Cavco Industries Inc (CVCO) 2009 Q2 法說會逐字稿

Good day, everyone and welcome to the Cavco Industries Incorporated second quarter fiscal year 2009 earnings call and webcast. This call is being recorded.

With us from the company today is the Chairman and Chief Executive Officer, Joseph Stegmayer. Please go ahead, sir.

Thank you, Cecilia, and welcome everyone to Cavco's second quarter conference call. With me today as always is Dan Urness, our Vice President and Chief Financial Officer. And of course, 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 our statements and comments -- all of our 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 controls. 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.

The challenges continued this past quarter as total industry shipments of manufactured homes remained in decline. The Manufactured Housing Institute recently reported that national home shipments for the first eight months of the calendar year were down 10% for the industry as a whole. However, aided by increased production of our Texas operation compared to last year, Cavco's comparative change was increase of less than 1%. Specifically to Arizona and California, our major markets, industry wide shipments were down 37% through August 2008, while Cavco's shipments were down 34%.

Industry shipment data is not yet available for September. However, for July and August, the first two months of Cavco's second quarter, home shipments were down 18% nationally and 35% in California and Arizona. We can't add anything to all the news in recent weeks concerning the financial markets and the general economy except to say that these problems certainly have an impact on our business. Would be buyers seem even more cautious, financing a home has become a very slow process, and many new development projects that planned to use factory constructed homes are being delayed further. While the near term outlook is not promising, we think there are reasons to be optimistic about the longer range.

And we will discuss this after Dan reviews the financial results. Dan?

Thank you, Joe. Cavco's net sales for the second quarter of fiscal year 2009 were down 22% to $30 million, from the prior year's net sales of $38.4 million. The lower sales figures are a result of reduced floor shipments which were down 11.3% as well as a 4.1% lower average selling price per floor, of approximately $25,600 versus the same quarter last year. The Company's gross profit margin for Q2 '09 was $3.7 million, or 12.3% of net sales versus $5.5 million or 14.4% of net sales for the second quarter of last year. The gross margin was increasingly challenged this quarter by reduced capacity utilization which dropped to just over 50%. The Company's backlog at quarter end was just under one week at $1.6 million.

We successfully reduced our selling, general and administrative expenses for the quarter by $410,000 to $3.1 million, compared to last year's second quarter SG&A of $3.6 million. As a percentage of net sales, SG&A was 10.5%, versus 9.2% last year. Interest income was lower by $433,000, primarily the result of generally lower interest rates from the Company's investments in US Treasuries. The current effective income tax rate for Q2 '09 is 38%, compared to 30% for Q2 '08. The rate has been largely affected by no longer realizing tax free interest income on short-term investments as well as a decline in certain state tax credits in fiscal 2009 resulting from reductions in the workforce. Fiscal 2009 second quarter income from continuing operations was $518,000, or $0.08 per diluted share, compared to $1.9 million or $0.29 per diluted share last year.

In comparing the balance sheet at September 30th, 2008 to March 31, 2008, our cash and cash equivalents balance increased $2.1 million, to $75.7 million at September 30th. Trade receivables were down approximately $2.3 million, compared to the beginning of the fiscal year, resulting mainly from lower sales volume. Inventory is up $1.2 million, primarily due to increased raw material prices, and slightly higher with finished goods inventory levels. PP&E is up mainly from the $537,000 purchase of a retail sales lot in New Mexico which we previously leased. This is a location on an existing company-owned retail outlet. Accrued liabilities are lower by $1.8 million, the result of a $1 million drop in customer deposits and a $700,000 reduction in salary, wage and benefit accruals. In addition, the balance sheet continues to be debt-free.

Joe?

Thanks, Dan. Shortly after our last conference call, the President signed into law the Housing and Economic Recovery Act of 2008. Some of the provisions of the Act should be quite positive for our industry. Specifically, the act provides for a $7,500 tax credit for first time home buyers. And if the buyer's tax liability is less than $7,500, the taxpayer actually receives a check back for the balance above his or her liability. This program will be effective through June 30th of 2009. Also very important is the FHA loan reform contained in the law. The FHA title one loan limit was raised to $69,700, it made for the purpose of financing a purchase of a manufactured home only without a land purchase. This change has been long awaited because the previous loan limit of $48,000 had not been changed for 16 years and was not sufficient for many buyers. Another plus is that the limit is now indexed for future inflation which was not the case previously.

The Act creates an affirmative duty for the GSEs, Fannie Mae and Freddie Mac specifically, to serve the manufactured housing industry. This includes accretion of mortgage products for personal property lending, and there will be a director who will be responsible for giving reports monthly to Congress including the progress of the GSEs on this mandate. Aside from this legislation, I think there will be greater emphasis on and demand for truly affordable, high quality homes in the future. As I've said for several years in these calls, the factory constructed industry lost many potential buyers of our homes to the on-site construction industry. As people were unable to purchase higher priced homes by virtue of the ill-conceived and poorly administered loan products made available to seemingly everyone, regardless of their qualifications. More responsible lending using sound underwriting principles should result in a greater percentage of home buyers considering and purchasing our products once again.

So there are some positives developing. Meanwhile, we believe that we are doing the right things to deal with the current environment and our strong financial condition adds to our capability to successfully navigate through a myriad of financial and economic problems which are unprecedented in the modern history of this country. Moreover, our people and the quality and diversity of our homes that we build make us confident that we are positioned to grow this business in the years ahead.

We'll now be happy to take questions, Cecelia.

Thank you. (OPERATOR INSTRUCTIONS) . And our first question comes from David Wells of Avondale Partners.

Yes, hi, thanks for taking my questions. First of all, have backlogs changed appreciably since the end of the quarter as we've gone into October here?

Thank you, David and I'll pass that to Dan who has the numbers in front of him.

Sure. I mean, our backlogs have been fairly weak for the last year, really. They have gone down since this time last year when they were around $4.5 million.

And any -- I guess earlier in your comments there about $1.6 million is it a consistent rate today, or was that a quarter-end number that you had given?

That was a quarter-end number and that's not inconsistent with today.

Okay. All right. And just to follow up on that, any changes with regard to capacity utilization, still trending at that just over 50% rate?

Well, that's come down since the last quarter and the quarter before that and we are working to keep that from reducing any further.

Okay. And third question, just as you look back over the quarter, just wondered if you could give any color on what sales trends look like on a month to month basis, if you saw any changes or was it fairly level as you went through the period?

I think, David, it has -- it has gotten somewhat tighter with respect to incoming orders. It was -- as Dan indicates, it's been very tough all along and -- but I think it's -- while it's hard to measure, there probably has been even a little further decline since the public knowledge of the financial crisis over the last month or two.

What are you seeing with regards to raw materials? Have those prices started to trend back down or are you still seeing inflation there?

A mixed bag. On raw materials, we're seeing -- we're still believe it or not seeing some increases. In fact, we just received two more increases on some major products we buy just in the last couple weeks. However, we have seen a stabilization and at some points a decline in some other raw materials. I think the more interesting point would be that what's it going to look like in the months ahead because commodity prices are obviously falling. Some of the reasons we've been given for the increase in raw materials by our vendors has been the petroleum price increases, the increased cost of adhesives, increased the cost of paint, increased the cost of so many products use petroleum, even carpets and floor coverings and so as your prices declined it will be interesting to see if we see some relief on those products.

Sure. And would we see a lag effect, then, if those -- if those prices were to come down, would you see those start to get reflected fairly quickly or do you have a -- what do your inventories look like from a raw materials perspective and how long would it take to work through those?

It would come down fairly quickly. We turn our raw material inventories quite rapidly so that's not so much of a problem. We do have a surcharge, generally, a material surcharge on the homes we sell so that surcharge would be adjusted as some of these commodities and purchase prices come down. I would say that there should not be much of a lag, really in realizing lower prices.

All right. And then just lastly here, the company's cash balances continue to increase which is a good thing, but just wondering if you could give any color on what your plans are with regard to those cash balances.

Well, I would say short-term we would try -- we would like to find some very safe and liquid investment alternatives. We've been very conservative and fortunately moved our investments into US Treasuries before this debacle. In fact, probably some nine months ago. So the money that we have invested is very safe. It's all in US Treasuries and it's very liquid. Obviously, though, the yield on it is de minimus at this point. Short term, we would like to see if we could find some other instruments that would offer safety with higher yield. We're looking into that as we speak. Longer range, I think probably more to your question, we continue to look for opportunities to strategically position our company for, again, greater growth when times change and so we'll continue to look for opportunities to expand either from an acquisition standpoint or from a green field or de novo operation and we're going to stay pretty much in the areas we know, factory construction, and there will probably be more opportunities in this field in the months ahead. So we're keeping our ear to the ground with that, with respect to those opportunities.

Great. Thanks for taking my questions.

You bet.

We'll go next to Jay McCanless of FTN Midwest.

Hey, good morning.

Hey, Jay.

Wanted to ask first, how many retail stores do you have open now?

We currently have six.

Okay. With the -- Joe, with what you were talking about with title one hopefully coming -- getting more active and more lenders getting involved there, does it make any sense to expand out your retail distribution?

Possibly, Jay, but I would say that we have a very strong distribution network of independent dealers. We've been in our markets so long, over 40 years, that -- and I think over the years we've continued to upgrade and obviously with the downturn the industry's seen the last couple of years, the strong survive and we've been fortunate to have very strong distributors. I don't think we intend to get into retail internally in a large way. We would certainly consider certain pockets of opportunity, perhaps if they presented themselves and we found something that made sense but I think our overall strategic intent is to continue to work through independent distributors, retailers and community developers and land lease community operators.

Okay. And then just sticking with title one for a second, what -- in terms of the different pieces of the puzzle, whether it's the local banks or Jenny May, et cetera, where do you see as the potential stopping point for that right now? I know that Jenny May had committed earlier this year to buying about $1 billion worth of that paper. Is that commitment still in place and what have you seen on the local finance level?

Yes, I believe the commitment is still in place. I think the FHA title one program doesn't really kick in until the end of the calendar year. I think when it becomes the new numbers actually become effective. So we haven't seen much impact yet in that program. Plus I think as tough as conditions are, and with the lack of knowledge of some of these programs, really hasn't been spread around, I think we have yet to see much benefit from the loan reforms and the down payment assistance program through the tax credit. I shouldn't really call it down payment assistance but it basically does help people get cash back in their pockets or reduce their tax liability in a very short order so it can help in that regard. So I think we'll start to see more benefit from these programs into the new calendar year. I don't think we've really seen any benefit so far.

Okay. And then my last question, repurchase liability, are you seeing anything moving on that, trend going up? Trend going down?

Our repurchase liability is declining slightly of course as unfortunately our business declines. With respect to actual repurchases, our experience has been very, very modest and we watch that very carefully, of course. We try to work with our retailers and the floorplan lenders to mitigate any problems in that regard, so that's something we review continuously and at this point we don't have any cause to be in alarm about that, but it is something we'll watch carefully.

Okay. Great. Thank you.

Thank you, Jay.

(OPERATOR INSTRUCTIONS). And we'll go next to David Cohen of Midwood Capital.

Hi, you mentioned floor plan lenders. Have you seen any changes in terms of the availability of that capital for your dealers? Are there any analogies like there are sort of taking place in the automotive world where certain lenders are backing away from floorplan financing?

David, two things. One is that rates -- interest rates are moving up somewhat, I believe, with the floorplan lenders to the retailers. And two, although we're told that there is no change in the availability of financing for existing accounts, I think they're being very cautious about opening up new accounts with dealers. So if a new dealer comes to them and asks for a line of credit, I think they're going to be fairly conservative about that. But so far they have not -- with respect to our distribution anyway, we have not heard one story about them cutting off any existing dealer.

And was there -- so far, have you seen -- what percentage if any of your dealer base has closed up shop? Have they gotten that bad where folks have actually closed up shop?

The percentage would be miniscule. We could count on one hand the number of dealers that we deal with that have closed, so it has not been a factor. Although I would say it's certainly a concern going forward, because these dealers have had tough times for a while but the better operators are used to managing their costs in these tough times. Many of them have been through these cycles before, although this one obviously is very tough. But a lot of the execution is entrepreneurial, family run, and they can cut their overheads very quickly and adjust accordingly. One thing we get a little bit trapped with is their inventories might increase relative to their sales because their sales are declining so much. But the good thing on that note is that inventories are relatively quite low long among all the retailers. If a retailer has five or six homes, their sales drop, they would rather be at four or five homes, so they have to try to reduce, but their reductions are not from high levels as we've seen in past cycles so I think that's a positive, if there is one, in these -- in that part of the decline.

Okay. Thanks. I'll get back in queue.

Okay.

We'll go next to [Michael Ware] with Presidio Investment Management.

Good morning, just a question on pricing. You guys obviously saw the ASPs come down a little bit in this quarter. Just wondering if you can comment generally on the competitor environment and how your competitors are reacting to the -- on the pricing side, whether you're seeing pricing competition pick up as volumes weaken here. Thank you.

Michael, the average selling price coming down for really two primary reasons. One is the competitive environment you mentioned and yes, we certainly are seeing some competitive pressure from a pricing standpoint. There is some operators in the manufacturing side who will resort to pretty desperate measures to try to keep a plant running even at a minimal schedule, and so we are seeing some price competition from that standpoint. The other major factor would be a reduction in the size of the homes and the amenities in the homes and that's probably what's driving -- in other words, a product mix issue and that's I think driving the average selling price more than the pricing is, although the pricing does have an impact. But frankly, people are buying lower priced homes, somewhat smaller in size, less options in the homes and that is affecting both average selling price and our margins.

Okay. So there hasn't been any discernible change in terms of the competitive pricing environment, people aren't pricing more aggressively as we've seen things weaken here?

Well, as I said, we do see some of that. It kind of goes in spurts. Once in a while a manufacturer will come out with some special and they'll offer a home maybe for a limited time, trying to spur some sales, at a certain price where they'll offer certain options at no additional charge and so we see some of that and we have to do battle with some of that but oftentimes those products are down scaled in terms of specifications and quality and the parts involved in putting them together, the componentry and so we also will sell on the basis of the quality and the advantages of our product. So we don't necessarily match those prices. We try to be reasonably competitive but we're not going to get down to the point where we don't make a margin on our product and I think in some cases that can and does happen. But it also happens for a fairly short time period because the manufacturers, especially in this environment, can't afford to do that for very long.

Right, right. Just one other question. With the foreclosures increasing, are you seeing site built homes becoming more of a factor in your market in terms of increasing the competition?

Right. The foreclosed upon homes and the fact there's of so many homes in the market, it does have an impact, depending on the area. There's some areas where it really has no impact, more rural areas. In planned communities, it doesn't have as much of an impact. But certainly where our homes were located or could be located near the large tract built subdivisions that are discounting homes heavily, it may have an impact. Although, again, our price points are still, even with discounted pricing on the part of the on site constructed homes, our price points are still generally lower than those price points. So a buyer can still look to our product at a much lower price point than they could at a discounted site built home.

Okay. Well, thanks, guys and good luck.

Thank you.

(OPERATOR INSTRUCTIONS). We'll go to a follow-up from David Cohen with Midwood Capital.

Just looking for some clarification. With regard to the FHA title one program, is there -- within that, is that a loan guarantee or is that something that is originated by the FHA? In other words, does a private lender need to be involved in underwriting the loan? How does that program work?

Yes, the loans are generally written by mortgage originators, whether it be banks or mortgage brokers. But they are FHA loans so they can sell them immediately to FHA. They don't have a funding issue. That's the good part of the FHA program. They can sell them immediately and have the FHA insurance. So the availability of those funds is a big positive. With respect to the $7,500, that's a tax credit that the home buyer gets and they obviously file for that tax credit. So the originator of the loan can help them with the paperwork but they're not really the conduit for providing that $7,500 back to them.

Okay.

As I mentioned, the good part is is if an individual and some of our buyers might not have a $7,500 tax liability and so the good part of this program is that they can eliminate whatever tax liability they do have, let's say $2,000 then the $5,500 balance they'll actually get in cash as a refund. Okay.

And besides the FHA, where is -- I guess who else is the major player in terms of capital financing these loans today?

Well, I think you have some lenders that are holding these loans in portfolios such as US Bank which lends to this industry. Our understanding is that they keep these loans on their balance sheet. Wells Fargo has been traditionally a provider of loans to our industry and continues to do so. So I couldn't tell you exactly what some of these institutions are doing with the loans. I suspect some of them are keeping them on the balance sheet, some of them have vehicles to sell them, which I imagine has been increasingly difficult.

But you haven't heard necessarily anything about this type of paper becoming, less -- that these private sources of capital backing away from this type of paper?

No, not specifically, no more than we've heard about that in the macro sense for all lending. We haven't heard anything. Keep in mind, these loans now that we've been generating in manufactured housing are pretty good because the underwriting standards have been so you tough for some time now. We did not participate in the wild underwriting if you will that the on-site construction industry did. So we don't really have the kind of problem with our loans, most of the loans that have been written in our industry have been fairly good credits. They've been reeling down payments on the homes and they've been thoroughly and I would say meticulously in many cases underwritten. So I don't think the performance of our product is going to mirror at all the performance of conventional mortgages.

Okay. Thank you.

Sure.

And with that, we have no further questions in queue. This will conclude today's conference ladies and gentlemen. We appreciate your participation and you may disconnect at any time. Have a great day.