Cavco Industries Inc (CVCO) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Cavco first quarter fiscal year 2012 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). As a reminder, today's conference call is being recorded.

I would now like to turn the conference over to your host, Mr. Joseph Stegmayer, Chairman and Chief Executive Officer. Please go ahead.

Thank you, Ellie, and good morning, everyone. Welcome to our first-quarter conference call. With me today is Dan Urness, our Vice President, Chief Financial Officer and Treasurer.

As always, we are required 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 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. The complete statement on this subject is included as part of Cavco's first quarter news release filed on Form 8-K and available on our website, as well as through many other sources.

When we held our previous conference call, we had just completed the acquisition of nearly all the assets of Palm Harbor Homes. Subsequent to that call and after receiving regulatory approval, we closed on the purchase of Palm Harbor's insurance subsidiary on June 10. Because of bankruptcy estate issues and the time to obtain regulatory approvals, this acquisition has taken slightly longer to complete than we originally anticipated. Now that it is accomplished, we are pleased that our initial involvement with the operating units of Palm Harbor confirm our favorable findings during due diligence.

The five operating production facilities are in good condition with excellent capabilities. The operations management teams are strong and experienced, and the retail stores are exemplary in terms of their attractive locations and model home displays. The sales and customer service teams are well skilled and knowledgeable, thanks to sound training programs.

The new lines of business that joined Cavco with this acquisition are a mortgage financing business named CountryPlace Mortgage, and an insurance operation, Standard Casualty Company. The management teams of these two businesses are seasoned veterans in their respective fields. Both operations have sound track records, good internal controls, and should provide attractive growth opportunities.

Dan will review the financial disclosures in a few moments. Meanwhile, I would like to point out that, as you may have noted, the required accounting treatment, which Dan will explain clearly in his comments, indicates that the assets were acquired at a discount to their fair market value. While this certainly is favorable, it is just one aspect of measuring the success of an acquisition. The other, of course, is how we benefit from the assets acquired in the future.

To that end, we are confident that addition of the favorably recognized Palm Harbor brand, the high-quality and aesthetic appeal of Palm Harbor Homes, the retail distribution business and the finance and insurance line, will complement Cavco and Fleetwood operations very well. We are excited about the possibilities we see with this new addition.

While some changes have already been made, there remains much work to be done to integrate Palm Harbor with our Company. As this work progresses, we expect to benefit in a variety of ways. These include the ability to offer an enhanced product line, broader geographic manufacturing and distribution capabilities, the addition of new and relatively consistent revenue streams from financial services and the economies of scale and synergies available to a large organization.

While my comments today have been focused on the acquisition, I certainly want to point out that our Cavco and Fleetwood businesses continue to do well, considering the challenges posed by adverse economic conditions, very low consumer confidence levels, tight retail and wholesale credit markets and a depressed site-built housing environment. Our people have done a remarkable job coping with these and other issues.

Based on comments from and analysis from economists and other financial experts, the months ahead would appear to offer little relief from the nation's current maladies. However, we are a financially sound company with excellent people resources and are solidly positioned as an industry leader. Accordingly, we are confident in our ability to find and pursue attractive growth opportunities.

I will now turn it to Dan Earnest for his comments.

During the first quarter of fiscal year 2012, Cavco concluded its previously announced Palm Harbor purchase. Included in the purchased assets were five operating factory-built home production facilities and 49 operating retail locations in addition to the related assets such as inventory, equipment and accounts receivable. Cavco also purchased the stock of Palm Harbor's mortgage finance and insurance subsidiaries during the quarter.

In accordance with accounting requirements for business combinations, we allocated the Palm Harbor purchase price of $83.9 million to the various assets and certain liabilities acquired, based on their individually determined fair values. The purchase price was ultimately lower than the combined fair value of the purchased net assets, which resulted in negative goodwill of $18.8 million. This negative goodwill amount is reported as a one-time bargain purchase gain on this first statement of operations since the transaction closing, a requirement of applicable accounting standards.

The consolidated financial statements for the first fiscal quarter, ended June 30, include operating results from Palm Harbor since the applicable acquisition date.

Net sales for the quarter were approximately $99 million compared to $47.5 million during the same quarter last year, an increase of 108%. The combined Company sold 1851 homes during the first fiscal quarter, up 41% compared to 1316 homes in the prior-year quarter.

Consolidated gross profit as a percentage of net sales this quarter is approximately 16% compared to 14% in last year's quarter and 14% sequentially. The margin improvement is mainly the result of the added Palm Harbor finance and insurance subs, which are higher-margin businesses.

Quarterly SG&A cost were $17 million or 17% of net sales, an increase of $11.8 million compared to $5.2 million or 11% in Q1 last year. The increase is from the addition of the Palm Harbor businesses and transaction cost of $744,000, which was less than 1% of net sales.

Interest expense of $1,461,000 is from debt service on securitization financings connected to the CountryPlace Mortgage securitized manufactured home loan portfolios. GAAP requires us to record interest expense separately on the P&L, even though the offsetting interest income is included in net sales on the consolidated statement of operations.

Other income includes interest earned from inventory finance, notes receivable and the debtor-in-possession loan to Palm Harbor, eliminated upon closing of the transaction. The DIP interest income was subsequently converted to a reduction in the cash purchase price paid for the Palm Harbor assets in April.

The effective tax rate this quarter was 32% compared to 39% last year. Net income in Q1 '12 was $17.5 million compared to last year's net income of $850,000. Excluding the one-time effects of the $18.8 million bargain purchase gain described earlier and excluding deal cost of $744,000, the Company would have reported a net loss of approximately $800,000 this quarter.

Next, we will go over the balance sheet comparisons for June 30, 2011 versus March 31, 2011. Cash is down $43 million in connection with the Palm Harbor purchase this quarter. Restricted cash is made up of amounts held by the finance subsidiary related to consumer loan servicing, as well as customer deposits in bank trust accounts, in accordance with state law. Accounts receivable is higher, given the larger enterprise.

Note that we have a classified balance sheet, so some of the amounts are broken out between current and long-term. Short-term investments is one of those balances and as part of the overall benefit portfolio of Standard Insurance maintained as security for policies written in accordance with state underwriter requirements.

Inventories are higher, mainly from retail home inventories at Palm Harbor sales centers, in addition to materials and work in process at the five operating Palm Harbor factories. Assets held for sale primarily represent the expected proceeds from six idled factories listed for sale. Inventory finance notes receivable is relatively flat compared to March 31, 2011.

DP&E increased for the inclusion of the operating Palm Harbor factories. Approximately $15 million of intangible assets were added to the books pertaining to the various Palm Harbor businesses.

Accounts payable grew in connection with the acquisition. Accrued liabilities is larger by way of increased customer deposit levels, accrued warranties, deferred revenue, compensation-related balances and others. The construction lending line is used by CountryPlace Mortgage for short-term financing in the mortgage loan origination process. The current and long-term portion of securitized financings pertains to debt on the securitized portfolios.

Redeemable non-controlling interest increased from an additional $36 million investment from Third Avenue, our partner in the Palm Harbor purchase, and the applicable portion of net income this quarter. Likewise, retained earnings grew by Cavco's applicable portion of quarter net income.

With that I will turn it back over to Joe.

Thanks, Dan. Allie, we will now take questions from those on the call.

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

Could you tell us what the backlog is? I know it might be a little bit different now that you have Palm Harbor, but just curious.

It's $20 million at the end of the quarter, which is about -- a little over two weeks of production.

Okay, and do you have any idea how much of that would be attributable to Palm Harbor?

We don't break it out separately in that manner, [Barry].

And then as far as financing environment, industry conditions, things like that, could you touch upon if there has been any improvement or any changes?

Michael, I would not say that there have been any significant changes in the financing picture. Generally, good credit for land and home transactions, true mortgages, can get a mortgage. It seems to take a while; the underwriting process takes a while, but they can generally get it.

The challenge, probably, that continues to haunt all home sales, not just our industry, but is the one of appraisals. Appraisals are sometimes very difficult to get in certain markets, especially rural markets where there are not a lot of comparables. And so it takes a protracted period of time to try to get the mortgage completed, which has been a frustrating point for both the consumer and for us as a seller.

On the general economics side, I don't think we're seeing a lot of difference there. We see geographic differences. Texas is somewhat a better market than, obviously, are Arizona and California. But by and large, I think most of the country is facing the same issues economically. So it seems to impact our businesses across the board.

Okay, and related to the Palm Harbor deal, that loan, that high-interest loan that they had with Fargo -- is that still outstanding, or has that been terminated?

That has been paid off in full, and that no longer exists.

Okay, all right, thank you.

(Operator instructions) James Fronda, Sidoti & Company.

In terms of the 2Q -- I'm sorry -- 1Q selling expenses, is that a good run rate to use going forward?

Our SG&A expenses were up this quarter, and going forward I would say that they will -- we are anticipating them to be high. We can't predict right now if they are going to remain right at these levels, but we are going to continue to work those down and the opportunity is there to improve the bottom line.

Okay, great. And in terms of a tax rate, is there any type of tax rate you could give us to forecast out going forward?

The tax rate we're going to anticipate is going to continue along statutory lines, in the high 30s where it's been.

Okay, all right, thank you, guys.

Howard Flinker, Flinker & Co.

I had a few questions on the balance sheet. I take it the investments long-term are also related to the insurance company; is that correct?

That is correct, that's right.

And the consumer loans receivable -- do they all come from Palm Harbor, or did you initiate some of those yourselves?

They all came in connection with the purchase from the finance subsidiary of Palm Harbor. So we did not have any of those historically before the acquisition.

So then my question is, do you intend to continue that activity, or do you intend to wind it down and let other financiers pay for it?

No, we intend to continue that CountryPlace Mortgage business. What has changed, Howard, is that, over time, as the asset-backed market kind of shut down several years ago and has not reopened, what that mortgage company is now doing is primarily an FHA or government-sponsored mortgages. So we don't hold those mortgages for any extended length of time. It's actually just a very short window, and we then sell them. As we originate them to FHA standards, for example, then we would sell them to FHA in a very short order. So we won't have any loans on balance sheet long-term, other than the ones that already exist.

Yes, but they're going to go to the FHA. Has the FHA widened its standards to accept mobile homes, or is it the same kind of standard as before, which includes real estate and the land and the home, etc.?

There is a program for financing just the manufactured home only without the land. It is not used a lot yet, but most of what we are doing is primarily land and home mortgages, which is what Palm Harbor specializes in, anyway. They traditionally sell a home to somebody who has land, or to help that person find land. And so most of their transactions are true land and home packages or true mortgages.

You say the separate category for mobile homes without land are not being used much yet industry-wide. Why is that?

Well, there is some hesitancy on the part of the government-sponsored agency involved to authorize certain lenders to generate those loans or to sell them to -- today. So they have not expanded, you might say, the base of underwriters or originators of those loans. And that's, I think, just a part and parcel of the whole government slowness and preoccupation with other situations right now, and particularly in the mortgage business.

So, although they did expand the maximum loan amount that can be financed as a home-only transaction, which is very helpful, took it up from the $40,000 range up to the -- almost the $70,000 range, so -- which was sorely needed, and we finally got that.

Yes, $70,000 covers a lot of homes.

It does. With the home only, it does cover now a lot more homes than it used to. And we look for that program to be used more in the future, but it has been slow in ramping up.

So it's eligible; it's a matter of bureaucratic or governmental delay, and at some point we could probably guess that it will be used?

I think that's probably a good assumption, yes.

Okay, thanks.

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

A couple questions for Dan -- on the interest expense line, I know you had Palm Harbor for a little less than -- a little more than two-thirds of the quarter. It looks like it would be -- if we just took that $1,461,000; that would be closer to $2 million on a full-quarter basis. Is that the kind of number that you think we should be looking at going forward?

Yes, you're pretty close. It's actually more like 75%, but $2 million would be where you are running into, if you did that math, although I would tell you that the nature of the portfolio and the securitized debt is that it's declining over the life of the underlying loans, so it would presumably decrease over time.

Okay. And then on the gain that you had in the quarter, if we wanted to look at that after tax and pull that out, would it be the regular tax rate that you had in the quarter, or should there be a different tax rate on that?

Well, we wouldn't apply any tax rate to that. In fact, the tax benefit recorded right now is 32% of the bottom line, if you excluded that gain. And that's the right way to look at it. So you wouldn't really apply any kind of tax ramification to that number because it's not a taxable amount.

Okay, and then as far as the impact of the non-controlling interest related to that gain, how should we look at that?

That did affect the non-controlling interest. It -- if you look at the income statement, the portion that relates to the non-controlling interest went right to the temporary redeemable noncontrolling interest line on the balance sheet. So it served to increase that amount on the balance sheet.

And what percent is that, again? Is that 50%?

That's a 50% ownership; that's correct.

Okay. And if we wanted to break out those acquisition-related costs, would we just use the regular tax rate?

Yes, that's right.

Okay, all right, thanks for the help.

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

Thank you, Ellie, and thank you for joining us. As always, feel free to follow-up with us here in Phoenix, and we look forward to our next call with you. Thank you.

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