Cavco Industries Inc (CVCO) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to your Cavco second quarter fiscal year 2011 earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the call over to your host, Joseph Stegmayer. Please go ahead, sir.

Thank you. Good morning, everyone. And first I'm obligated 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 Securities Acts. Cavco disclaims any obligation to update any forward-looking statements and investors should not place any reliance on any such forward-looking statements. For it's complete statement on this matter as part of our Form 8-K filed yesterday and it is available on our website as through many other sources.

Well we're pleased that we were able to report profitable results for the quarter. The manufactured housing institute's actual shipments report for the month of August, the latest month available, showed manufactured housing shipments up 8.7% from August of 2009. Looking through the first eight months of the year, the calendar year, 2010 started off with a decline in January and then shipments in February were flat and March, April, May and June all registered gains and we saw a slight decline in July and this August gains. So through the full year now, the industry stands at 35,521 homes, which is a 6.7% increase from the prior year, not a major move but certainly going in the right direction.

We remain concerned of course with the general tenor of the economy and its impact on housing. It's interesting that the surveys that are done by a variety of trade associations and economists indicate that the greatest reason for buyer reluctance in their home purchase is that they cannot sell their existing home. The second is the employment economic situation. Both of these are the highest reported reasons why people are not buying homes. Third would be negative media and behind that would be hard to get buyer financing. It's interesting that both the employment and economic situation and the negative media questions, the response to those have increased as reasons for not acting in the latest quarter.

Competition from short sales and foreclosures continues to be an issue, although that varies by region and certainly by the type of buyer. For example, if our buyer's out in a rural area they're going to typically have less competition from short sales and foreclosures than if they're in an urban area or fully developed area with a number of subdivisions around them. Since our industry sells to a lot of rural customers, often times we don't face quite as much competition from foreclosures and short sales as you might imagine.

We do feel that although we're faced with some difficult times currently and certainly going into the winter months, the typically slow season for housing, we are quite cautious about the outlook near term, but we do remain positive on the outlook longer term. There is a good case to be made for pent-up demand in housing. A number of economists have indicated that between the 1.5 million and 1.5 million households were not formed during these recent several years of downturn, and on the verge of being formed, once the job market stabilizes. Also, house prices appear to have bottomed and are not expected to fall further on a national basis, which is good for our industry because we sell affordable housing primarily, and if house pricing in general stabilizes, it again makes our product at a lower price point that much more attractive.

There's expected to be a net increase of eight million housing units that are required in the United States through 2014, and that's looking at incremental housing needs based on population increase of about 13 million people, plus nearly 1.5 million replacement units during that time period because about 300,000 units are scrapped each year due to a combination of fire, flood, obsolescence, dereliction, et cetera. So this means that the current excess number of housing units could be absorbed in the early part of 2011, that is the foreclosures and the short sales, and that we'll start to see more, at least more demand from our types of buyers for their housing needs versus using apartments and living with other family members.

So these people will -- it's our feeling that will come out of these other forms of housing and start looking to buy their own home. And we'll be an obvious choice because again of our price points and the current financing and the anticipated financing environment whereby people not being able to buy homes far above their qualifying levels. And that will drive many people back to affordable housing and we are the primary answer in the affordable housing category.

If we look at housing demand for single family home sales, manufactured housing has typically accounted for 20% plus of that need of all new single family homes sold. That has not been the case in recent years where we've been down to 11% range. If we can get back to even a modest 15% range of all new single family homes sold and if new home sales, single family new home sales, increase, to a moderate level once again, they experienced back through the 20-year period even before the subprime boom of 1.2 million to 1.4 million units, we'll see manufactured housing shipments in the 180,000 to 200,000 plus range. Obviously we don't expect that to happen overnight but it does indicate that given just modest return in housing, we could see a substantial increase in manufactured home shipments, which I will remind were about 50,000 last year and are expected to be about that same range for 2010.

So we see a lot of opportunity. We feel we're well-positioned for that opportunity. Our people are doing a good job now on keeping us on the right track. We monitor costs very closely as we're able to operate at these very low levels of utilization and keep our head above water. So with that I'd like to turn it over to Dan to review the financials and then we'll be happy to take any of your questions. Dan?

Thank you, Joe. For the second quarter of fiscal year 2011, net sales were $45.9 million, which was $16.5 million higher than net sales of $29.4 million in the same quarter last year, a 56% increase mainly resulting from the Fleetwood Homes purchase. Note that Fleetwood Homes was purchased only midway through the prior year quarter. Sales orders have generally declined during the past four months, leaving our order backlog at approximately $2 million at September 30, 2010. The average sales price per floor remained low, at $22,944 this quarter, 3.9% lower than last year's comparable quarter average. The downward movement in the average floor price compared to last year is from the addition of Fleetwood Homes operations, which produced a generally lower price point product than Cavco's traditional business as well as consumer trends towards smaller sized homes with fewer amenities.

Our gross profit percentage this quarter increased to 15.6%, compared to 14.1% in last year's second quarter, and is up from 13.6% in Q1 sequentially. The ongoing improvement in the gross margin is a result of manufacturing efficiency and cost containment efforts among all ten factories during the past year.

SG&A costs in Q2 of $5.5 million increased $948,000 over last year's quarter but improved as a percentage of net sales to 12% versus 15.5% for the same quarter last year. However, after excluding $711,000 of one-time transaction costs for Fleetwood Homes in the prior year quarter, the current quarter comparison improvement of SG&A as a percentage of sales was a more modest 1%. The current quarter effective income tax rate is 38.7%.

Second quarter net income is $1.2 million, compared to a net loss of approximately $200,000 in the second quarter of last fiscal year. The portion of the current quarter net income that relates to the noncontrolling interest owned by Third Avenue value fund is $519,000, as shown separately on the statement of operations. The net income attributable to Cavco stockholders was $680,000, which represents a diluted net income per share for the quarter of $0.10, versus a net loss per diluted share of $0.03 during the same quarter last year.

In comparing the balance sheet at September 30, 2010 to March 31, 2010, the balance sheet operating accounts are relatively flat, with the exception of net inventory finance notes receivable which grew to $21.2 million, compared to $12.9 million last-- or in March. That's an $8.3 million increase funded by $4 million of cash and a $4.3 million combined net change in the other operating accounts. The Company currently has a $3.9 million income tax receivable on its balance sheet for federal tax loss carrybacks, which is expected to be received from the IRS in early 2011 after the federal tax return for the fiscal year ended March 31, 2010 is filed this fall.

In conclusion, the Company ended the fiscal second quarter with approximately $71 million in cash and cash equivalents, continues to carry no debt, and has improved its consolidated total equity by approximately $1.2 million in the last 12-month period. Joe?

Thank you, Dan. And we will now take any questions.

Thank you, sir. (Operator Instructions) Our first question comes from Michael Corelli with Barry Vogel & Associates.

Hi, good morning.

Good morning, Michael.

Any new on potential financing initiatives from government agencies or otherwise?

Well, we continue to meet with FHA and they have issued their rulings now on the Title 1 FHA financing and Ginnie Mae has put out their rules for packaging those Title 1 loans as asset-backed securities and providing the ability to sell those. There's not much has happened yet in terms of actual volume or activity but that Title 1 lending program which allows personal property or chattel loans up to almost $70,000 will be a good help as it rolls out more. Other than that, I think with Fannie and Freddy still in conservatorship, Michael, they're hesitant to really initiate any new programs which would be helpful to our industry.

So far the FHA Title 1, I thought I had heard that they don't have to certify lenders again for this -- for the new Title 1 program?

Lenders have to be -- yes, lenders have to be approved to generate those loans and sell those loans. I think that process is in the works and there are a number of lenders who are already approved for that purpose but we do need a larger population of those lenders.

All right. So I mean this could be something that could be reasonably positive for the industry over time?

I think so. And I think it should start developing into this next year. Most feel in Washington, D.C. now nothing's really going to happen until after the election cycle and the new Congress gets installed. But a lot of these initiatives are on the table to be talked about at that point in time.

Okay. And as far as business conditions currently, it sounds like you've seen orders declining over the last few months and we're heading into the winter here. Do you think it's -- you're going to be in another very difficult winter and do you think the industry can continue producing shipments for the next few months of the year that would be ahead of last year?

Well, that's a -- that is the $64 question, I think. I think it is going to be a difficult winter. I know that as Dan mentioned, our backlogs are down and that's not a good sign as you go into the winter months. But I think the industry will probably end up being relatively flat. My, my-- this is just my guess, relatively flat for the full year that is-- we'll-- flat to slightly increase. So that obviously indicates we might have some slower months in the next several months of the year. But I don't think it will be down substantially these next few months so I think the industry can eke out a small increase this year. It's-- but I think it's going to be difficult. I think the industry will have its challenges and I know we'll have our challenges the next few months to try to keep all the plants running on any kind of full schedule.

Okay. Thanks a lot.

You bet, Mike.

Thank you. (Operator Instructions) Our next question comes from James [Funda] with Sidoti & Company.

Hey, guys, how are you?

Good morning, James.

In terms of the acquisition with Fleetwood, I mean this $47 million revenue top line, I mean, $45 million, is this going to be the norm going forward?

Well, that really depends on business conditions, but we report all the revenues of Fleetwood Homes' operation. So that number will -- in terms of comparing quarter-to-quarter or apples-to-apples you might say, yes, it will remain consistent. In terms of it's actual volume it will really depend on the operation of those seven Fleetwood plants that are currently in operation.

Right, okay. Thank you. That's all I need to know.

Okay. Thanks.

Thank you. Our next question comes from Paul Carter with Point Defiance Capital.

Good morning. Thanks for taking my questions. Regarding your seven Company-owned retail centers, you were going to close some of them but then changed your mind in the first quarter due to sort of strength in sales. With backlogs down, is that still the plan to keep them open for now?

Yes, it is. We have a very small presence in retail. Most of our retail is done through independently owned and operated retail establishments and communities and developers. We use those Company-owned stores really as you might say as beta test sites. We can test new products in those stores. We try to do selling techniques and designs. So they're a valuable asset in that regard. And in a couple areas we have them located where we don't have independent distribution. So our intent is to yes to keep those running. It's not necessarily though to expand the retail presence, we don't plan on doing that.

Okay. Great. And assuming sales increase next year and into 2012, how can we expect sort of SG&A expenses to change going forward?

Well, we are running at a fairly consistent pace right now at these operating levels, but if we were able to increase our revenue and increase our profitability, those SG&A costs will go up with compensation that's tied directly to earnings. So there'll be an increase, but as a percentage of revenue, we would expect that it would go down as revenue goes up.

Okay. Great. And your floors per unit sold increased again this quarter a little bit to the highest it's been in a while. I know it's not a huge change, but is that purely sort of a mix issue between park models and regular homes or are buyers sort of gravitating towards larger floor plans?

Well, if you mean our- the average home price per sales price, it's a mix for sure, Park Models are included in that, and the average floor price will go up with a higher mix of specialized floor models. But the prices we expect will continue around these levels where they're at right now.

And Paul, I would add to what Dan is saying, that it's very hard to predict that. That's going to be somewhat variable. It depends, as Dan indicated, on product mix and obviously on lower volumes, just changes in product mix even minor changes in product mix can affect the floor average. If we had larger volume obviously those minor changes in product mix wouldn't have as much of an effect. But hat combined with -- yes, the approach right now I think most people are buying lower, more affordable homes, lower price points and/or they're putting less amenities in the homes so they can qualify for their financing. So that's having a pushdown effect, it's somewhat mitigated as Dan indicated by mix. But that's-- it's kind of a hard number to get a handle on quarter-by-quarter, just because of the lower volumes we're operating at right now.

Okay. Great. And what's the competitive environment out there right now just among sort of other manufactured home companies in some of your markets, are any sort of smaller competitors sort of going out of business or shrinking their operations at all?

Well, it's very competitive. Most plants are operating at pretty low levels of utilization, capacity utilization, and so it creates some very competitive activity out in the marketplace.

The second part of your question, yes, we are seeing some closures of plants. There's still excess capacity, but I think we see with each passing quarter there's a -- you hear about a plant closing or -- in a couple cases actual companies have closed down totally. It's more so that companies with multiple plants are reducing the number of plants they operate. We expect that probably be some further reduction in plant capacity in the months ahead. Again, what we said, given the winter months, but how much of that we'll see is kind of an unknown. Most of the companies operating in this business are privately owned or not providing public information, so we really don't know what kind of financial condition they're in or their ability to withstand this downturn. But we suspect that we'll be-- there will be, Paul, some further shutdowns.

Okay. Great. Well, thanks very much.

You bet.

Thank you. I am showing no further questions at this time.

Okay. Well, thank you then and we appreciate you all participating in the call. We'll look forward to talking with you in a few months. As always if there's any questions or things we can help you mid term feel free to call us here at Cavco. Thank you for listening.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the conference and you may now disconnect.