscal 2008 second quarter income from continuing operations was $1.9 million or $0.29 per diluted share compared to $3.2 million or $0.49 per diluted share last year.

From a balance sheet perspective liquidity increased as our combined cash and short term investment balance grew $7.4 million to $71.3 million on September 30, 2007 compared to $63.9 million on March 31, 2007. Our trade receivables were moderately higher compared to the beginning of the fiscal year. Inventory levels are lower as a result of efforts to bring our retail and manufacturing material inventories further into line with declined market and production demands.

Prepaid expenses are lower from reduced prepaid insurance and income tax balances. Plant and equipment balances are modestly increased, the result of additional build out in Texas and some upgrades in the Arizona factories. Our current assets were 4.6 times current liabilities and we had no short or longer term debt at quarter end.

In closing, we are working to improve our margins in this difficult market environment through continued innovation and design and exploitation of our niche market strongholds. This, along with disciplined cost management helped us to maintain profitability during the quarter. Alana, at this time we'd like to take any questions.

Thank you. (OPERATOR INSTRUCTIONS)

Our first question comes from the line of Kathryn Thompson with Avondale Partners. Please proceed with your question.

Good morning. This is actually David Wells in for Kathryn.

Couple of quick questions for you. First off just wanted to see if there had been any changes in Arizona and California markets since the last quarter end conference call that you've noticed?

David, there really haven't. As I indicated in my comments, the shipment levels have been fairly consistent for this year, consistently depressed, that is, but they've been fairly stable these last several months versus the prior quarter in both states, Arizona and California.

All right, great. Thank you and then secondly, if you could give a little bit more color about how business is in Texas and how your plant there is faring.

Sure. Business in Texas is a little better than some other states in the country and nationwide I should have mentioned that manufactured housing shipments are down 23% year-to-date. So most states are in decline, but Texas is one that is actually showing modest increase in shipment levels.

Our plant there is doing quite well in terms of its reception among retailers. We've--I think gotten very good comments on our product. We're producing a lower to low medium price point product in that state and it's I think a very good quality product and being very well received. We're expanding our share there. The plant is still in the start-up phase in the sense that number one, we're not profitable yet there and number two, we're not up to production levels we expect to get to, which is obviously one of the reasons we're not profitable.

So it's a question of training people. We've been very careful and measured about not ramping up production too fast because we want to make sure we have excellent quality product and we establish a good reputation from the get-go. We're trying to build the same--build upon the same philosophy in Texas that we offer in our core markets here in Arizona and California and New Mexico and that is that have a reputation for high quality and high value. So we don't want to push production too fast and frankly, we're getting--the people we're hiring don't have a lot of experience, so it takes some training but we do expect that plant to show considerable improvement as we go through the balance of the year.

Okay, and then in terms of kind of capacity, utilization and backlogs, could you give a little bit more color on those?

Sure.

Overall.

Our capacity utilization overall is about 65% and that's fairly stable with the prior quarter. Backlogs are quite low, frankly, we're at slightly less than $5 million. We're in the $4.5 million to $5 million range right now and that's down slightly from last quarter. As I indicated, we do have a concern about these next several months which are seasonal slow months for the industry and going into these months with a minimal backlog is a concern to us.

All right, and then finally just in terms of the kind of devastating Southern California fires that we're hearing about is there any color on potential business that could be arising from that?

Well, I think it's too early to tell yet. We certainly are in contact with our retailers, distributors in that market and they should see some demand for replacement homes, particularly we have traditionally sold homes in that inland empire area where some of these fires are devastating that area. So it's possible, but it's--I wouldn't say yet that we've actually seen any impact.

All right. Thank you for taking my questions.

You bet.

Our next question comes from the line of Jay McCanless with FTN Midwest. Please proceed with your question.

Hey, good morning, gentlemen.

Good morning, Jay.

Wanted to start off first with talking about the retail segment for a second. It looks like your shipments there were up over 100% versus last year. Could you talk a little bit more about that?

Sure. It has everything to do with a contract which we did for the Army Corps of Engineers and we shipped 33 homes under that contract and that happened during the quarter. So I wouldn't look at that as an increase in recurring business, although we do try to go after contracts like that aggressively. It definitely skewed last quarter when you look at it in comparison.

Okay. How many retail stores do you have open now?

We currently have seven retail stores.

And are those retail stores seeing any benefit from the pickup in business in Texas?

They are. I think we're--the two stores we have in Texas are doing fairly well, so I'd say yes, they're seeing some improvement.

Okay, and then in terms of acquisition opportunities with the war chest that you built up now, are you seeing any bright spots, any one that you're talking to? Is there the potential that we could see a deal from you all down the road?

Well, I hope so, Jay. I mean we certainly want to expand both from a denovo or Greenfield standpoint [since we are] in Texas as well as acquisitions and in some sense I'm certainly glad we didn't push that button a year or two ago given industry conditions right now, but certainly we continue to look and yes, we are talking with people, we have consistent dialogues with a number of friends in the industry that we've known for quite some time. It's--as I've indicated before, it's sometimes an issue that the seller just make up their mind where they want to make a move and it's a long term process. We're not going to do anything rash and we're not going to--I think we're trying to hit a home run in an acquisition. We want to do things that we can control that makes sense and where we can bring something to the table to improve upon. So we'll look at geographic expansion and some product line expansion opportunities from an acquisition standpoint. In summation is, there's nothing right now that we have to report in terms of any progress on the acquisition front.

Okay. Great. Thank you.

You bet, Jay.

(OPERATOR INSTRUCTIONS)

Our next question comes from the line of Dean [Manchuto] from Akeeda Cap. Please proceed with your question.

Hi. Thanks for taking my question. I apologize. I'm a little under the weather today, so bear with me.

No problem, Dean.

I'm looking at your earnings and I just kind of wanted to sort of parse out the interest income portion of it and it looks like you did about $0.19 in interest income in the first half of the year. Is that correct? And I'm tax effecting about 20% of that. Are my numbers close to correct?

Well, I don't have that in front of me, but it's in that range.

In that range, okay. So it was $0.55 diluted minus the $0.19. So I get the business, the manufactured home business, did about $0.36 in the first half of this year, this fiscal year?

Sure. That's a reasonable breakdown.

And the first half of any fiscal year tends to be the stronger half, is that correct for you guys?

Well, not necessarily. We historically tended to have a strong fourth quarter. The third quarter is seasonally slow, but in recent years really all norms have kind of been thrown out because of the swings in this marketplace and so we don't really have a trend that we could really put our--hang our hat on in the last couple years. For example, two years ago we had a very strong third quarter. That's not going to be the case--wasn't the case last year, it's not going to be the case this year and frankly, if we don't see something turn, we wouldn't necessarily expect to have any significant improvement in the first calendar quarter which is our fourth quarter. So it's--it could be difficult comparisons over the next three to six months.

Right, right. But interest income I mean should run right at about $0.38 to $0.40 a year or something like that, correct? And go higher as you add to your cash balance.

Sure. It will increase as you add to the cash balance. I don't have that right in front of me. There's a good amount of interest income that is tax free, not all of it's tax free.

Right.

But, that's certainly a rational way to look at it.

Right, and then again the homebuilding business did about $0.36 in the first half, doesn't sound that you're all that encouraged regarding the second half. So probably at best the homebuilding business is going to do around 70ish at best, probably $0.70 for the year. Does that sound about right or--?

We're not going to go there because we really don't give guidance. So that's something you have to come up with.

Okay, fair enough.

Sorry.

Just kind of want to hear your perspective on--you talked a little bit about what's been going on of late in your business and why it's been a bit depressed. Can you talk about what--I mean just from the way I'm seeing things houses are for sale out there. Any type of house that you want to buy, whether it be stick built, whether it be new, whether it be existing, it's a buyers market out there and I don't see that changing for a while. So my question is, can you help me understand what's going to happen to make--to make, or to cause your business to show some signs of improvement in the next 12 to 18 months?

Yes, I think there's several things that could impact us. Certainly the issue that financing is going to become more rational with this debacle in subprime and the impact it's having on non-subprime loans. I think the lending will become more reasonable in terms of collecting real down payments, paying principal on loans from the get-go, verifying employment, verifying documentation and in doing so it will lessen the opportunity for people to move up to price point scale which they certainly have been able to do these last few years.

There's no question, Dean, that if you look at our industry and its share of single family housing new sales or starts, it's at its low ebb for many, many years. I think probably it's historical low ebb, at 9% range or so of all new single family homes sold and even less than that as single family housing starts. So we have--and a lot of that has happened, that phenomenon has happened just in this roaring past five years or so for the mortgage industry and so I think it's reasonable to think that we can get some of those buyers back, that some of those buyers will again look at our product as their housing alternative.

Okay, I just, I guess that's where I'm finding the disconnect. Why would they look at your product versus a now less expensive stick built home?

Well, because the price point is still considerably--our price points are traditionally considerably below even a lower end stick built home.

Right.

So it's a more affordable product. It's a product that in--and sometimes not even a question of affordability, sometimes in rural areas it's an issue of it's very cost prohibitive to get a builder to come out and build one home in a rural area. So it can be--it's sometimes not a question of price, but oftentimes it's a matter of affordability and if a customer is looking to hit a certain monthly payment which many housing buyers are in the affordable range certainly, they've been enabled in recent years to buy more expensive home but keep that lower payment and that's what I'm saying is unrealistic.

We felt it was unrealistic the last several years and I think now with this blow-up it's proven I think we've been vindicated somewhat in our opinion there, but it's--this industry has traditionally had in the 20% plus range of all new single family homes sold and at times we've been a lot higher than that and so it's I think this product is not going away, it's a very viable product. In fact, the economies of building a home in the factory vis-a-vis building them on site continue to improve and escalate. The supervision of labor, the availability of labor, these things are only going to improve our position versus site built I think as time moves on and as we show costs, environmental issues and labor availability continue to become issues.

Right. Okay. Well, I appreciate that. Thanks, guys.

You bet.

Our next question comes from the line of Howard Flinker with Flinker & Co. Please proceed with your company.

Flinker.

Hi Joe.

Hi Howard.

Could you please compare the decline in end price and any declines in raw material costs.

Well, we can--so average selling price you're saying?

Yes, was that attributable to cheaper materials or was that attributable to price reductions because the market softened?

There's certainly some material factor in there, Howard, but it's largely a product mix issue. We're producing now more single section units and more--somewhat more modestly priced units than we were this time a year ago. So it's primarily product mix. There's probably some raw material price component in that, but it's predominantly the product mix.

So mainly customers buying down a little?

That and also keep in mind that you might recall we have our special business which is our Park models and cabins which by definition are smaller and lower priced than a home and that business continues to be quite good and--where our manufactured housing business is in decline. So the mix is not necessarily that buyers are just looking at lower priced product. It's that that business is somewhat stronger than the others and so that's influencing it as well.

Okay. Thanks.

Getting back to while waiting for another question, Dean, if you're still on here, I'd like to add to my prior comment the fact that in manufactured housing there's a lot of old stock in planned communities and parks, if you will, particularly in California that will gradually be replaced and I think that has slowed down recently again because of financing but that will pick back up again.

So that's another issue and thirdly, I think our product is becoming--gradually becoming more accepted by developers as an alternative to trying to manage a construction process that takes a lot longer, THAT'S less efficient and it's higher cost. Developers can turn their land much faster using manufactured factory built product and I think that trend while it's a slow trend, that trend will continue to help the industry.

(OPERATOR INSTRUCTIONS)

And there are no further questions at this time. I would like to turn the call back over to you. Please proceed with your presentation.

Thank you, Alana.

We have no further comments on the quarter. We do look forward to talking to you next quarter. We appreciate your attending this one and if there are any follow-up questions, feel free to give us a call. Thank you.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.