Cavco Industries Inc (CVCO) 2008 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Cavco Industries third-quarter fiscal year 2008 earnings 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). As a reminder, this conference is being recorded Friday, January 25, 2008. I would now like to turn the conference over to Mr. Joe Stegmayer, Cavco Industries. Please go ahead, Mr. Stegmayer.

Welcome, everyone, to Cavco's third-quarter call. With me today is Dan Urness, Vice President and Chief Financial Officer. Before we begin we respectfully remind you that certain statements we will make on this call, either in our remarks or in response to questions, may not be historical in nature and therefore are generally considered forward-looking. All statements and comments are made within the context of the Safe Harbor rules.

All forward-looking statements are subject to risks and uncertainties, many of which are beyond our control. Our actual results or performance may differ materially from anticipated results or performance. Cavco disclaims any obligation to update any forward-looking statements made on this call and investors should not place any reliance on any such forward-looking statements.

Business conditions are lousy. For those of you who listened to our second-quarter call held about three months ago on October 26th, my comments today may sound repetitive. For example, industry wide shipments to our largest markets, Arizona and California, are down 41% and 42% respectively for the 11 months ended November 2007 compared to the comparable prior year period. These declines are approximately the same level as they were for the first eight months of calendar 2007.

In October we stated that we saw no signs that would suggest improvement from the depressed home shipment levels in the near-term. Unfortunately that assumption was accurate. Industry wide shipments for 2007, according to analysts, are expected to total in the neighborhood of 95,000, about 19% below the low level of 2006. Arizona and California will in all likelihood record in 2007 their lowest annual factory built home shipment levels in more than 12 years.

On a more positive note, capital has remained profitable amid the market turmoil. I'll ask Dan to review the numbers with you and then I'll make some further comments before we take your questions. Dan?

Thank you, Joe. Net sales for the third quarter of fiscal year 2008 declined 16% to $31.9 million compared to last year's third-quarter net sales of $38.2 million. The decline was driven by reduced wholesale shipments which were lower this quarter by 17%, as we shipped 746 units compared to 898 units during the same quarter last year. This shipment decline was offset slightly by a 1% increase in our average wholesale sales price per home during the third quarter, which was approximately $40,300 versus $39,900 per unit in the same prior year period.

Lower production levels adversely affected this quarter's gross profit margin which was $4.6 million or 14.4% of net sales, off from $6.3 million or 16.5% of net sales for the third quarter last year. Selling, general and administrative expenses for the quarter declined $440,000 to $3.3 million versus $3.8 million during last year's third quarter. As a percent of net sales SG&A was 10.4% in Q3 '08 versus 9.9% in Q3 '07, because of the lower sales volume compared to last year.

Interest income was higher, primarily the result of a larger balance of investable funds during the quarter. The income tax provision rate for Q3 '08 was approximately 30% compared to 33% for Q3 '07. Fiscal 2008 third-quarter income from continuing operations was $1.4 million or $0.20 per diluted share compared to $2.1 million or $0.32 per diluted share last year.

From a balance sheet standpoint our cash and cash equivalents balance was $69.6 million on December 31, 2007 compared to a $63.9 million combined balance with cash, cash equivalents and short-term investments on March 31, 2007. During the third quarter we repositioned our liquid assets primarily into low-risk U.S. treasury money market funds. Our trade receivables were moderately higher compared to the beginning of the fiscal year and inventory levels are relatively flat compared with March 31, 2007.

Plant and equipment balances modestly increased, the result of additional buildout in Texas and some upgrades in our Arizona factories. Our current assets grew to five times current liabilities. We had no short- or long-term debt at quarter end. Finally, this quarter the Company initiated a $10 million stock buyback plan which will provide another basis to return value to shareholders. Joe?

Thanks, Dan. As we look to the months ahead some of the challenges we face are a weak home resale market where potential customers are having difficulty selling their existing home in a reasonable time frame and/or at a price they want to accept. This delays their ability to make a housing change no matter how fervent their interest in doing so.

Second is the contracted and unpredictable mortgage lending industry environment. It is difficult to obtain a loan without top-notch credit and the time it takes to complete the process has been extended.

Third is the concern consumers have about the housing market and the general economy. The news and commentary about these topics is generally discouraging and certainly does not serve to motivate people to act positively on a home buying decision.

Despite these challenges, which will certainly have a constraining effect on manufactured housing demand in the near-term, we believe that there will be opportunities for growth in the future. Some of the chilling statistics that the industry has created in recent years could be indicators of better times ahead. For example, 2007 home shipments for the industry will be at their lowest level in 46 years. For the most recent five consecutive years the industry has endured shipments that have been below those of each of the prior 40 years.

As an industry we've lost many potential buyers to higher priced homes because consumers were enabled to purchase homes beyond their means by aggressive and often ill-advised lending practices. These absurd lending practices appear to have come to an end. The need for affordable housing continues to grow and we can be a big part of the response to that need.

In addition, we serve people looking to make lifestyle changes whether it is to a home of more modern design, greater value for their money, easier upkeep, greater energy efficiency or for a host of other reasons. Meanwhile the current environment shows no indications of improvement for the housing market and while the near-term outlook is virtually unpredictable it is not positive.

We feel confident that our team is totally focused and motivated to achieve our objective of continuing to produce positive results. And as Dan indicated with his review of our balance sheets, we're in a sound financial position to face these tough times and to take advantage of opportunities for improved performance. We're ready to take questions.

(OPERATOR INSTRUCTIONS). Kathryn Thompson, Avondale Partners.

Thank you. Could you please give me capacity utilization for the quarter and how it compared to the previous quarter and last year?

Yes, Kathryn, this quarter we were running at about 60 to 61% of our capacity. I believe in the last quarter we -- last year did you say?

Last year and last quarter?

Okay. Last year we were at about the same level, slightly higher at about 62% and last quarter I think we were in the 64, 65% range.

Okay. And also backlogs, kind of the same order -- current, last quarter and last year?

Our backlog is about $4 million currently which is down slightly from the $4.5 million that we had at the end of last quarter. Compared to last year it's up just a slight bit from about $3 million in Q3 '07.

Also Palm Harbor yesterday had some comments -- or this week rather -- had some encouraging comments about Texas. I know you only have one plant there, but how has activity been there?

The Texas market has been certainly more positive than other markets in the country and we're seeing that. The demand in Texas appears to be for lower price point products and particularly in single section, single module homes. But the demand is certainly better in that state.

Are these first-time home buyers or is it people who would have gotten maybe part of the subprime debacle where they were going to get to a low-end stick built home and now are getting into a single wide product? Who is this buying segment and where have they been?

Well, those are good questions. I'm not sure we can precisely answer what their other housing choices may have been or they might be looking at. I think it's a combination; it is first-time home buyers, it's move-up buyers. Certainly some of these customers probably are not being enabled anymore to buy a site built home that they may have gone to in past years. So that's part of it.

I think part of it is the fact that the level of demand at retail in Texas has been somewhat stable for a number of years, it's just been satisfied by a lot of resales of homes, particularly repossessed homes in that state, and that satisfied a great deal of the retail demand for manufactured homes. Those repossessed homes -- or the supply of those repossessed homes has dwindled considerably so that the alternative is a new home.

And so -- or I might add too that if they are repose they're much older than they were several years ago; the repos are more aged before they're actually repossessed. So the alternative to the buyer is a new, probably lower price point manufactured home.

Okay. Interesting. Also, I know you mentioned your buyback on the call. When was the last buyback you did or have you done one?

Kathryn, this is the first one we've announced in our short history as a public company. And as Dan indicated, we just announced it about two weeks ago now.

When can you go to the market?

We can't go of course during this quiet period, but once this news is disseminated I believe -- I don't have that in front of me -- but I believe it's something like five days after the news release.

Okay, great. Thank you very much.

Jay McCanless, FTN Midwest.

Good morning, everyone. I wanted to ask about the retirement market in Arizona. I know Kathryn just talked about Palm Harbor, but I wanted to see if you all could give us some type of information on how many units you believe are sold into active adult communities for manufactured housing say in Arizona and California each year or what you see as the dollar potential of that market in an average year. I know this isn't an average year now, but could you give us some context on that?

We'll probably have to get back to you on -- if we can get real specific numbers in the industry. The state industry association may have some numbers on that that I don't have in front of me. But for Cavco the 55 plus market has been an important one for us, continues to be an important one for us and probably it accounts for at various times 25 to 30% of our business. That certainly has been a market that's been slowed by some of the issues I mentioned in my comments, particularly the resale of their existing home.

What is interesting, we find that lower price point product, particularly for what we call out here the snowbirds, the people who are seasonal livers, that is not full-time -- making a full-time housing change or true retirees, but snowbirds that come for the winter season, that market is still fairly good. But those people are making a more modest home buying decision in terms of price and they make it as a conscious decision to have a second home.

But what has been really slowed is the full-time 55 and older, whether they're still working or whether they're actually not working anymore, those buyers are the ones that are not making the home buying decision right now or making it to a much lower extent than they were. But getting back to the core of your question on the numbers for the industry overall in Arizona and California, I think, Jay, we'd have to do some research and talk to some of our marketing people as well as look at some state statistics to see if there are some numbers on actual dollar volume to that 55 and older market.

Okay. And then this one is a question we're seeing in the news yesterday and today about different stimulus packages the government is proposing to pass. From the initial read of it, it sounds like if a company wanted to expand a plant, invest in a new plant, etc., right now there would be certain tax advantages to doing so. Is that a strategy that you all have contemplated or might contemplate for the Texas market or maybe some of the other Southeastern markets?

Well, it will be interesting to see what the final opportunities are there. But yes, it might be a good opportunity for us because, as you know, we're in a mode of trying to expand this business. And so if there are some tax advantages, obviously we wouldn't make a decision based on those tax advantages, but it might encourage us to do something and it certainly would be a benefit to us when we do something and we're certainly going to be expanding the business as we go forward. So depending how long those tax benefits are in place and how meaningful they are I think they could benefit us.

Okay. And then my final question, just looking ahead to next year, do you have a forecast of where you think CapEx depreciation should look or what they should be?

Well, we're running our depreciation rate right at about $800,000 a year. CapEx, we don't have any significant plans in place other than what we call maintenance CapEx and a little bit further spend in Texas. So it's going to be continuing at the moderate level, below $1 million.

Okay, great. Thank you, gentlemen.

(OPERATOR INSTRUCTIONS). Tony Gleason, Lehman Brothers.

Good morning. Just wanted to check on your thoughts on buyback. How do you think about the economics of a buyback on the stock versus acquisitions that you might be thinking about?

Tony, we look at the buyback program as a way to affect return on value to the shareholders. Obviously we can also do that by growing the business. As you say, expansion through acquisition. And that's our primary objective is to grow the business either through de novo operations such as what we're trying to do in Texas now and acquisition opportunities which we continue to look at. I think the stock buyback is kind of the third leg of the stool, but the first two are our primary objectives.

And how does the current stock price compare relative to acquisition opportunities that you're looking at in terms of valuation?

Well, I would --.

I mean, is it fair to say that the sellers are still using prices from last year and multiples that might be from a few years ago and that the acquisition opportunities aren't manifesting themselves or is that more reluctance to pull the trigger on your part?

I think you stated pretty well, better than I could probably. Tony, I think anytime you look at it most of the acquisitions are privately owned and it's tough for those sellers to understand the valuations of change. Almost the same analogy to -- or it's analogous to the home seller who doesn't want to drop his price to sell their home even though the market has dropped. And so I think some sellers of businesses, they might still be thinking much higher numbers that maybe they saw several years ago or maybe somebody talked to them about several years ago.

Or maybe they're even using outside cases where some sellers will look at their earnings from two years ago and still use that as a basis even though their earnings are much softer now. They want a pricing based on those prior maybe peak earnings, which obviously is not realistic but it's realistic to them. So it is a difficult environment from that standpoint and we continue to look and talk with those people and hopefully we can put something together. But again, we're not -- as we've said before, we're not going to say something that doesn't provide the opportunity for a positive return for our shareholders.

How does the current stock price compare relative to what your value of what you place on the firm or is the price not really a function of returning that capital to shareholders?

Well, I think we do feel that the value is attractive and that's one of the reasons we announced the buyback. I think we have no qualms about instituting a buyback at these levels. But again, a buyback is kind of the third priority you might say, so I don't want to overemphasize it, but it's something where we will step in and take it advantage of these fluctuations in the market.

Okay. I just had one last question. Things sound pretty grim. If you look at '08 what opportunities are you looking to capitalize on as far as -- as we're bumping along presumably the bottom here?

Tony, I think we have a very strong position out here in the Southwest market. We intend to continue to try to push on that, try to increase market share in a slower market. There are opportunities even when times are difficult with the developer market. There are still some chances to work with developers who are looking at building, again, lower price point subdivisions or communities and we're dealing with a number of those. Sometimes those projects are very long in the making, but we have a number of those on the burner so to speak.

We have I think from a traditional what we call a retail distribution channel, that's the most challenged right now. And unfortunately the positive there is that inventories in the retail channels are not high, they're not really at the levels they were when we first went into this -- when the industry first one into this slowdown.

So even though things have slowed down over the last year or so, particularly in our markets here in the Southwest, retailers have kept their inventories in check. So we don't need to go through that whole cleansing process. If we just see a slight improvement in demand I think we'll see orders from some of these retailers. But frankly, the traffic is very slow right now at the retail level. We need to see some catalysts that will bring the buyers at least back to starting to look again.

It's not that the price points of our products are too high, they're very attractive. It's just that the retailer is not seeing the traffic. And then, as we just talked about, we'll continue to look at are there some opportunities here to look at expanding modestly even in the face of this slowdown where we get positioned so that when things do turn up we'll have a larger footprint from which to grow and that's obviously the idea in Texas.

Right, right, right. As you think about the builder opportunity, what are the impediments to that manifesting itself?

Well, I think the builders, like everyone else, are very cautious about their expansion. They're also concerned about will they be able to get the consumer financing to sell the homes once they put them in a community. So they're moving very slowly and cautiously, but I think that will come to fruition, it's just a question of time.

But again, it goes back to when the buyers come back to a lower price point, an affordable home, a lifestyle home. And I think that's what these developers are looking to get positioned to do. But like the rest of us, they really don't have any idea when that will come back so hence the slow movement.

We're doing a lot of designs, we're doing a lot of design work for them, designing custom product. So there's activity going on, there's just not a lot of orders yet. So I think we're getting positioned. And once those developments get on a course they will happen eventually, it's just a question of when they'll start seeing some sales.

Thanks, Joe.

Okay, Tony. Thank you.

Dean [Machatto], Atika Capital.

This is kind of a follow-on from the last question. Sort of just considering your own commentary and I guess the simple fact that you mentioned that the industry is at multi-decade lows in terms of shipments -- and I'm looking at your numbers here and it looks like this year net of your interest income you're going to earn about $0.65 or so per share.

Based on that, if you take out your cash balance from your current stock price you get about $22 in valuation for the business. If I take that over the $0.65 in earnings I get almost a 34 PE. So my question to you is why would you go out and buy back stock when you're saying that the industry is the worst you've seen in decades and you don't really see how it's going to get better anytime soon? Why would you go out and pay 34 times for your stock? What is the value proposition that you're seeing out there?

Dean, I think it's again the fact that we have pretty good confidence in the medium- to longer-term. I think we're well positioned in a growth market; Arizona is the fastest growing state in the nation, California is the most populous state in the nation I believe and we're in those markets. These times won't last forever; some of the numbers I mentioned in terms of the industry statistics I think one could view as, again, boding well for the future.

This industry sold a lot of homes, a lot of homes in the early '70s that are now 30 plus years old and they were built in fact before the HUD code standards were in place, many of them. And they were built to different energy standards and so forth. So there's a lot of replacement business, particularly in states like Arizona and California where many of those homes were sold back then.

So there's a number of things I think that are positive. It's the old -- I don't mean to sound trite, but it's the old glass half full, glass half empty issue. And we need do think that, although times are extremely tough right now, these times won't last forever. I think we've proven that with a little bit of help from the economy, a little bit of help from the market we can generate very good returns in our business and very attractive margins. I think those times will come again. We simply don't want to leave any impression that we can predict when that will happen and the stock buyback is a long-term proposition for us.

So does that mean that the pace of the buyback is going to be relatively slow, if you will? You're going to sort of do it opportunistically?

I would say that's a good assumption, Dean, yes.

The prior questioner touched on this topic, but just to get a sense as far as valuations of potential acquisitions out there. Are they not at levels that you want to see them?

Yes, but also -- there's a little more to it than that. There's also the question do we want to acquire right now and have more capacity that is a challenge to fill. So, there's also a question of timing and we know we can't be perfect market timers, we don't pretend to be. But there is an issue of trying to be somewhat close. And do we want to take on the potential burden of trying to fill more capacity in maybe some other geographic market.

So there's two -- it's not just the pricing of the acquisition. It might be that we could find one that might be very bargain basement priced, but there might be good reasons for that. So it's a combination of the environment and the pricing.

Okay. Thanks, guys.

You bet.

[Juan Gomez], BB&T Capital Markets.

Thank you for taking my call. Good morning. I just have one quick question actually. When the FHA Modernization Act of 2007 is passed, how significant do you think it will be for the industry and for capital?

I think for those people who might not be familiar, that FHA Modernization Act will increase the loan limits on some FHA loans that haven't been raised for some time and it will provide more opportunity for manufactured homes to be financed FHA. I think it's a very good positive for the industry. As with any other one event I don't think it's the be all/end all.

Many of us in this industry have grabbed for life lines these last several years and I'm not a believer in that. I think it's going to take a variety of things. But certainly the FHA improvement act will be a big positive for the industry and I think it can help finance, particularly on the home only side where FHA finance has been restricted because of the low loan limits that have been in place for many years.

Have you heard from inside or people within the industry I guess when this could pass?

I'm sorry, I didn't follow that, Juan.

If you have heard from -- within people in the industry, do they know when this new act could pass, could be signed into law?

I think the feeling is pretty positive that this will go through, barring any earmarking and so forth that might be done on the bill, I think the view is that there's good support for it on the legislative branch, but I couldn't give you a time as to when it might be signed by the President.

Okay. Thank you very much.

(OPERATOR INSTRUCTIONS). Mr. Stegmayer, 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 and that will conclude our conference call for today. We thank you for joining us and we look forward to speaking to you in three months. Thanks very much.

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