Cavco Industries Inc (CVCO) 2009 Q1 法說會逐字稿

Good day, everyone, and welcome to the Cavco Industries first quarter fiscal year 2009 earnings conference and webcast. Today's call is being recorded. With us today from the Company is the Chairman and Chief Executive Officer, Mr. Joseph Stegmayer. Please go ahead, sir.

Thank you, Melissa. Good morning, and thanks for joining our call today. With me is Dan Urness, our Vice President, Chief Financial Officer and Treasurer. Of course, before we begin, we are obligated to state that we speak today under the umbrella of the Safe Harbor rules. Certain comments we will make are forward-looking statements. Cavco disclaims any obligation to update any forward-looking statements, and investors should not place undue reliance on any such forward-looking statements, because they may not in fact materialize. There's a complete statement on this subject incorporated in our 8-K which was released yesterday. During our fourth quarter conference call, we said that the next several months would be very tough, and indeed they have been. As the general economy and the housing industry continue to struggle, we feel fortunate to be solidly in the black and to be financially strong, enabling Cavco to continue to develop new product and to pursue new markets. Before I make some additional comments, I'm going to ask Dan to review some financial highlights, and then we'll take your questions. Dan?

Thank you, Joe. Net sales for the first quarter of fiscal year 2009 were down 5% to $35.5 million from the prior year's net sales of $37.4 million. The lower sales figure is the result of reduced floor shipments, which were down 3.7%, while the average selling price per floor this quarter of approximately $26,400 was 2.3% lower than the average selling price per floor during the same quarter last year of approximately $27,100. MHI recently reported the industry HUD code production and shipment information through May of calendar year 2008. Accordingly, national floor shipments for the first five months of the calendar year were reported to be down 9% for the industry. Aided by the ramp-up of our Texas factory, Cavco's comparative change was a decrease of 1.8%.

Isolating these same statistics for the Company's key states of Arizona and California, industry floor shipments were down 38.5% through May 2008, while Cavco shipments were down 29.9% comparatively. The Company's gross profit margin for Q1 '09 was $4.1 million or 11.8% of net sales versus $5.4 million or 14.6% of net sales for the first quarter last year. The gross margin was challenged this quarter by low margins in Texas, resulting from that factory's product line combined with our low utilization. The margin was also adversely affected by higher raw material costs in each of our operations. Normally, we're able to pass along raw material price increases in our wholesale sales prices; but the current market environment has not afforded us many opportunities to do so in an efficient and time timely manner. We successfully reduced our selling, general and administrative expenses for the quarter by $0.5 million to $3.1 million, compared to last year's first quarter SG&A of $3.6 million. As a percentage of net sales, SG&A shrank to 8.7% in Q1 '09 versus 9.6% in Q1 '08.

Interest income was lower by $377,000, primarily the result of generally lower interest rates and the Company's more conservative cash investment strategy. The current effective income tax rate for Q1 '09 is 38% compared to 32% for Q1 '08. The rate has been largely affected by no longer realizing tax-free interest income on short-term investments, as well as a reduction in certain state tax credits in fiscal 2009 resulting primarily from decreases in personnel. Fiscal 2009's first quarter income from continuing operations was $853,000 or $0.13 per diluted share, compared to $1.735 million or $0.26 per diluted share last year. In comparing the balance sheet at June 30th to March 31, our cash and cash equivalents balance was $73.4 million, essentially the same as the balance three months ago. The Company's trade receivables were moderately lower. Inventory is up $2.1 million, primarily due to timing of shipments at quarter end. Current assets were five times current liabilities, at June 30th and total current liabilities were down slightly from March 31. Our balance sheet contains no short or long-term debt and our stockholders' equity improved to $147.2 million at the end of the quarter. Joe?

Thanks, Dan. We are gratified that our Texas facility is growing and is profitable. Meanwhile, our Arizona operations have performed very well, given the market conditions Dan just referred to with his comments on home shipment levels. Our people are doing everything they can from an operations standpoint to mitigate the rising costs of raw materials and transportation expense. On the product line front, we have introduced a new line of green homes as well as a selection of solar homes. In fact, these new features were highlighted in a television news story about Cavco that aired on CNBC this past Monday. If you did not see it, you can still view this story at CNBC.com under "TV Stories by Reporter Jane Wells". While there is virtually no visibility as far as the near term outlook is concerned, one bright spot may be the comprehensive housing reform bill moving through Congress.

While I think the bill is flawed for a number of reasons, within this broad legislation is a logical and important manufactured housing FHA Title One initiative that will significantly increase the limit for home only or chattel loan. The reason we feel this particular part of the bill makes sense is because the loan limit for FHA financing of a manufactured home has not been raised, not even adjusted for inflation, since 1992. As a result, the number of loans originated under FHA's Title One program has declined to an insignificant number of less than 2,000 per year. The new loan limits should spur more activity in this valuable lending program. There are also tax credits for first time home buyers and a tax credit for people who do not itemize on their tax return, both helpful issues for affordable home buyers. In any event, there's no doubt that the economy and housing market will continue to be difficult environments in the months ahead. We remain confident, however, that we have the wherewithal, financial and otherwise, to combat the challenges we expect to face. Longer term, we appreciate the fact that we're involved in geographic and demographic markets that offer excellent potential for improved systems-built housing demand. With that, Melissa, please open it up for questions.

Thank you. The question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS). Our first question will come from David Kaplan with Sidoti & Company.

Hi, good morning, everyone.

Good morning, David.

Could you please provide the capacity utilization and backlog for the quarter, please?

Sure. Our capacity utilization is in the low 50s this quarter and our backlogs are at $3 million for the Company.

Okay. And then also in terms of the cost pressures, where are you seeing the greatest cost pressures?

Well, David, we're seeing those in virtually every area of what we buy that you could mention. One of the biggest items we buy is steel and aluminum for various parts of the home. Steel price has risen tremendously -- still rising. Another is insulation and paint --both paint, of course, is often petrochemical based. Insulation takes a lot of energy to produce. The only area we have not seen significant increases is in some of the -- what we call panel products -- plywood and OSB have not risen nearly as much. They've been fairly stable. But gypsum, which is the wallboard we use inside the home, same as other construction methods, has risen significantly and appears to continue to be rising. Electrical parts, plumbing parts, floor coverings, carpets, carpet pads, linoleum, all have a petrochemical relation so they're all rising on that basis. as well as, of course, the transportation costs to deliver them.

Okay, thank you. And just the last question, could you talk about any special projects you're currently working on? You had mentioned on the last call that you had been working on a project for the past few quarters. Are there any other ones in the pipeline?

I'm not sure I'm following you, David. From what project? Community projects. Community projects?

Yes.

Yes, well, we have several that are fairly active and a number of worked on. The problem right now, though, is although we're gaining -- we feel we're gaining share or gaining shelf space, if you will, and more involvement with more communities, the problem is, of course, the business in those communities is fairly slow right now. What we do feel positions us well, as home sales pick up we're going to be more involved in more locations than we have been in the past. I can't point to any one specific project that has had any meaningful impact in the short term. But I think we're making inroads in a wide variety of projects, both Arizona, California and even New Mexico. Okay, great. Thanks a lot. You bet.

Our next question comes from Michael Corelli with Barry Vogel and Associates.

Hi, good morning.

Good morning, Michael.

Just a question about unit shipments. Obviously, considering the environment in the industry, it was pretty surprising that you were able to maintain relatively flat unit shipments. Is that mainly due to growth in Texas that's offsetting weakness in other areas, or was there anything else that you were able to do that?

Well, yes, certainly Texas is the biggest factor. As Texas continues to ramp up, it is providing additional volume. That helped both on unit shipment and the sales number. We also had stability in our specialty line of products, which are smaller units. They seem to be very popular now, for somewhat lower price points, and we've had interest in some of our new cabin line of products for residential cabins. So it's kind of across the board, but I would say the biggest factor in the unit shipment certainly was Texas.

Could you give us an idea of how many units you increased in Texas versus a year ago?

No, we don't break out, Michael, by plant.

Okay. And then do you think you -- there's a possibility you could maintain relatively flat shipments because of what's going on in Texas? Although I did see after a period of some rapid growth there the shipment data for Texas got a little softer in May.

Yes, Texas is doing better than many states, but it's by no means without its challenges as well. So we would expect to continue to ramp up production in Texas over time. Production activity here in our Arizona markets is certainly up -- it's hard to predict at this point in time. But I think you'll see a stabilization of our shipment levels.

Okay, mostly because of Texas ramping up and the other ones not deteriorating as much?

I think that's probably a good assessment for the short term, for this next quarter.

Okay. Thank you very much.

You bet.

(OPERATOR INSTRUCTIONS). We move now to Jay McCanless, FTN Midwest.

Hey, good morning, everyone.

Hi, Jay.

My first question is a conceptual question. And I agree with your assessment on the housing bill that may pass tomorrow in the Senate, if The Wall Street Journal is correct. But I'm wondering if you could give us the outlook on how it's going to affect the different segments of your market. In other words, is leisure -- are the leisure and active adult buyers going to respond as quickly as maybe the entry level buyers or the affordable buyers of your single section product in Texas? How do you think that's going to play out if this bill ends up being ratified?

Well, that's a valid point. I think the -- I think the empty nester buyer demographic, the aging Baby Boomer buyer that is such a large demographic and an important one for our industry, certainly important for Cavco, that is a little different market. I think they're more dependent upon sale of their existing home, which of course still could help them sell their home much faster than they have been able to do heretofore. And also it really depends on their determination that this is -- that they've overcome, I should say, I guess, the denial that they have that their home isn't worth quite as much as it was several years ago, and I think that gradually happens. These people want to make a housing lifestyle change in that demographic, they've made up their mind to make the change.

I submit that they can delay it for a while, but ultimately the clock is ticking and they want to make the change. And so I think the housing bill could have an impact by the better resale of their home. Other than that, it doesn't have a lot of impact to those buyers. It has an important impact to the affordable home buyer, and those are still a big market for us. Not only in Texas, but we sell a lot of typical first time home buyer and first move-up buyer homes in the Arizona and California markets. And in fact, in California we sell a lot of communities, Jay, that are family-oriented communities. And that business is very slow right now, but California has an enormous number of parks and they have -- it's estimated about 60% of the homes in those parks are pre-1976 in age, pre-the HUD code, so there's a long line of replacement business that could and will happen, and this bill could help spur some of that.

Okay. That's great. Could you give the percentage mix of multi-section product versus single section product for what you did in the first quarter versus what you did, say, in the first quarter of '08?

Sure. I presume you're speaking of HUD code product, which for us multis are around 90% and singles are around 10%.

Okay. And that was -- well, I was actually going to see if you take the split between, say, multi-section for all your different classes and then single section to include park models, cabins, et cetera.

You know, in that breakdown it would be about 50/50.

About 50/50. And des that compare about even with last year?

It does. It's pretty close with last year as well.

Okay. My final question, did you all buy back any stock this quarter and what's the outlook for that since I know you have the authorization now.

Right. We have not purchased any yet but we stand ready to do so.

Okay. Great. Thank you.

Okay, Jay.

And we go now for a follow-up question from Michael Corelli. Please go ahead, sir.

With the rising costs that you were talking about and the fact that you've been shifting, I guess, to more lower priced products, should we expect the margin squeeze to get worse going forward?

Well, Michael, that's quite a forecast. I think that we expect to see continued margin pressure. I'm not sure that we necessarily expect it to get weaker, but certainly material cost challenges don't appear to be dissipating to any extent. It's surprising in some cases why they continue to rise, but -- for example, in gypsum, gypsum shipments are way down for the industry, but somehow they're still talking about price increases. In other products you can see that maybe demand is still there worldwide. So I think at least for the time being, we'll continue to see the raw material price pressures and the somewhat reluctance on the part of the market for us to be able to pass all those price increases through, certainly in a timely manner. So I think we'll continue to see some margin pressure. I don't necessarily think it's going to get a lot tougher than it's been, but it could.

Okay. Thank you.

And we take our next question from Howard Flinker with Flinker & Company

Hi, Joe.

Howard, how are you?

Good, you?

Good, thanks.

Your comment about replacement housing, kind of interesting. Would that stem from the $7,500 credit essentially? Is that your line of thought?

On the replacement housing?

Yes, on the housing bill.

Right. Well, I think yes. What it stems from, I think, of course that credit is for first time home buyers.

Oh, it's only first time? I forgot.

I believe that's what I read anyway, and so that would help our affordable home buyers, the people coming out of rentals.

Right.

On the older age demographic, the 50, 55 and older --

Yes.

I think, again, the whole bill might spur the sale of their home. Other than that, it doesn't have a significant impact probably on their purchase -- other than perhaps a lower income retiree who might not be itemizing or something like that, the bill could help them with the tax credit for them. But I think this is primarily going to help the first time affordable home buyer.

Oh, you mean it would generally loosen up the market?

Provide, I think, more financing capability for those buyers.

Right. And second, this is a kind of subjective question. If you can think back in your memory when you were at Centex or Champion and the upturns -- several upturns in those markets occurred; and if you can think of the early signs, do you see any of those now?

Well, some of them.

At some point soon you're going to have to see them, because it's been, what, seven years?

That's right. There's some of them. Certainly, we're pleased that inventory levels are very much in control; that is, they're not way out of line, and in fact we're seeing our inventory levels among our distribution base decline, which is a good sign. Eventually, as they exhaust -- as sales decline, obviously a retailer distributor generally wants to reduce their inventory.

Of course.

Typical. And so it takes them a little bit longer to do so because obviously sales are slower. But once they get through that, they eventually get to the point where even if sales are slow they have to order a home to sell a home.

Yes, at some point they've reduced inventories too much because they, too, get scared like people in the investment business.

Well, so that's right. And they're going to get so low they can't sell out of inventory anymore. So they have to order a home when a customer comes in. Initially, they might be trying to sell the customers on taking a stock model home, just like a spec home in a site built subdivision. They might be (inaudible) to take that, because want to reduce it. But after they get their levels down, the customer comes in and they order a home for them. They don't try to convince the customer otherwise because they're ready to order a home. So we're seeing that. Every month that goes by we're in a better position from that standpoint, because our dealers obviously are not ordering many homes. They're certainly not ordering homes for stock. So as they reduce their stock inventories, they get closer and closer to ordering a home every time they sell one. We're not quite in that position, yet but I think we get closer all the time. So yes, I see some of those signs. And --

What about traffic? At some point doesn't traffic start to increase? Even before buy? And are you seeing any of that?

Well, it does. But the reports we're getting on traffic are all over the map, really.

Oh, I see.

Some say traffic has increased. Some say it's declined. Some say it's very sporadic. One week they'll have 20 customers, and the next week they'll see two customers. So we're getting all kinds of reports. It seems to --

But it's not getting any worse, either.

No, I think customers certainly are there. Some of them are hesitating. They want to see what's going to go on in the economy. They want more confidence. Some people obviously just don't have the credit quality that -- they're looking, but they don't have the credit yet to buy the home. But I think the traffic is out there. And I think we will see more of it. I think the -- apartments are quite expensive so the alternatives are not that attractive. And price of the homes is very attractive.

Okay. That gives me an education. Thanks, Joe.

You bet.

And at this time, Mr. Stegmayer, we have no other questions standing by. I would like to turn the program back to you for any additional or closing comments.

Thank you, Melissa. Well, we're very pleased that you all could join us today. We're cautiously optimistic that we could see improvements as the year progresses. It's certainly going to be a difficult environment, but we think we're well-positioned to capitalize on any opportunities. We look forward again to talking to you here in a few months. Thank you very much. Have a good day.

Thank you, everyone, for your participation in today's call, and you may disconnect at this time.