Cavco Industries Inc (CVCO) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Cavco's third-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 introduce your host for today's conference, Daniel Urness, Vice President and Chief Financial Officer.

Good day, everyone. Before we begin, we respectfully remind you that certain statements made on this call either in our remarks or in our responses to questions may not be historical in nature and, therefore, are considered forward-looking. All statements and comments made today are made within the context of Safe Harbor rules. All 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. Investors should not place any reliance on such forward-looking statements. A more complete statement on this subject is included as part of our earnings release filed yesterday and is available on our website and from other sources.

Leading our discussion today will be Joe Stegmayer, Cavco's Chairman, President and Chief Executive Officer. Joe?

Thank you, Dan. Welcome, everyone. We are able to report slightly above breakeven results for what has been a difficult three month period for the housing industry. During our last conference call, we noted our concerned about entering the winter months, typically a seasonally slow period for the industry with low order backlogs.

As we anticipated, order rates declined during the third quarter, and we were challenged by low capacity utilization. Still, we managed to improve results significantly compared to the prior year third quarter. Once again, people throughout the Company demonstrated creativity, stamina and a sharp focus on customer needs, and we appreciate their efforts.

The volume of shipments of manufactured homes has not yet been reported for December. However, we estimate that calendar 2010 total industry shipments will be approximately 50,000 homes. This level is about the same as 2009 and would be the third consecutive year of the lowest homes shipment levels since 1959, the earliest date for which these figures are available.

So why do we have a positive outlook for the future? First, the 11-year decline in home shipments, particularly the anemic levels of the past eight years alone, would suggest that we shouldn't experience improvement. Housing is a cyclical industry, but this cycle has been longer and deeper than in the past. In addition, population demographics are in factory-built housing's favor with strong growth in the age groups that represent our largest markets.

Third, consumers appear to be turning away from buying large McMansions for a variety of good reasons. Home buyers are now considering housing they can truly afford, and this trend is expected to continue.

Rental rates seem to be stable to increasing in many areas, and renting has always been a prime alternative for many potential buyers of manufactured homes. So with what we believe is realistic optimism motivating us, we worked diligently on continuous improvement programs in all facets of our business. These include focusing on creativity and flexibility in construction capabilities, producing high-quality homes with discernible value advantages, and offering responsive service after the sale.

By definition, these programs never end. However, the results thus far are evidenced by our ability to build a wide range of homes and other specialty buildings in our factories, consistently improving levels of customer interest in our homes, and their satisfaction with them post-purchase.

There's a saying, a metaphor for tough economic times that one can't change the direction of the wind, but one can adjust the sails. This is what we've been about, and as a result, we are confident that Cavco is well-positioned to benefit from any improvement in the general economy, the financial markets, and in affordable housing in particular.

As we have indicated, and pursued in the past, part of our growth strategy is to consider acquisitions of related businesses and facilities that could have the potential to expand our product offerings and/or geographic reach. In that regard, on November 29, 2010, we announced an agreement with Palm Harbor Homes Inc. to provide, through our Fleetwood Homes Inc. subsidiary, debtor-in-possession financing to Palm Harbor during Palm Harbor's reorganization under Chapter 11 of the US bankruptcy code.

Additionally we have offered to purchase certain of Palm Harbor's assets, comprising its manufactured home construction and retail business, and its insurance and finance affiliates. Our agreement to purchase the assets and certain liabilities of Palm Harbor is pursuant to a sale process under Section 363 of the Bankruptcy Code.

Other parties may elect to bid for these assets as well.

We do not expect to know the outcome of these proceedings until early March. If we are successful, the Palm Harbor operations will be a fine addition to our business.

Meanwhile, we continue to face difficult challenges in the current economy, and we cannot assume these will appreciably subside in the months ahead.

Dan will review our financial information, and then we will be pleased to take your questions. Dan?

The third quarter of fiscal 2011 is our first full quarter comparison to prior year since the Fleetwood Homes acquisition. Net sales for the quarter were $39.6 million, which was 9% or $3.2 million higher than net sales of $36.4 million in the same quarter last year. The Q3 average sales price per floor continues to be low at $22,308, a 1.2% decline from the same quarter last year. This decline illustrates how the majority of existing product demand in all of our factories is for low price point homes. The consolidated gross profit percentage this quarter is 13.5% compared to 9.0% last year and 15.6% sequentially. The year-over-year margin improvement is the result of geographic and product line diversification from the Fleetwood Homes acquisition. The sequential reduction in margin percent is from intense pricing competition during a three-month period of weak incoming sales order rates, as well as backlog reductions among the factories that hampered production efficiency. Order backlog stood at approximately $1.7 million at December 31, 2010.

In addition, we began to realize increases in raw material costs.

SG&A costs in Q3 '11 of $5.3 million increased to $321,000 over last year's quarter, but declined as a percentage of net sales to 13.3% versus 13.6% for the same quarter last year. Interest income is approximately 10 times higher than last year, the result of inventory finance portfolio growth, and $214,000 of accrued debtor-in-possession interest income earned from our short-term loan to Palm Harbor Homes as they go through bankruptcy proceedings.

The current quarter effective income tax rate is 50% versus 29% last year. The higher than normal tax rate this quarter is the result of the annual tax provision trueup to the final fiscal year 2010 tax return filed during Q3.

The current tax rate is running at a more normal 39% of pretax income. Cavco achieved net income that was just above the breakeven level this quarter compared to a $1 million loss in the prior year quarter.

I will now cover balance sheet comparisons for December 31, 2010 versus March 31, 2010.

Cash is lower by $25.8 million. However, this is mainly the result of outflows, about $38.5 million to fund the debtor-in-possession, or DIP, loan to Palm Harbor, partially offset by $14 million in loan funds received from our partner in DIP financing, Third Avenue Management.

The reductions in Accounts Receivable and Accounts Payable are from the Christmas production shutdown of several factories, while all factories continued customer cash collections and trade payable processing throughout the holiday periods. Inventory finance and notes receivable grew $5.5 million as a result of the interest in our inventory financing programs among our independent retailers.

As previously mentioned, we have a short-term note payable of $14 million to Third Avenue, a non-controlling interest in connection with our debtor-in-possession loan to Palm Harbor.

In conclusion, the Company ended the fiscal third quarter with approximately $49 million in cash and cash equivalents and has improved its consolidated total equity by approximately $4.2 million since the beginning of the fiscal year.

Joe?

Thanks, Dan. We are ready to take your questions.

(Operator Instructions) James Fronda, Sidoti & Co.

Could you just give me a little color in terms of industry background in terms of interest rates? I mean I guess lending for the most part I know something is going on with Ginnie Mae there in June. If you could just give me a little more color.

Well, lending continues to be an obstacle, because Fannie and Freddie, the government-sponsored entities, are still in receivership, and so they've been reluctant to begin any new lending programs or expand existing programs.

So a lot of the financing is done through FHA -- which is acceptable. I really don't think that, although financing could be better, we don't believe that's the biggest obstacle right now to improving trends for the industry. We would rather think that other issues such as the general economy and consumer confidence and the direction of the economy are more important. But we do see some improvement in the finance area. There are some private lenders that are expanding their role, increasing somewhat their origination volume, but it's still fairly cautious from a finance front.

Okay. That's all I have for now.

Michael Corelli, Barry Vogel & Associates.

Good morning. Just following up first on the financing question, so as far as the new FHA loan limits, I mean I believe that program is now started, where they are starting to ensure loans in the industry?

Yes.

When did that begin and what kind of a ramp-up are you seeing as far as their presence?

Well, it has begun, and I think it is helping in those situations where people are buying a home with a loan up to $70,000 as a personal property loan. That is land not included. And that's helping somewhat.

As I think we indicated last time is still the case, the investor pool or the group of people actually originating these loans -- banks -- needs to increase further, and I think that's, again, part and parcel of banks in general being reluctant to loan money these days. I know many people talk about the banks are lending, but we don't believe that's the case. We believe lending across-the-board is still pretty restricted, and I think that certainly carries into home lending in our industry.

Okay. And considering we are heading again into a very weak period seasonally and your backlog is very soft, I mean do you think it's going to be difficult for you to remain profitable in the fourth quarter?

Well, since we've never made projections, I don't think we will start now. We didn't make them when times were better, and certainly, in these unpredictable times, we can't make them.

But we're going to do what we've been doing, and as I said in my comments, we are going to focus on the basics of good business. And we continually look at how we can lower costs, eliminate any waste, and be more efficient. And if we do those things, and we market properly, and we have good programs, we have our floorplan programs for our retailers where we will finance homes for them for inventory purposes as they are working on sales with their consumers. We have a wide range of product, and now we have a good geographic dispersion with the addition of the Fleetwood Homes factories. I think we are in good position, Michael. I can't say what we will do specifically, but I think we have a good opportunity in the months ahead to perform better than the market.

And then I know a lot of this hypothetical at this point, but as far as Palm Harbor, I just had a couple of questions related to that. One, as far as the finance and insurance business, I know they are an originator, and they are in the insurance business. What are your plans if you were to acquire them as far as those businesses are concerned?

Well, our interest is in the entire assets of Palm Harbor, including those two units. So we would expect to continue those in their normal fashion.

Okay. And I know they have a pretty big presence in modular. What's your presence in modular?

Well, you are right. Their presence is certainly larger than ours. We do build modular product, but we are not as diverse in that product line as Palm Harbor certainly is. For example, we don't build a lot of two-story modular units; Palm Harbor does. Palm Harbor builds somewhat larger modular units than we do. So they certainly have capabilities that are beyond what we are presently doing.

Okay. I mean I know they had been losing money recently. Obviously there are some changes you can make as far as overhead costs and purchasing synergies and things like that, and obviously using your financing maybe in the floorplan area can help them maybe to gain shelf space. Do you think it's a possibility that if you were to acquire them at the price that you've offered that they might be able to be accretive, or do you think that's too much to ask in the short term, considering the industry conditions?

You have a propensity to ask projections. (laughter)

It's my job!

I don't think we can go there. And we are not really commenting that much about Palm Harbor since it's still in the bankruptcy phase, and the 363 sale is not due to occur until early March. So I think we probably beg off right now in commenting.

But we do think, as I mentioned, that it will be a very good addition. We obviously wouldn't go into an acquisition unless we felt it would be positive for us longer-term. But we still have a lot of work to do in the due diligence phase, and for that matter we have a lot of work to do if we are successful in acquiring those assets. And I don't think one can really tell until you really get your hands involved fully in the business how we might be able to affect changes.

Good luck in the process, and congratulations on being in the position to, once again, be able to go after one of the companies that has gone bankrupt in the industry.

(Operator Instructions.) I'm showing no further questions in the queue.

Well, very good. We thank you all for joining us, and again, we look forward to talking to you in three months. And in the meantime, feel free to call Dan if you have any follow-up questions. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may all disconnect. Everyone, have a great day.