Cavco Industries Inc (CVCO) 2010 Q2 法說會逐字稿

Good day, everyone, and welcome to the Cavco Industries second-quarter fiscal year 2010 earnings call. This call is being recorded.

I'd now like to turn the call over to Joseph Stegmayer. Please go ahead.

Thank you. Good morning, everyone. Welcome to our second-quarter conference call.

I am obligated, of course, to mention that we speak today under the umbrella of the safe harbor rules, and certain comments we will make are forward-looking statements within the meaning of a number of security acts. Cavco disclaims any obligation to update any forward-looking statements and investors should not place any reliance on any such forward-looking statements. A complete statement on this subject is included as part of Cavco's second-quarter news release filed on Form 8-K yesterday afternoon and is available on our Web site, as well, as through many other sources.

Well once again, we can begin with the statement of the obvious, the overall housing industry is weak and demand for factory-built housing is soft as well. We expect these tough conditions to continue for a period of time. We'll talk more about that in a moment. Meanwhile, shipments through September for the industry-wide are down 42% from a year ago, and shipments for the calendar year 2009 will probably end up at an all-time low of approximately 50,000 shipments.

Retail is -- the retail selling of the homes is challenging with lack of consumer financing, low consumer confidence regarding the economy and slow levels of existing home sales slowing down the process of people trading in their homes and, in fact, selling their homes to buy a factory-built product.

However, retail sales are estimated to be running 10,000 to 15,000 more homes than wholesale shipments have been running, meaning that inventories at retailers are declining. This is a positive, and we see this, in particular, at Cavco. You can look at our filings in our Qs and look at the footnotes, and you'll see that our contingent liability, which is the inventory liability we carry with floor plan lenders, has steadily declined quarter by quarter and again declined this quarter.

So retail inventory pipelines declining is a very positive thing. Despite the slow sales levels, retailers have been able to reduce inventories, which will mean that, number one, they can become a little bit more profitable or break into profitability, perhaps, during this slowdown by operating at lower costs. And secondly, when business does improve, they will be begin to order homes more quickly, not having to liquidate existing inventories. So that's a positive.

Another positive that's come up recently is it looks like the extension of the tax credit for new home purchases and for first-move-up buyers is -- stands a good chance of being passed in the Congress and being signed by the President, which would extend the tax credit into next year. That would be a good sign for our industry. We have many first-time homebuyers, and certainly we have some first-move-up buyers as well, who would fit those categories as defined.

The other thing we'd like to talk about, of course, is our acquisition of Fleetwood Homes, which we completed in August, something we worked on for quite some time, we discussed briefly in our last quarter conference call since we had just made our first bid. We were successful in the bidding process, closed the transaction, as I say, in August, and the integration has gone very smoothly to date.

We have acquired seven operating factories. Those facilities are in Napa, Idaho; Woodburn, Oregon, Riverside, California; Waco, Texas; Lafayette, Tennessee; and Douglas, Georgia; and Rocky Mount, Virginia. We also acquired an idle plant in northern California and another plant that's idled in Texas.

By acquiring these seven operating facilities, combining with Cavco's existing three manufacturing facilities, we now have a strong presence in approximately 70% of the manufactured home shipments across the country. Or to say it differently, in the top 20 states, we're represented in all but four of those states with a strong presence. And by that, we mean either we have a facility in the state or we have a strong marketing presence in a state generally contiguous to the state in which our facility is located.

So we've certainly cast our net in a much wider direction from the Southwest to the Southeast markets, the Mid-Atlantic market, the Northwest market and a stronger presence in the West Coast market. In addition, we fit the what we might call the Midwestern states, the lower Midwestern states, Tennessee, Kentucky and can reach into some of the southern states from those facilities as well.

So we feel very good about the fact that we're in all of the major markets with the exception of the Midwest. We did not acquire a facility in the Midwest, the Indiana, Ohio, Michigan area. We had that opportunity, but we decided to pass on that, and we did not include a facility that Fleetwood had operating in those markets. We just did not feel strongly enough about the Midwestern markets given the employment figures and the lack of population growth in those areas. But in every other major market, we now have a presence. So we truly have a nationwide footprint, if you will.

With respect to the numbers, I'd like to turn it over to Dan to review the quarter, and then we'll come back and discuss what we see in the quarter ahead and take any of your questions. Dan?

Thank you, Joe.

As previously reported, during the second quarter of fiscal -- during this second fiscal quarter, Cavco and an investment partner, Third Avenue Value Fund, acquired certain manufactured housing assets and liabilities of Fleetwood Enterprises, Inc. through their jointly owned, newly formed corporation named Fleetwood Homes, Inc. Incident to the purchase, Cavco and Third Avenue each contributed $35 million in exchange for equal ownership interests.

In addition to the factories, Fleetwood Homes purchased all related equipment, accounts receivable, inventory, certain trademarks and trade names, intellectual property and specified contracts and leases and assumed express warranty liabilities pertaining to certain of the previous operations.

The purchase price of the transaction was $25.8 million and was paid in cash. Neither Fleetwood nor Cavco incurred debt in connection with the purchase or subsequent operations.

Third Avenue's financial interest in Fleetwood Homes is considered a non-controlling interest, as determined by generally accepted accounting principles and is designated as such in the consolidated financial statements. Based on the structure of the purchase, the results of the Fleetwood Homes operations are required to be fully consolidated into Cavco's financial statements. Therefore, our consolidated operating results for the second quarter of fiscal year 2010 included three full months of operations from Cavco's traditional business and approximately 1.5 months of operations from the newly integrated Fleetwood Homes business.

The combined operations produced net sales of $29.4 million this quarter, which is roughly on par with Cavco's standalone net sales of $30 million, as reported in the second quarter of the prior year. The Fleetwood operations accounted for approximately $12.3 million of net sales in the current quarter. Floors were -- floors sold were also comparable, 1,203 this quarter compared to 1,168 in Q2 '09, a 3% increase. The average wholesale selling price per floor of $23,887 was down 7% from the prior year, mainly from the generally lower price point of the Fleetwood Homes product lines.

Our gross profit percentage was 14.1% compared to 12.3% last year. The margin results were reflective of a relatively smooth transition for the Fleetwood Homes factories. The backlog of wholesale home orders at all factories combined was approximately $4 million at September 30th and resulted primarily from the addition of the seven Fleetwood Homes factories.

SG&A costs of $4.5 million increased $1.4 million compared to last year's quarter and were 15.5% of net sales in Q2 of this year versus 10.5% in Q2 '09. Included in SG&A this quarter are $711,000 of transaction-related costs, which represent a one-time current-period charge. Excluding the $711,000 deal costs, SG&A would've been $3.8 million or 13% of net sales for the quarter.

Interest income was lower by $256,000, mainly the result of lower interest rates from the Company's primary investment in US Treasury money market funds during the second quarter.

The current quarter income tax benefit was the result of this quarter's operating losses and the Company's expectation that it will fully realize the associated future benefits. The Company has a $2.6 million tax receivable on its balance sheet for federal taxable loss carrybacks.

The second-quarter net loss was $222,000, compared to net income of $518,000 for the second quarter of fiscal 2009. The portion of the current quarter results that relates to the non-controlling interest owned by Third Avenue was a $59,000 net loss, as presented on a second P&L line item this quarter. The net loss attributable to Cavco stockholders was $163,000, which represents a diluted net loss per share for the quarter of $0.03 versus net income per diluted share of $0.08 last year. Year to date, our net loss was $1.6 million or $0.25 per diluted share.

In comparing the balance sheet at September 30, 2009, to March 31, 2009, cash and short-term investments at 9/30/09 were $84.7 million. That's $9.7 million higher than the March balance of $75 million. The increase is primarily the result of the $35 million cash investment by Third Avenue, less the $25.8 million purchase price, in addition to changes in working capital account balances.

Trade receivables and inventories are up compared to the 3/31/09 balances, mainly from the addition of Fleetwood Homes working capital.

Prepaid and other assets were relatively flat, as expected. Deferred income tax assets were higher, the result of the increase in accrued liabilities associated with the Fleetwood Homes operations. PP&E was up at well, in each category, due to the purchase price allocation.

Accounts payable and accrued liabilities were higher, also due to the acquisition. Deferred tax liabilities have increased mainly from the future tax liability associated with the book tax cost basis differences among the Fleetwood assets.

The equity section was relatively unchanged with the exception of the noncontrolling interest component of nearly $35 million, which has been added. This amount was calculated as Third Avenue's investment of $35 million less their portion of the net loss for the quarter.

In conclusion, the Company continues to carry no debt, consistent with its pre-acquisition capitalization structure. Joe?

Thank you, Dan.

Before we open it up for questions, I just wanted to comment that we're extremely pleased about the Fleetwood acquisition. We feel that it is a great transformer for our company. We felt very good about the people we met as we went through the due diligence period, and our initial impressions have proven to be correct, and people have been excellent to work with. The integration, so far, has gone very smoothly.

The individual who is running the housing group for Fleetwood Enterprises, Charlie Lott, has agreed to stay on with us and is serving as President of Fleetwood Homes. He directs an excellent team in all seven of his plants, very experienced people, knowledgeable about the industry and very adaptable to new products and new ideas. So we've been very impressed with that and we also feel very good about the continued expansion, product-line-wise, of our existing Cavco plants.

So we feel we have the right product, good people and now the right -- we're in the right locations for our industry and for the housing market, in general, but we certainly need some sort of tailwind to spur some orders. We're just not seeing a very good rate of incoming orders, as Dan mentioned, in the backlog, and we expect that to continue to remain tough, especially as we enter the winter months, which are traditionally slow.

So we're quite pleased, I guess I might say, with the results for the quarter. Even though we reported a loss, we thought our people did a good job of containing the loss. We're not sure where the next quarter will bring us, but it certainly is going to be very challenging, as well. And again with the typically slow month in December and the first part of January, it'll be additionally challenging.

We are more optimistic, however, for the latter part of calendar 2010. At a recent industry meeting, one of the leaders in the finance industry, the consumer finance industry, indicated that his thoughts were that shipments would tend to increase, home sales would increase in the latter part of calendar 2010 based on greater availability of financing. And we certainly would welcome that, and we think that certainly a case could be made for that.

As we mentioned, inventory is lower. If we can see some greater consumer confidence in the economy, if we see the banks just even loosen their purse strings a little bit from a financing standpoint, I think we'll see more buyers return to manufactured housing. As we've discussed before, we lost so many of our buyers to more expensive homes during the times of the subprime wild financing. With that not being around anymore, we think that people will return to looking at our products, but they just have to feel a bit more confident about their jobs and about the economy in general.

So we have some tough months to go through. We're well positioned to do so, however. Dan indicated our balance sheet remains extremely strong with no debt, a lot of flexibility. So we'll weather this storm, and we'll come out of it as a stronger company, better positioned, and I think we'll continue to see some consolidation in the industry. So perhaps, as business improves, there'll be somewhat less manufacturing capacity, which will also improve the rate of growth for existing facilities.

With that, we'll be happy to answer any of your questions and please open it up for those individuals.

Thank you. (Operator instructions.)

We'll turn first to Michael Corelli with Barry Vogel & Associates.

Hi. Good morning.

Good morning, Michael.

Congratulations on completing the deal.

Thank you.

Two questions for you. First, the contribution by Third Avenue, why did you structure it with such a large cash contribution considering you have such a healthy balance sheet and the purchase price was only $25.8 million? How'd you determine that it would be such a big investment?

Well we wanted, first of all, to give plenty of opportunity to support inventory financing going forward. As you may know, inventory financing or floor plan financing, as it's often called, has been in short supply in recent quarters as Textron Financial left the business and certainly other finance companies have tightened up. So that's been a challenge. We don't know how long that will go on. But Cavco's been in position to -- in partnership with a number of financial firms, to offer floor plan financing for our dealers. And we wanted the same opportunity for Fleetwood.

So Fleetwood Homes, Inc., that subsidiary, has ample supply of cash to participate in floor plan financing programs for its dealers, as well. It'll be a -- it's a huge competitive advantage in the field. Many manufacturers are not able to offer floor plan financing, and their dealers are at a loss as to how they finance both homes for inventory as display homes and homes that they have custom orders for from consumers. And they have to temporarily float the purchase of that home, and they require floor plan financing for doing that. That's the primary reason.

How much cash would you say you're using for that currently?

It's very minimal now, Michael. It'll -- we expect it to ramp up over time. It'll also depend if anyone else enters the floor plan financing business or if the banks decide to do it more on a local basis with dealers, which is not the case right now. Some dealers are able to get lines of credit with their banks, but floor plan is not a friendly word among bank institutions right now, not just for manufactured housing but for any other consumer durables.

And so we're not sure how long that lack of financing will exist, but that will be the primary determinant as to how much we deploy in that field. Right now, it's a very small amount. It's only in the several million dollar range.

All right.

And then just secondly, if you exclude the Fleetwood revenues, it looked like your revenues from quarter to quarter went from about $13.6 million to $17.1 million. What was the reason behind that increase?

You're speaking specifically to the Cavco factories, is that -- ?

That's right, the second quarter versus the first quarter. If I took out -- I think you said there was $12.3 million from the Fleetwood assets in revenues, and you had $29.4 million. So I took that out, I got $17.1 million. And I believe you reported $13.6 million last quarter.

We did have some improvement to some of the facilities. More of the existing Cavco facilities were able to run on a full-week basis. Now that's not at high rates of production but, nevertheless, we didn't miss as many production days as we did in the prior quarter.

Why do you think that was?

Well I think it's a combination of, again, inventories declining at our retailers. So they tend -- when they get an order -- a customer order for a home, they're tending less to sell it out of inventory, gradually, than they have been. So it results in a new order for us and then -- and partially just, I guess, a slight improvement in the business.

It's hard to put a finger on that portion of it. But certainly I think reduced inventories are gradually going to mean that even if retail sales don't pick up substantially, at least when a customer comes to a retailer, the retailer is probably going to have to order a home because they don't have as many on site to sell from.

Okay, thank you.

You bet.

(Operator instructions.)

Next, we'll turn to Jay McCanless with FTN Equity.

Hey. Good morning, guys.

Good morning, Jay.

Sticking on the split-out of Fleetwood versus Cavco, if I excluded the Fleetwood results from this quarter, what would standalone Cavco's gross margin have looked like?

Stand by and Dan will look that up, Jay.

Okay.

We have a variety of papers here to take a look at. You're saying that the gross margin for Cavco alone --.

Yes, sir.

-- were it not for Fleetwood.

Because it was a pretty big sequential increase. That's why I'm just trying to figure out what the impact of the Fleetwood plants was.

Right. And the Fleetwood impact was there.

Cavco's was around 10%, which was better than the sequential quarter, and Fleetwood added to that.

Okay. Okay. And then on the SG&A line, excluding the $711,000 in deal costs, with the $3 million in change that's remaining, how much of that on a percentage basis would you say is fixed versus variable now?

How much of our SG&A -- ?

Is fixed versus variable?

I'm not sure we have that offhand here now. Now, a good portion of it, historically, has been because we -- a large portion of our management's compensation is the form of incentive pay. Our base salaries are comparatively low. So we do have a big variable there. But I'm not sure we could state -- we'd have to get back to you on that, Jay, what portion of SG&A tends to be variable.

Okay.

Obviously, the sales commissions are in there too, which are variable with volume, and there's several other parts that are variable.

Okay. Right.

And then a little bit of forecasting but hopefully you guys can give us something here -- since the Fleetwood plants probably are not producing the same level of home maybe in terms of the price point that the Cavco plants are producing, can you give us an idea of what we should expect for an average price per floor or an average price per home going forward?

We can. We expect that price to be in the mid 30s.

On a per floor basis?

On a per home basis actually.

Okay.

On a per floor basis, we'd be looking in the low 20s.

Okay, so approximately $30,000 on a per home, and then approximately $20,000 on a per floor basis?

I would say $21,000 to $22,000 on a per floor basis, and closer to $35,000 on a per home basis.

Closer to $35,000, okay, great.

And then my next question, with the SG&A where you have it now, what -- and the capacity -- and I want -- and I was going to ask too what it -- what was capacity utilization in the quarter?

For all ten factories, our capacity utilization was 34%.

34%, okay.

How much more could you all ramp up production and ramp up capacity utilization before you'd have to make significant increases in SG&A do you believe?

Well I don't think we'd have to make significant increase in SG&A other than the variable expense we just talked about would obviously be rising as plant profitability increased.

Right.

So every plant would have higher commissions and higher incentive pay moving out, as would the entire company. But I don't think we'd have significant ramp up in non-variable SG&A or -- yes, non-variable or fixed SG&A. In other words, I don't think we'd have to add a lot of people. We might have to add a body or two here or there, but not -- I don't see where it would be anything significant, Jay.

Okay.

Our SG&A should remain among the lowest, if not the lowest in the industry. In fact, we have a better opportunity as volume increases to actually be at all-time low levels for Cavco with the additional volumes.

Sure.

Certainly, we're increasing SG&A in things -- in back office kind of issues, like accounting and internal audit and that sort of thing with more facilities. But that would be more than offset by the additional volume once we -- especially once we get some volume percolating.

Okay.

What was your mix of single-section homes versus multi-section in the quarter?

They were split right at about one-third single and two-thirds multi-section.

So that's pretty close to the industry. Do you all expect that going forward?

I think we should a pretty good proxy for the industry, especially now with Fleetwood being probably a closer proxy to the industry. Cavco has generally not been at industry levels because we tend to sell a medium to upper-medium price point and tend to be more multi-section. But Fleetwood I think will bring us more in line with the industry averages.

Okay.

And then my last question, on the floor plan financing that you all are doing for dealers, is there a limit to the amount of dollars you'll put at risk there? And if not, what sort of loss metrics are you banking on right now for that portfolio?

The amount of risk -- and I'll let Dan talk about how we're looking at potential losses and -- but the amount is yet to be determined I guess is the best way to say it. We -- we have a lot of capacity to do so. I think we'll see it -- as I mentioned to Michael a minute ago, we'll see it wrap up fairly slowly. But if business picks up, if could increase.

On the other hand, we might see is if the economy improves and business picks up, we might see other floor plan lenders come into the industry or return to the industry. So it's kind of hard to predict. But we're prepared to certainly go into the -- initially the $10 million, $20 million kind of range, and I could see it going higher than that if market circumstances dictated it.

We're being -- of course, we're teaming up with very strong financial companies in that area, and they're underwriting appropriately and doing all the credit checks and so forth. So this is in a very controlled environment. It's not somebody just making the decision to sell somebody a home without thoroughly vetting their capabilities to pay for the home.

Sure.

And then what are you expecting for losses, or what are you projecting?

Well we have different stratum within the portfolio that we're building. And for that portion of the portfolio, where we're at risk for loss of the home, we're putting together a reserve, which will maintain it, at somewhat less than 1% is what we're setting aside right now as a reserve. And then there are other components to that portfolio where we're not at risk for loss of the home, so we don't plan to carry a reserve for that.

Okay, great. Thanks, guys. Great work.

Thank you, Jay.

Next, we'll turn to Howard Flinker with Flinker & Company.

Hi, Joe.

Good morning, Howard.

In your $70 million purchase with Marty Whitman, did you get any working capital?

Well essentially, we did because the monies we each contributed to the joint venture were in excess of the purchase price. So that will remain in that entity as working capital, yes.

Right. That's not what I meant.

Was there working capital that came along with the purchase?

Oh, did we acquire working capital?

Yes, yes.

Yes, sure. We acquired receivables and inventory. I think Dan mentioned several of those numbers in his comments. But we acquired a certain amount of inventory from plants and receivables, which were -- in effect, the receivables were guaranteed in the purchase agreement so that there was no risk of loss on the receivables we acquired.

I didn't hear that comment or the number. Do you have the number of the two combined?

Sure. Dan I think can give it to you.

Sure. The accounts receivable was $2.1 million that we acquired, and the inventory was $7.8 million.

So roughly $10 million together?

Correct.

So your effective purchase price was really $60 million?

That would be one way to look at it.

Okay. And the second is, in your balance sheet, could you please explain the increase in receivables and inventories [ at the end of] September. I would suspect it has something to do with the merger, but I don't know the mechanics of it, the technicalities of it.

Well the receivables and the inventory are really just trade receivables and working capital inventory. The receivables have grown just in connection with the business and the operations since the date of the acquisition. There's nothing else in there. Obviously, it combines with Cavco's receivables, which preexisted.

And the same thing for the inventory, it's comprised of primarily raw materials and it's the Cavco operations plus the Fleetwood operations. Also included in there are Cavco's retail inventories, which have always been there in the past.

They're much higher than they were in March. Is that seasonal or did they just build?

No, it's just incident to the purchase.

So it's part of the -- so it comes along with the purchase. Because, if you notice, both are roughly double what they were six months ago, but sales, even combined, are about the same as they were --.

It's just --.

-- last year. I'm combining two different periods, of course, but that's what confused me a little.

Yes, Howard, that' just having the additional seven plants for -- the ten-plant total is all that is.

Okay.

The neat thing about our industry and about the way -- certainly the way we run our business is that we don't produce any finished product inventory, floor inventory.

Yes, I know.

So any of that raw material is -- any of that inventory I should say, is raw material work in process -- very, very little finished goods. The finished goods that are in there are just in transition, you might say, on their way to a customer. So --.

Go ahead.

We're pretty clean from that standpoint.

And raw material costs went up, too, in the six-month period. So in units, it's probably not as exaggerated as --.

That's probably true. And inventories -- well in absolute dollar amounts, that's correct.

Okay, thanks.

You bet.

(Operator instructions.) And Mr. Stegmayer, it appears there are no further questions. I'll go ahead and turn the conference back to you for any additional or closing remarks.

Okay. Thank you.

And thank you all for joining us today. We'll be happy to follow-up with your individually. Feel free to contact us. We'll look forward to talking to you at the next quarter's conference call. Thank you very much.

With that, we'll conclude today's conference. Thank you, everyone, for joining us.