Cavco Industries Inc (CVCO) 2010 Q3 法說會逐字稿

Good day, everyone, and welcome to the Cavco Industries third-quarter fiscal year 2010 conference call. Today's call is being recorded. At this time I'd like to turn the conference over to Mr. Joe Stegmayer. Please go ahead, sir.

Thank you, Robbie, and welcome, everyone, to Cavco's third-quarter call. With me today is Dan Urness, our Vice President and Chief Financial Officer.

Of course, we before we begin with 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 considered forward-looking. All statements or comments are made within the context of the Safe Harbor rules.

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

Well, another tough quarter for the industry as a whole. Home shipments for the fourth calendar quarter, which coincides with Cavco's third fiscal quarter, are estimated to have declined by 27% from the prior year, making it the poorest fourth-quarter performance in the history of the industry and probably the second weakest quarter overall. Only the three months of calendar 2009 -- first three months that is -- generated lower home shipments.

For the full year 2009 the estimate is about 50,000 homes were shipped from approximately 156 factories. That's 39% fewer homes than in 2008. All nine geographic regions as reported in the country posted declines of from 30% to nearly 50% from the prior year.

While we're certainly not satisfied with Cavco's performance, we are gratified that our people did a very solid job of pursuing sales opportunities and maximizing efficiencies in this very difficult environment. I'd like to speak for a moment about our acquisition of Fleetwood Homes completed just over five months ago because we have several positive things to report there.

First, the integration of Cavco and Fleetwood has gone very well, in fact better than any acquisition situation that I have experienced in my career. The Fleetwood team, under the capable direction of Charlie Lott, has been very willing to adopt Cavco's philosophy and operating style. And Cavco's operating management, for their part, has been very receptive of the folks from Fleetwood and helpful to those new members of our company.

Second, one of the results of this smooth transition is that we're already in the process of expanding our product offerings in both operating units, be it the sharing of product designs and production methods.

Third, the response to our customer base to the acquisition has been very encouraging and supportive.

And fourth, we will see some operating efficiency improvements as a result of our larger size and buying power, although for a period of time transition-related expenses will mask at least some of these savings.

Dan Urness will review the results and then I'll offer some additional comments before we take your questions.

Thank you, Joe. For the third quarter of fiscal year 2010 net sales were $36.4 million, 45% higher than the $25.1 million reported in the same quarter last year. The third-quarter 2010 results include the Fleetwood Homes operations which, as previously reported, were acquired during the second quarter of the current fiscal year.

There were 1,565 module sales recorded this quarter, a 73% increase over the same quarter in the prior year. However, the average sales price per floor of $22,571 is 15% lower than last year's third quarter. The downward movement in the average wholesale selling price is from the impact of Fleetwood Homes' operations, which produces a generally lower price point home than Cavco's traditional business. Also, current market-driven price pressures are as strong as they have ever been.

Our gross profit percentage this quarter was 9.0% compared to 10.6% last year. The lower margin results are reflective of the lower price point homes predominately sold this quarter, as well as inefficiencies in our operations arising from short or nonexistent lead times. The backlog of wholesale home orders at all factories combined was approximately $2.5 million at December 31, 2009, which translates into three to four days on average.

SG&A costs of $4.95 million increased $2.1 million or 73% compared to last year's quarter and were 13.6% of net sales in Q3 2010 versus 11.4% in Q3 '09. SG&A costs are higher from the addition of the Fleetwood Homes operations.

The current quarter income tax benefit was the result of this quarter's operating losses, which we expect to mostly utilize as NOL carrybacks on our next IRS tax return. The Company has a $5.3 million tax receivable on its balance sheet for federal tax loss carrybacks as of December 31, 2009.

The third-quarter net loss is $1.168 million compared to net income of $110,000 in the third quarter of fiscal 2009. A portion of the current quarter net loss that relates to the non-controlling interest owned by Third Avenue was $138,000 as presented on a separate P&L line-item.

The net loss attributed to Cavco stockholders was $1.030 million, which represents a diluted net loss per share for the quarter of $0.16 versus net income per diluted share of $0.02 last year. Year to date our net loss is $2.6 million or a negative $0.41 per diluted share.

In comparing the balance sheet at December 31, 2009 to March 31, 2009, cash and short-term investments at 12-31-09 were $77.7 million, $2.7 million higher than the 3-31-09 balance of $75.0 million. The increase is primarily the result of the $35 million cash investment by Third Avenue management, our partner in the Fleetwood Homes transaction, less the $25.8 million Fleetwood Homes purchase price in addition to the redeployment of $8.2 million toward inventory finance notes receivable.

The majority of the other balance sheet amounts are all higher compared to the beginning of the fiscal year as a result of the Fleetwood Homes acquisition during Q2 of fiscal 2010. The seasonal drop-off of business at the end of December accounted for the low AR balance at 12-31-09.

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

Thanks, Dan. Once again we have no real handle on when industry conditions will improve. The state of the general economy, the vitality of mortgage loan markets, consumer confidence and other related factors will be pivotal. Fortunately, as Dan clearly pointed out, our company has a solid balance sheet with no outstanding debt. We also maintain strong control of operations and have thereby minimized operating losses on very low production volumes.

From an industry standpoint it is interesting to note that for the 20-year period from 1990 to 2009 home shipments averaged more than 213,000 annually. And for the 10-year period from 2000 to 2009, which includes four to five years of our industry being severely affected by the subprime lending move that drew potential buyers away from affordable systems built homes to higher priced site construction homes. Even during that period there were more than 136,000 homes produced per year.

Obviously these past four years have been exceedingly weak. However, we now believe that we may finally see a modest improvement in shipments in 2010 although the pace of the improvement will be held back by continued inventory liquidation among retailers of homes; additional factory closings throughout the industry, which tend to temporarily negatively upset the market before they benefit it; and by the macroeconomic factors I just mentioned.

Importantly, factory built housing is not going away; the product is too good of an idea. It is a well constructed, it's attractive, it's energy-efficient, environmentally it's more friendly than site built construction, it's convenient and versatile for a variety of applications for consumers and it's a good value in homeownership. We feel we're better positioned than ever to capitalize on even modest improvement in industry conditions and stand ready to do just that this year. Robbie, we're now ready for questions.

(Operator Instructions). Jay McCanless, FTN Equity Capital.

Good morning, everyone. I wanted to ask first -- I know the balance in what you all have loaned out to retail dealers moved up almost double sequentially. I wanted to find out if there's going to be an upper bound for that or what your thinking is there?

You're right, it has moved up and we expect it to continue to increase. We are not really sure how far it might go; we've initially targeted some months back a $10 million level, but we estimate that it certainly could move through that level. It really depends on what other floorplan activity occurs within the industry.

Floorplan is still very difficult to obtain for many retailers -- in not only our industry by the way, but it applies to so many other industries. The banks are just really interested in inventory lending. And so this is not just a manufactured housing issue.

We, as you know, Jay, have combated this with the introduction of our own floorplan programs that we do in coordination with some very experienced lending institutions. But we use some of our capital and that's the number you're referring to. We find this to have been a very helpful competitive factor.

Retailers are very interested in our being able to help them with this, their inventory financing needs. So we think it will continue to give us competitive edge. And we'll be watching it very closely from the standpoint of performance.

So, I can't really answer your question in terms of the dollar amount we expect, but we stand ready to invest significantly more money in the floorplan business.

Okay, that's great. And then wanted to ask also, I believe that retail -- there's been some estimation that retail unit sales actually exceeded wholesale production this year. I wanted to see if you all received any year-end stats on how many homes were sold at retail and if there's an average number of homes that are still out there on retail lots at this point, what that could translate to into demand for the coming year.

Right. First of all, yes, we do think that retail sales have exceeded wholesale shipments. It is hard to get a definitive number. We subscribe to a number of proprietary services that provide retail sales at the state and local county levels. And those numbers would indicate that probably something in the order of 10,000 plus more retail sales occurred last year than the 50,000 wholesale shipments.

Now that might not incorporate all the retail sales that were going on, it doesn't -- we're not totally confident that that number captures all sales in all areas in all states for a variety of reasons. But we do think that the level of retail sales was at least that above wholesale shipments. And as I said in my comments, we think that will continue -- that inventory liquidation phase will continue, but we've been through a lot of that so far I think.

Although it will go into this year, I think it will diminish and we'll see more dealers ordering homes when they have customers that want to buy a home. Right now every time a customer comes on the lot they'd rather sell them a home from inventory to reduce their overheads and scale back somewhat. And then you have the issue of some stores closing and that inventory having to be consolidated. So it has been an issue of cannibalizing of manufactured home sales. I think that will gradually diminish through this year.

Okay. And then my last question, have we heard anything new from Ginnie Mae about when they'll be more aggressive buyer of Title 1 FHA insured mortgages? Or have we seen some other new participants willing to come in and start writing Title 1 mortgages?

Right. And for the benefit of those who haven't been following that particular issue, let me also give some background. The Title 1 program -- FHA's Title 1 program allows for financing of a home only loan for people who want to buy the home and put it on their own private land that they own or for people who put it in planned land leased communities. And for years that loan amount was really too low.

It's now been 18 months since legislation was passed to increase the loan amount to nearly $70,000 and it's been eight months since the comment period on the proposed program ended. Yet still we've seen no action, no final action on Ginnie Mae really providing the rules while FHA -- I'm sorry, FHA providing the final rules so that Ginnie Mae can move the program forward. And that's been a real problem for our industry.

It's something the industry in total is working on and talking with the folks in Washington about, but it's been a very, very slow process. So we don't know when that will begin, Jay, but it is a very important program for the industry that we do need to get focused on and completed. And some people estimate that it could be fairly significant in the amount of new homes sold.

Okay, great. Thank you, gentlemen.

Thank you.

(Operator Instructions). Michael Corelli, Barry Vogel & Associates.

Hi. A couple of questions for you. You said you think that 2010 may see some improvements in the industry versus 2009. Could it you just give us some thought on what you're basing that comment?

Sure. One is the issue I just mentioned, I think the inventory liquidation will be gradually diminishing through the year. I think we're seeing some stability now in the dealers that remain in the industry. There were certainly some consolidation and closures this past year. We may see some more of that, but again I think it's gradually stabilizing.

So we don't think there will be -- even if demand doesn't rise dramatically, or much at all, we think that there should be some more wholesale shipments because of the lower inventory levels on the part of retailers. That's number one.

Number two, we're assuming that there will be some improvement through the year, not immediately but hopefully towards the mid to later part of the year in the financing picture. Right now the Title 1 program I mentioned has been a hang-up, and also just conventional mortgage lending has been very difficult for buyers to obtain FHA loans or was primarily used in the industry for land and home transactions.

But the process is very slow; the underwriting standards seem to change regularly. Once that stabilizes and if the banks start to lend a little bit again that will help. And we certainly expect to see some improvement in that through the year.

And thirdly, Michael, I would say that there may be somewhat less competition from a manufacturing standpoint, there are still a lot of good competitors out there. But I think we've all kind of consolidated, become a little bit more efficient. And I think there will be perhaps a little less price competition, not a lot less -- but I hesitate because I think we'll see a little bit diminished desperation, if you will.

This past year companies tried to keep plants open and even if they went to close a plant they had to liquidate inventory. So pricing was extremely aggressive as people tried to do that. And I think we'll see a little bit less of that going on this year.

Okay. And then could you give a little bit more detail on the inventory financing? Now do you provide the dollars to a third party who then basically makes the loan to the dealer who's buying the inventory? And if that's the case what percentage of the home value might you provide and then what kind of a return are you getting on those dollars?

Well, I can answer part of that, and that is that, yes, it works pretty much as you suggested. We provide -- we assist in providing capital to those lenders. And they do all the -- they are licensed in the various states and so they keep the program compliant with all laws and regulations, they also do all the underwriting, they do the servicing of the loan, the invoicing for the loan. We're basically a capital provider. So that's how that works.

Now with respect to -- and we do earn a return obviously on our money. But we're not prepared to really get into disclosing how that program works. But I think we can safely say that it should more than pay for itself; that is it will obviously take some reserves for defaults and bad debt. But beyond that, beyond those expenses we still think we'll get a positive return on that investment. And obviously we're comparing to a pretty low bar with the yield on our investments being the de minimus.

Okay. And then, Dan had just mentioned about the -- I think you said a $5.3 million tax receivable. Is that a tax refund that you're going to expect to get?

Yes, we expect that we'll get part of that soon because part of it relates to the prior fiscal year, about $2.3 million of it. And $3 million of it relates to this year to date. And we won't receive that back until we file our return for the fiscal year 2010, which ends on March 31 of 2010.

Okay. Great, thanks for your help.

[Lloyd Kanter], [Kanter] Capital Management.

Hey, Joe and Dan, congratulations on continuing to survive in this historically bad time for your industry.

Thank you, Lloyd.

Sure. I think there was a comment made about the Fleetwood Homes lower average price of homes blending in with historical Cavco. Is this going to be -- just a transition period and we'll get back to the normal environment, kind of more historical Cavco home prices? Or will this be a permanent move down in your average home sold?

I think it will be more of a continued process. I think our average selling price will be somewhat lower. Fleetwood's product mix tended to favor more than ours did more the entry-level price point homes. And so by definition they will bring our average down somewhat. They do have a couple plans to build higher price point homes as well. But as I say, their mix is more weighted the opposite way.

So it actually -- it rounds out our product line quite a bit. We were not really a significant participant in the entry level and kind of that first move up level home. So, it's not a bad thing but, yes, you're right, it will lower our average selling price on a go-forward basis somewhat.

Now I think it's exacerbated in this environment, of course, by the pricing environment and the competitive nature of the plant closures and retail liquidations and everything I mentioned. So it will -- there's room for that average selling price to move up. But I think to your point, it will continue to be somewhat lower than it has been if we go back several years.

Is it fair to say that when the market does start to improve, likely that the entry-level might do better than the higher level early on?

Well, that's one of our thoughts, yes, that when people do start looking to buy homes again the financing will continue to be fairly restrictive. And people will need to buy homes that -- well within their budgets and probably with at least a real down payment and maybe significant more down payment than was done these last several years.

So, yes, I think the lower price points will be a popular addition. And also it relates to some of the geographic areas that we're participating in where they tend to be lower price point markets and that's one of the reasons Fleetwood pursues that. It's not to say that attractive margins can't be achieved on those price points because you typically -- the plants can be scaled to run that kind of product and can run very efficiently.

And so there are attractive opportunities there. It's just right now they're squeezed because of the low capacity utilization and the price competition.

Got it. Thank you both.

Thank you, Lloyd.

And with that we have no further questions in queue. I'd like to turn the program back over to Mr. Stegmayer for any additional or closing comments.

Thank you, Robbie, and thank you folks for joining us. We'll be looking forward to reporting to you again in a few months. If you have any follow-up questions feel free to contact us. Thank you very much for joining.

That does conclude today's call. Thank you for your participation.