Cavco Industries Inc (CVCO) 2009 Q3 法說會逐字稿

Good day everyone and welcome to the Cavco Industries, Inc. third quarter fiscal year 2009 earnings call and webcast. Today's call is being recorded. At this time for opening remarks I would like to turn the call over to the Chairman and Chief Executive Officer, Mr. Joseph Stegmayer.

Welcome everyone. We reported the results of the third quarter ended December 31, 2008 yesterday, and they were posted on our website, Cavco.com, and of course widely available in other public domain.

The figures that Dan will review in a moment represent our poorest performance for any quarter in nearly six years as a public company. We are certainly disappointed with the results. We believe that we have always prepared our company to expect the unexpected. We think that we are nimble, and that we can quickly adjust to market demand and changing environments. And we feel our productline is very competitive, and our distribution base is good.

Still there is only so much a team can do when faced with the unimaginable events in the economy that we have witnessed. And the resulting freefall in consumer confidence.

In Arizona for the three-month period ended in November, the latest period for which industry statistics are available, industrywide shipments of factory-built homes were down 33% from the prior year period, which was at that time the lowest shipment level in some fifteen years. For California the shipments were down 45%. These states represent our two largest markets.

In Texas, our third biggest market, shipments fared better, however, they were still 13% less than the previous year period.

Even for those buyers who do not lack confidence, consumer financing is a big challenge. Those that can qualify often face long lead times to get approved and to close their loan. And a new and significant development occurred during the quarter, and that was the announcement by Textron Financial Corporation, one of the major providers of home inventory lending to retailers and developers, that they intend to cease lending operations by the end of next month.

While there are other sources of lending for the distribution chain, this exit is expected to adversely affect the ability of some retailers to buy homes for resale, which could have a negative impact on the industry as a whole. We will discuss this more later during the call.

Before Dan reviews the numbers, I want to state that our people have been an extraordinary job steering the Company through the myriad problems we all face. They have been steadfast in their commitment to customers and to the Company. We have had to make some very difficult decisions, including reducing our team via attrition and some layoffs. We have consolidated or eliminated some positions to bring operating expense more in line with current business levels.

And while further adjustments may be necessary, depending on the economic environment, we have and we will continue to affect these changes without compromising our ability to custom-design homes, to introduce new models, to support our retailers, and service our homebuyers.

Dan, please review the numbers, if you would.

Cavco's net sales for the third quarter of fiscal year 2009 were down 21% to $25 million from prior year's Q3 net sales of $32 million. That is on a 20% decline in modules shipped. While the average selling price per floor was relatively flat with prior year at $26,535.

The Company's gross profit margin for Q3 '09 was $2.7 million or 10.6% of net sales versus $4.6 million or 14.4% of net sales for the third quarter of last year. The margin decrease was principally from reduced production efficiencies we are experiencing at our current low production levels, with capacity utilization just under 50%.

The Company operated with a minimal backlog throughout the quarter, and the backlog of orders was negligible as of December 31, 2008.

We successfully reduced our selling, general and administrative expenses for the quarter by $464,000 to $2.9 million, compared to last year's third quarter SG&A of $3.3 million. As a percentage of net sales SG&A was 11.4% in Q3 '09 versus 10.4% in Q3 '08.

Interest income was lower by $532,000, mainly the result of generally lower interest rates from the Company's investments in U.S. Treasuries. The current income tax benefit is the result of a current quarter adjustment for excess tax expense in (technical difficulty), and the true-up to our recently filed tax return for fiscal 2008.

For the nine-month periods ended December 31, 2008 and 2007, the effective income tax rate was approximately 32% and 30%, respectively.

Fiscal 2009 third quarter net income was $110,000 or $0.02 per diluted share compared to $1.4 million or $0.20 per diluted share last year.

In comparing our balance sheet at December 31, 2008 to March 31, 2008, our cash and cash equivalents balance increased over $500,000 to $74.1 million from $73.6 million at the beginning of the fiscal year.

Trade receivables are down nearly $2.4 million compared to the beginning of the fiscal year, resulting mainly from lower sales volume.

Inventory is approximately $600,000 lower on reduced work in process levels and finished goods units.

PP&E is up due to the $537,000 purchase of a retail sales lot in New Mexico, which we previously leased. This is the location of an existing Company-owned retail outlet.

Trade payables are roughly $1.8 million lower, as there is a limited purchasing activity during the plant holiday shutdown at the end of the quarter.

Accrued liabilities are down by almost $3.3 million, largely the result of a $1.4 million reduction in salary, wage and benefit accruals, and a $1.4 million drop in customer deposits.

The balance sheet maintains adequate liquidity, and continues to be debt free, positioning us to provide options to retailers affected by recent fallout in the manufactured homes inventory finance arena, which Joe will mention further during his comments. Joe?

So the good news is that we are solidly positioned in markets with good medium and long-term potential. Sure, they are very difficult now; however, consider that in addition to the large number of traditional land and home private site home sale opportunities in California and Arizona, states with growing populations, those states also have a large number of land leased communities planned specifically for factory-built homes.

For example, California has more than 4,700 communities, with nearly 400,000 home sites. Resales alone in these communities average more than 40,000 homes per year. Many of the homes are quite old, often built even before the Federal HUD building code was enacted in 1976. These homes will be replaced over time.

Furthermore, living in a new, low maintenance home in a lifestyle community is a desirable choice for many people in the large and growing age 55 plus demographic.

The price point of a factory-built home should appeal to an increasing number of buyers as the economy goes through this deleveraging process. The energy efficiency, the ability to build green homes, the flexibility of systems built homes, and the great value they represent, are among the important factors that merit the consideration of potential homeowners.

As the financial markets become more liquid and the economy begins to stabilize, we would expect to see increased levels of consumer interest. This time people not being able to buy homes above their means, which should results in our industry eventually advancing towards its historical share of new single-family home sales.

Meanwhile, Cavco is fortunate to be in sound financial condition, as Dan pointed out. We will use our financial means to support our distribution base as they seek inventory financing solutions. We will continue to invest in product development and pursue market share gain opportunities in our geographic areas. And we will judiciously consider expansion, if we can identify attractive opportunities that are manageable until the general economy and housing markets improve.

Before I open it up for questions, I inadvertently spared you the disclaimer, which I probably should go back to now at the beginning of the call.

That is that we are speaking today and will be answering your questions under the umbrella of the Safe Harbor rules. And these comments that we have made, and will make, in answer to your questions are forward-looking statements in many cases. Cavco disclaims any obligation to update any forward-looking statement. And investors should not place any reliance on such forward-looking statements because they may not materialize.

With that, Gwen, please open up for questions.

(Operator Instructions). David Wells, Avondale Partners.

First off, just thinking about Textron, what percent of the total market did they represent in terms of their floor plan business?

That is somewhat hard for us to determine, and probably a better question for them. But I would think that they were in the 30% plus range. But it is kind of a tough number to get to, because there are -- there have been generally three major, or specialized, lenders to the industry. But a lot of distribution in this industry find other sources that are not really countable in the database. That is, they are financing through their local bank. They are using other credit lines they might have. And they are not using the specialized floor plan lenders.

So that number reflects -- that I just said, reflects what the specialized lenders have in assumed outstandings, not the total amount of floor plan that might be going on in the industry.

Have you gotten a sense then if some of other sources, like a local bank or credit unions, are they ticking up some of the slack, proverbially, in the industry, or is that capacity just going away entirely?

No, I think definitely many retailers and distributors are turning to their bank relationships or establishing credit lines. So yes, I think some of that void is being picked up by other sources outside the traditional lenders. And some is being picked up by -- I think by other -- the remaining floor plan lenders in some cases.

In looking at your cash balance, it was down slightly from the second quarter. Was that due to timing difference with payables or was there an actual operational cash burn in the quarter?

That was mostly due to the fluctuation in the balance sheet line items' operating accounts. You know, at these low levels of operating income that we are more subject to -- and we are going to have larger -- change our cash flows due to just the fluctuation in those accounts.

How should we think about the tax benefit in the quarter on a go forward basis? Is that something that we expect to continue -- or what should we use or be thinking about as a more normalized tax rate?

A more normalized tax rate going forward is going to be in the high 30s. So, no, this wouldn't be expected to continue.

Are we reaching a circumstance where you would see the need to potentially impair the goodwill on the balance sheet?

We have looked at that, as we always do. We have a scheduled time when we look at that annually per the GAAP standards, which is at the end of our fiscal year, upcoming March 31. But given that the stock market in general has decreased and our market capitalization has decreased, we have watched that and so we're going to continue to watch that going forward. But we have been taken any steps in that regard at this point.

What are you seeing in terms of raw material prices, and just any color that you could give there would be helpful?

Raw material prices have, in some cases have come down. It has been still a mixed bag. We're certainly not seeing the pressure, the upward pressure that we saw as an industry in the last several years. That has subsided.

But it doesn't mean that some vendors have not been asking for price increases. Some have been able to achieve them. Others have had to roll back or not get the increase they anticipate. Obviously, for builders, like ourselves, we are not able to really get price increases either in the marketplace. So we have had to work with some vendors and not taking some increases, and making other adjustments.

I would say on balance it is kind of a draw at this point. I would expect that there might be some opportunity to see some further softening. Obviously steel pricing has come down, which should affect not only the steel we buy directly to build the homes, but obviously too the steel involved in a lot of component parts we buy.

Copper is down, so wiring should eventually come down. But some of these things take a while to get through the pipeline we're told. So they don't come down quite as fast as they seem to go up. But we do expect some additional relief in the months ahead.

Looking back over the third quarter, was there any variation in sales trends on a month-to-month basis or was it fairly consistent over the quarter?

I would say it was fairly consistent. It was increasingly weak during the quarter, but that -- number one, that is not too unusual. December it is always a very slow month. But in this case December was particularly slow.

Then any change since the quarter's end that you can comment on there?

We don't make forecasts and such, but obviously business conditions haven't really changed much. It is an extremely tough environment. As I said in my comments, consumers' lack of confidence in the environment and the economy has taken its toll on, I think, all sellers of durable goods. And I don't see that changing in the short-term.

I guess last question is, given continued weakness in the market, and especially in your core markets, at a similar revenue runrate going forward do you feel like you can maintain profitability without tax benefits and things like that?

That sounds like that would be making a forecast to me. We're certainly going to try our best. But anybody who says they know where this economy is going, I don't think is in sync. We have no way of knowing what housing demand is going to be. Typically later in the spring we will see some typical spring buying patterns, but we will have to wait and see if that occurs. We will have to wait and see if the liquidity issues are addressed by the government and so the banks start lending a little bit again.

So I think there is too much uncertainty. We didn't make these forecasts when times were a little bit more stable. We're certainly not in position to make them now.

Jay McCanless, FTN Midwest.

I wanted to touch on the retail distribution finance that you discussed in the prepared text from the release. I wanted to find out first how much of your $74 million in cash you are willing to commit to this effort? And also just some details in terms of do you get any interest benefit for the amounts that you invest in it? If you could walk us through the mechanics of it, I would appreciate it.

First, I would like to say that we have a fairly -- a more modest floor plan lending balance for our size than many companies in this industry. We find that a lot of the people we deal with, the developers, planned community operators, even some retailers, have other nontraditional financing arrangements, their banks or equity capital in some cases. So we have probably a lower portion of our sales funded through traditional floor plan sources.

Having said that, we do think that we are willing to commit some of our capital to support qualified distributors, qualified retailers with floor plan. And we are doing this through one program now. And in answer to part of your question, yes, we do receive a return on the amount of money we invest in that floor plan. It is a return based on a slight premium to LIBOR. We earn that the funds we employ in that floor planning process.

And we, by the way, do not do any of the underwriting. And we don't do the collection effort, that is all handled by the lender. And they do all the compliance work and so forth.

Beyond that we're certainly willing to look at committing an increasing portion of our capital do this process. But if you look at our contingent liability for the entire Company, it is in the range of $27 million. So as you can see, even if we were to floor all the activity we have traditionally had in that area, it would be a portion of our funds, and we don't anticipate flooring all that activity.

Okay.

Did that give you some flavor?

Yes, it does. Thank you. I guess the next question is, if you are going to expand the Texas operation and try to grow what you're doing in [Saugeen], is this part of that strategy or you mostly trying to do this on the folks in Arizona and California?

When you say do this, you may now provide floor plan?

Yes, provide the floor plan (technical difficulty) in Arizona and California.

I think we do it for any, as I mentioned, qualified retailer. The retailer has to be a good going business operation that we've had a relationship with and feel confident in. And they have to -- they will have to have some skin in the game, so to speak, also. But yes, we won't do it based on geography, we will do it based on the need in a particular area and the ability of that retailer to borrow.

In terms of -- how does this relate to the buyback that you all have authorized? Are you pursuing this rather than the buyback at this point? Is the buyback on the shelf? What are you thinking about that?

I think your first comment is a fair one. I think we will focus on these other needs right now, rather than buy our stock. It is always a possibility, but right now with the rapid changes going on in this industry and in the economy in general, we think it is wise to look at employing this capital within our business operations, and this lending environment is a major one right now.

With Textron's announcement, with them exiting the [industry NG], I guess, doing a little bit of lending, but not much right now, what dose that make the used market for manufactured housing look like? Is it more of a threat now than it was three months ago, six months ago? And are you all seeing decent turnover in that market?

A threat from what standpoint?

In terms of competitive threat, people looking at a used unit rather than a new Cavco unit.

Instead of? We have not seen any discernible trend towards more used sales activity. I think the issue is more the fact that customers aren't shopping right now. Traffic levels, although we have had indication they have increased here recently somewhat, but traffic levels have been very slow. The buyers that do show up are not (technical difficulty) more looking and waiting.

And some of this of course, in addition to the financing problems, also goes back to the issue of trying to resell their existing home, in many cases. Especially with the 55 and older demographic, where they're looking at changing a lifestyle. A lot of these people have put off their decision based on not wanting to sell their home at current prices or perhaps not being able to sell it and the timeframe (technical difficulty) expected to take longer.

I think those are more the issues. We have not seen the used market for manufactured homes really take place of any new home sales. I don't think there is a tremendous quantity of used manufactured homes in the pipeline.

My last question, the first time homebuyer tax credit was passed in July of last year. As I understand it, it applies for manufactured housing and can be used to buy a new manufactured home. Are you all seeing the lenders -- retail lenders in the space getting active what that program, trying to entice people to use that credit to look at manufactured housing, especially with the higher limits now for FHA insured mortgages?

Right. Certainly we have seen a number of retailers try to promote that in their advertising on their websites. To the extent that buyers have used it, we really don't have that data. But obviously the sales activity, the sales level certainly wouldn't suggest that it is creating a big wind at our back in terms of sales activity. It hasn't.

I think with respect to FHA Title 1, that has been pretty slow in taking off. I think they're trying to get more banks signed on to participating. And it seems to have had a fairly slow start. Hopefully that will build steam as we go through the year.

Is there any thought in your mind of using some of the cash on your balance sheet to finance folks through Title 1, and getting your FHA certification?

We will and do consider a lot of options. And doing something retail financing is a possibility. We don't have any immediate plans to do what you suggest. Rather we think we would participate with existing finance companies that have the mechanisms in place to handle the compliance issues and the servicing operations and the conduit for selling those loans. So I think we probably would be more apt to team with somebody than to start it ourselves.

Michael Corelli, Barry Vogel & Associates.

You said you have purchased a retail lot in New Mexico. What was that price again?

That price was $537,000.

What was behind the decision to do that?

That was just -- we have been there for a number of years. That location has been consistently successful for us. It was just an opportunity to buy versus lease and the numbers worked out that it made sense to buy. Nothing more than that.

As far as just on the tax rate again, so if you had a pretax loss like you did in this quarter again, would we use a 30 some odd percent tax benefit against that loss?

When I mentioned that we would be in the high 30s going forward, that would be on the presumption of an income. In the event of a loss, it would be potentially zero. And then in the event that we were able to obtain carrybacks or things like that, it could factor in. So it is a tough one for me to tell you what it would be.

I know you said the backlog was negligible, but do you have number?

No, negligible means (multiple speakers).

No number? Joe, at this point, and I know it is hard to predict things, but do you see anything coming in the not too distant future that will change what we are seeing in the industry?

Do I see anything coming, you said?

Yes.

Again, I think it really depends on the progress that the country makes. But certainly with every month that goes by there are people who need homes that are putting it off. People want to make a change in there home, they have put it off. And so that is the difficult part. We really can't tell when those changes in the macro picture will occur.

But I think the evidence is pretty clear that people will not be able to stretch the way they have been. And that will again attract people to look at our product. I think you, Michael, are familiar with the numbers, other people are. But we typically as an average, as an industry, would be up in the high teens to 20% range of all new single-family homes sold. And we haven't been in that range for a number of years.

We're starting to move back in that range, but that is by default. That is because not many site built homes are being sold either. But eventually as the housing market improves in aggregate, I think we will gain a better share of the pie again.

I think it was taken away from us really by the finance more than anything. And that doesn't seem like that is going to reoccur in the foreseeable future anyway. I think that is the most positive thing about our business. The other positive things are some of the trends, people getting away from the Mac Mansion, wanting a simpler lifestyle. Our homes are modern, efficient. They have all the features, and can have all the bells and whistles that people want to put on them, depending on their price point they want to pay, yet they are very manageable.

I think the second home market will also increase over time as thing stabilize. But other than those kind of broad brush points, no, we don't have any silver bullet we can tell you that is going to change in the short-term. We, I think, have a very competitive product. And we're very flexible in our production environment. We can build anything people want us to build, and that is a big advantage today.

Dax Vlassis, Gates Capital Management.

I was just wondering, from what you said the contingent liabilities of $27 million, I think that was up a couple of million from last quarter. Are you saying that part of that $27 million that -- I believe you just have guarantees on those, I guess, secured by the actual assets. Are those going to turn into actual loans that you're going to make? Can you explain what you meant by that?

And if I heard you right, it was somewhere in the neighborhood of zero to $27 million kind of range you would consider for allocating towards the financing component of this new venture.

That's a good opportunity for me to clarify and make sure we are sending the right message. First of all, our floor plan contingent liability is actually down from the prior quarter, from $29 million to $27 million. But all I was saying was that just gives -- one, potential people looking at us an idea of the maximum amount.

As I said, we are in no way suggesting that we're going to go to $27 million in floor plan outstanding on behalf of the Company, with Company funds anytime soon. It may never get to that point.

I was just saying even if one considered if we floored all the product that has typically been floored by our retailers, that would be a number. But obviously this number is not going to change much. It is out there now. The lending doesn't get pulled away. So that -- we would replace that business. We would add to that business over time.

It is Jeff Gates. Just to clarify, are you talking about additional guarantees or are you talking about actual funded loans where you would actually earn more on a portfolio of receivables. And can you tell us of your existing $100 million or $140 million of sales, or whatever it is, how much is currently in total floor plan?

We're talking here about -- probably not guarantees. Although that could be [an instrument] used. What we're talking about is going forward, if there is a lack of floor plan lending, and a finance company says, listen, we're having trouble obtaining funds to lend to our customers. But we would like the business. We like -- we have the servicing model set up and the whole operation. We're compliant in all these states. If you provide the funds or a portion of the funds, we will continue to lend to Cavco distributors.

And that is probably where we would more enter the picture. So it might be a portion or it could possibly be all of a particular lender's funding of our customers' inventory purchases. Or it could be, as you said, I guess it could also be some sort of guarantee of those funds. But it would probably be more of the funds, because the problem is right now many of the finance companies are having trouble in the commercial paper markets getting the money to lend to their customer base.

Right. What percent of your business is currently -- do you see being floor planned, and how does that compare to the industry?

And we have about 40% of our business typically is floor planned. The rest we don't use -- we're not getting paid by floor plan lenders. We're paid in cash in effect.

The inventories at retail, have the retailers just been selling the homes that they have on their lot and basically not reordering if they don't have the financing for it?

First, yes, they have been reducing inventories on their lots for a number of reasons, not just because of the floor plan. Initially they reducing them because business is down and they're trying to cut overhead. That certainly exacerbates the sales problem for us, because the retailer might have -- let's say they have seven homes and that was a good -- they were getting good turns on that in better times they might reduce that to four or five homes. And it takes a while sometimes to sell those couple of models.

(technical difficulty) and then as you say, the issue that now it might not be able to get floor plan to add stock units. And that is a challenge and that is why we're looking at what we're doing. Because let's say a retailer has reduced their inventory and they generally obviously sell the ones that are most sellable, most popular models. They want to get those most popular models back, even if they have some other models in stock. They need the more popular ones, because are the ones that are going to create turns for them.

And that is where we can help assist in getting some floor plan for them to make sure they have models that are popular in their particular market area. And eventually they will sell the other ones that are slower movers, of course, but in the meantime they need to restock with the popular ones.

One follow-up. Are you seeing significant numbers of opportunities to grab dealers that might have been affiliated with other manufacturers? And should we expect your number of dealers to -- where should we expect your number of dealers to go? I guess there is a negative as far as the shakeout of dealers everywhere, but would you be able to pick up enough of other dealers to offset what you might lose in your existing base?

Again, that is kind of a little too specific a forecast for us. But I would say that is obviously what we're trying to do. We historically have been able to gain market share in down markets. Yes, I think we do have a competitive advantage vis-a-vis some of our peers in that we have this floor plan availability potential. Some people may not be in a position, or might not choose to participate in the floor plan lending. And I think that does gives us some leg up.

But it is a very competitive market out there from a price standpoint. Obviously all manufacturers are struggling to keep plants running. So it is a very price competitive market. So I don't take anything for granted. I do think that we are in a solid position to be able to offer our retailers, and prospective retailers that we might bring on, some advantages in their doing business with us.

Last question, as far as the other manufacturers in your geographic area that you compete with, is this last -- I shouldn't say last leg down, but this additional leg down in number of units, does that wash anymore of the actual manufacturers out? And do you see your competitive position improving, given the financial strength of the Company's balance sheet?

I would say first that we don't look forward to the peer group going out of business. I don't think that ever does any good for the industry as a whole. I would say that further consolidation in the number of factories would be helpful to the industry. Obviously, based on the shipment levels and the capacity that is presumably outstanding now with the number of plants still open, that is a challenge. And that of course creates more price competition as people struggle, again, to keep a plant running.

I think we'll see -- as an industry, we will see more plant consolidation, more plant closings, and companies individually consolidating their manufacturing operations to fewer production facilities. And that will be healthy.

I don't know what companies will face other challenges and so forth. Certainly some companies have more levered balance sheet than we do -- most do. But whether they will be able to overcome those issues or not, I don't know. I do think that we will, again, be able to use our strength as a competitive advantage currently.

(Operator Instructions). [Michael Ware], [Presidio Investment].

A question on pricing. You touched on it briefly. I just wonder if you can give us a little more color as to what is going on on the pricing side? You obviously saw your ASPs stabilize in this quarter. Wondering if there is a mix element behind that, if the competitive environment has stabilized such that we are not seeing more pricing degradation? And what your expectations are in the pricing side going forward? Thanks.

The pricing environment is I would say fairly stable, notwithstanding my previous comment that it is very competitive. The homes have gotten to such a competitive level that there's not a lot of room for manufacturers to drop pricing as such much further. More the average selling price fluctuations you'll see for us certainly, and probably for other companies in the industry, is more of a product mix issue.

Right now we are seeing what buyers are out there are buying smaller homes or lower price point homes. That will impact our average selling price. I don't think it will be so much just price declines overall. I think we have been through most of that at this point. And I don't see a large drop in overall wholesale price declines. I'm sorry, I'm answering all points of your question. Was there another point there?

No, you covered it. That's great. Thank you guys.

There are no further questions at this time. I would like to turn things back to our speakers for any closing remarks.

Thank you everyone for joining us today. We look forward to talking to you more, hopefully about more pleasant news ahead. We feel we are very well set to take advantage of whatever opportunities come our way. And we look forward to sharing those with you in the next quarter. Thank you.

Thank you everyone. That does conclude today's conference. You may now disconnect.