Cavco Industries Inc (CVCO) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Cavco fourth-quarter fiscal year 2011 earnings call and webcast. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time.

(Operator Instructions)

I'd now like to turn the conference over to your host, Mr. Joseph Stegmayer, Chairman and CEO. Please go ahead.

Thank you, and good morning. We would, of course, like to mention that we speak today under the umbrella of the Safe Harbor rules. Certain comments we will make are forward-looking statements within the meaning of the -- 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. A more complete statement of the subject is included as part of Cavco's third-quarter (inaudible) release, filed on form 8-K yesterday, and available on our website as well as through other sources.

It has been a busy quarter, and we are pleased with our results for the fourth quarter. Economic conditions did not provide any boost for us, particularly in the areas important to improving demand for our products, such as the levels of unemployment and consumer confidence, where we saw, really, no marked improvement. These are 2 key elements that we look at for signs of improving demand for our houses. We have been able to operate all of our factories, although not at full schedules. We've kept people working, and we've kept our heads above water.

Of note, our Fleetwood homes operation, in its first full year as part of Cavco, operated profitably. We are very pleased about this performance, which exceeded our original strategic plans, developed just 18 months ago when we acquired the Fleetwood business.

Times are still challenging, industry shipments continue at historically low levels, competition is keen, and, in places, is becoming an issue with certain raw materials and purchased parts. Still, we feel confident about our prospects for what we call the systems-built or factory-built housing industry, which provides enhanced quality homes, more efficient use of labor, better controlled material usage, and lower cost to the consumer, compared to on-site construction methods. We are, likewise, encouraged by Cavco's position in the industry, our geographic and product line diversity, our excellent distribution network, and our demonstrated ability to operate effectively and efficiently at very low levels of capacity utilization.

With that I want to ask Dan to cover some of the financials, then we'll come back with some additional comments and finally take your questions.

Thank you, Joe. Floors sold during the fourth quarter were essentially flat compared to last year's fourth quarter at 1,595 floors. However, net sales for the final fiscal quarter improved 7%, to $38.8 million. This increase was the result of a 7.8% increase in the average selling price per floor, driven mainly by modestly higher home-selling prices to keep pace with increased material costs, as well as a higher level of park models and cabins in the production mix, which carry higher sales prices.

The consolidated gross profit percentage this quarter is 13.7%, compared to 8.8% last year and 13.5% sequentially. The year-over-year margin improvement is the result of geographic and product line diversification from the Fleetwood Homes acquisition. Order backlogs stood at approximately $5.9 million at March 31, 2011. SG&A costs in Q4 '11 of $5.3 million increased approximately $600,000 over last year's quarter, mainly from additional compensation tied to earnings and Palm Harbor transaction costs of $175,000. Excluding transaction costs, SG&A, as a percentage of sales, was 13.3% this quarter, compared to 13.1% last year.

Fourth-quarter interest income included $782,000 of debtor-in-possession interest on the loan outstanding to Palm Harbor during the period. The dip interest income was subsequently converted to a reduction in the cash purchase price, paid for the Palm Harbor assets in April. Even though there is a pre-tax income this quarter, a net tax benefit was recorded. Cavco recognized a positive income tax adjustment of $950,000 resulting from a decrease in Arizona statutory income tax rates, enacted this quarter. Excluding this adjustment, income tax expense would have been $258,000, with an effective annual tax rate of 37% versus a 35% tax rate in the prior year.

These items resulted in net income this quarter of $1.6 million, or $0.23 per diluted share, compared to last year's fourth quarter net loss of $729,000, or $0.11 per diluted share.

We'll now go over the balance sheet comparisons for March 31, 2011 versus March 31, 2010. Cash is slightly higher, supported by $36 million additional cash, loaned by Third Avenue Value Fund, our Fleetwood Homes and Palm Harbor investment partner, in the form of a convertible note that automatically became equity on April 23, the date of the Palm Harbor purchase. $40 million was invested in the Palm Harbor dip loan at March 31, and, subsequently, credited toward the $83.9 million purchase price at closing.

Prepaid assets are lower, by roughly the same amount of the $4 million income tax refund received from the IRS in January. Inventory finance notes receivable grew $4.8 million, to $17.8 million, as a result of the ongoing need for inventory financing among our independent retailers. Redeemable non-controlling interest represents the original investment by Third Avenue and the related retained earnings pertained to that investment. Retained earnings grew by $2.8 million this year, which we consider a significant achievement for our people, given the protracted industry downturn and various economic challenges that affected the Company in fiscal '11. The rest of the accounts are relatively flat compared to 1 year ago, as anticipated. With that, I'll turn it back over to Joe.

Thank you, Dan. We would like to talk briefly about our acquisition of Palm Harbor Homes, which we discussed during the last conference call. We have completed, as of last week, the acquisition -- out of bankruptcy court, a 363 auction sale -- of the assets of Palm Harbor Homes and its subsidiaries. So, we're just in process of getting thoroughly involved in the operations of Palm Harbor. And we'll have a lot of work to do, of course, in integration, and fitting this business into our operations.

While we're very enthusiastic about what we've purchased -- we were interested initially in Palm Harbor because of its strong brand name and reputation for building a high-quality product and servicing it well after the sale, which fit with our operating method and philosophy -- strategically, the operation strengthens our position in Texas and surrounding states, which are traditionally among the strongest areas of demand for manufactured housing; it adds a direct presence in Florida, also a historically large market for our products, which we have not been able to serve heretofore; and, it adds a very creative, innovative line of modular homes, built to state and local codes, typically that are somewhat larger, often two-story, and are sold to small developers and development projects, as well as individuals.

Finally, Palm Harbor has very strong marketing capability and is very active in internet marketing; and, we expect to be able to learn and develop that capability more thoroughly through our Company. So, we're very pleased to add Palm Harbor to our operations. We think this now provides us, basically, nation-wide capabilities, and will be a great addition to our business, longer term. We have a lot of work to do in this integration process; we had to turn around these operations and make them strong contributors, but we think we have an excellent opportunity to do so. With that, we will be glad to take any of your questions.

(Operator Instructions)

Michael Corelli, Barry Vogel & Associates.

Just a couple questions, one, the backlog. I believe that was a reasonable increase versus the last 2 quarters. Could you talk about that?

Sure. We have seen a nice increase. I think it's somewhat the result of some seasonal pickup in business. Also, I think we have, as we've indicated before, we've been gaining some shelf space among our distributors, and I think that's starting to pay off in inventory turns. That is, we're getting orders from those model homes. So, we're seeing some improvement, we feel, in our market share and distribution.

Okay. As far as the financing environment, anything changing or anything new?

The financing environment has not changed significantly. I think Freddie Mac has shown an increasing interest in our industry through providing affordable housing, so that's been a somewhat recent development, I guess you might say. They're looking more closely at our industry once again. FHA continues to be the method of preference for financing most land/home transactions. And then the personal property lenders, the so-called chattel lenders, are still active in the business. We haven't seen any really new entrants, but we have not lost any either. I think the ones that are involved, especially lenders, are continuing to do a very good job fulfilling that niche.

There's no question that financing is still a challenge. I don't personally believe it's the largest challenge, because I think good credit customers, credit-worthy customers, can eventually get a loan. It takes longer than it should, probably. There's more hurdles to jump through, because of what went on in recent years. But, ultimately, that financing is still there. We're more concerned about the unemployment levels and, as I mentioned, consumer confidence.

Okay. As far as the rising raw material prices, is that something you think you'd be able to combat with some raising your prices? Or is that difficult to do with the competitive conditions at this point? Or do you think maybe margins might be under pressure?

I think probably the answer is yes to all three of those. Yes, it is difficult to do, obviously, in an environment where competition is keen and demand is low. However, everyone is facing these same raw material price increases, it's not as if we're alone. We would expect competition to have to deal with this as well. Some might choose not to pass it all on, but the industry generally uses a surcharge method that is kind of a line item on the invoice to homes. So, as these commodities and raw -- and purchase parts change in price, the surcharge is adjusted. Somewhat like the -- like other industries use on a fuel surcharge. We use it on basic commodity pricing. So, if lumber goes up, there's surcharges added to the invoice. That'll go up and down with commodity pricing. And most people in the industry use that. And most distributors are familiar and expect those prices to change somewhat.

Okay. And, lastly the Palm Harbor deal; based on the price that you paid, any thoughts about the impact of profitability in the new fiscal year as far as whether it be diluted or accretive?

As with our Fleetwood acquisition, we're not prepared yet to provide any real indication there. We bought Palm Harbor, as we did Fleetwood, to situate ourselves in a stronger position for longer term. We certainly didn't buy it for the short run, because, as we all know, the business is quite weak right now. But, we think it gives us some significant advantages that I've mentioned, and it puts us in a very strong position, gives us additional buying power, and it should be a very good addition. I don't think we're expecting any short-term miracles. There's a lot of work to do to integrate the operation -- cut costs, cut overheads, and duplicity of overheads. And those things don't happen over night.

So, I would say, give us some time, we think it's going to be a great addition. Fleetwood, I think, is a good indication of what we're able to do if we work quickly and effectively. And, I think we can do that here as well.

(Operator Instructions)

James Fronda, Sidoti.

I just had a quick question in terms of the interest income now that the acquisition has been made. Is that still going to run through the income statement?

The interest income from the debtor-in-possession loan ends on the purchase date, which was April. So, there will be that small amount that will be in the statement next quarter, and that's where it will stay. It won't be reversed or anything like that. It'll be interest income and that's where it belongs.

Okay. That's all. Thanks.

Howie Flinker, Flinker & Co.

Hi, Joe.

Howie, how are you doing?

Good, you?

We're doing pretty well.

I would think you are -- you raised price and your sales stayed the same. You didn't chase away any customers. That's pretty encouraging, if you ask me. Your unit sales that is. Could you please explain the accounting of the acquisition of Palm Harbor? On one hand, you have a note receivable of $40 million, on the other hand you have a note payable of $36 million. How does that work?

Yes, that's fairly temporary, but I'll let Dan explain that.

Well, the $40 million is the debtor-in-possession loan that was a loan to operate the estate of Palm Harbor during its bankruptcy proceedings. And then that, you see on our balance sheet, that was credit bid -- or accredited toward the purchase price in April. So, it's subsequent to the statements you see here.

Oh, I see. So that'll disappear, it'll turn into equity or an asset?

That's right.

And on the other side, you still owe the $40 million -- $36 million or is that going to come back from Palm Harbor somehow?

The $36 million is separate in that it is a loan from our partner in this acquisition, Third Avenue.

Oh, I see.

So, that loan converts to their interest in the new partnership going forward. But, at this statement date, March 31, it's still considered a loan outstanding.

So, that $36 million will become minority interest or something there or equal interest or something like that. But not a direct liability of you, is that correct?

That's correct.

Okay, that explains it. Keep fighting, there aren't many of you left. I'm still impressed by your sales results.

Appreciate it.

I'm showing no further questions at this time and would like to turn the call back over to Management for any closing remarks.

Thank you. We appreciate you being on the call. And, as always, we're available for follow-up comments or questions. And we look forward to talk to you again in a few months. Good day.

Ladies and gentlemen, this does conclude today's conference. You may all disconnect and have a wonderful day.