Cavco Industries Inc (CVCO) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Cavco industries fiscal second quarter for the year 2012 conference call. (Operator Instructions). I would now like to introduce our host for today, Mr. Joe Stegmayer, Chairman, President, and CEO. Sir, please go ahead.

Thank you, Karen, and welcome, everyone. With me today is Dan Urness, Cavco's Vice President and Chief Financial Officer.

First of course we are obligated 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's 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 news release filed on Form 8K yesterday and available on our website as well as through other sources, including the SEC website.

Well, folks, we are reasonably pleased with the performance for the quarter. We say that because we're -- we feel fortunate to have profit in a very challenging market. We're still faced with all the challenges of the economy. There is no question that consumer confidence and job security, which are essential to the housing recovery, are still very, very low, and these two factors are really offsetting the fact that our homes themselves have become even more affordable from historical perspective. We are seeing some improvement in certain parts of the country, although the improvement is quite modest even in those areas. And in certain areas of the country, of course, still faced with enormous challenges in the housing market, including the West Coast and Florida and the East Coast -- Southeast Coast of the country.

Last quarter we talked quite a bit about our acquisition of Palm Harbor. We had just acquired it in that quarter as you may recall, and it has gone very smoothly. It is now well on its way to integration with the Cavco operations, although we certainly have a lot more work to do. We're very pleased with the performance of Palm Harbor to date, the enthusiasm of their people, and we feel there is still quite a few synergies to be yielded, but we have made some progress in that regard.

It is also worth noting that it is now the second anniversary of our acquisition of Fleetwood Homes. Those of you who have followed us might recall that we acquired that in a bankruptcy auction in 2009, and that has gone extremely well for us. The people there have been remarkably resilient in some very tough markets and also been very adaptive to the Cavco culture, and so we're very pleased with the performance of that acquisition. We expect to achieve the same results over time with the Palm Harbor acquisition.

From the standpoint of our performance this quarter, I am going to let Dan get into that in a moment. But we do feel that the immediate future will be -- continue to be challenging, both from a standpoint of the economy and also as we enter the winter months typically. It is typically a slow season for housing, and manufactured housing, systems built housing, is no exception to that rule. So we expect the months ahead to be challenging.

But we are, again, buoyed by the fact that we're seeing some improvement in certain parts of our markets, particularly in the Texas and southeast and central states we're seeing some improvement. So our plants are operating very efficiently, although at fairly low levels of utilization. Our people's spirits are very good, and we think we have a tremendous amount of demographic positives going for our industry, both the dynamics of first time home buyer and the 55-plus, the aging baby boomer generation are prime markets for systems built housing.

It is probably safe to say that 18- to 32-year-olds are somewhat we're wary of homeownership, since over the past several years all they have seen is home prices going down. That's why we think smaller mortgages, lower monthly payments characteristic of factory built housing will be a positive for that particular market. Always a large market for housing, and certainly has been a large market for manufactured housing through the years. So we think actually our price points will play well in this current atmosphere that's been created by the subprime debacle.

In addition, the 55-plus market has always been a good market for our housing and likewise should continue to be so. Our homes provide energy efficiency, ease of maintenance, and a lower total investment, so people can maintain large amount of their savings in investment accounts and generate more disposable income with a lower or even no house payment. Many 55-plus buyers pay for their home in cash, and others make a large down payment and keep their monthly payments very low. So it is very attractive and economical way for people to live once they're empty-nesters.

Our Company is in very strong financial condition. We expect that as we digest these acquisitions we'll continue to get operating efficiencies and marketing synergies, and we feel that these will grow through the year ahead.

With that I am going to turn it over to Dan, who will cover the specifics of the numbers for the quarter, and then we'll be happy to answer any of your questions.

Thank you, Joe. The second quarter financial results include a full three months of activity for Palm Harbor homes compared to the prior year actual results, which were prior to the Palm Harbor transaction.

Net sales for the quarter were $130 million, compared to $46 million during the same quarter last year, an increase of 183%. The combined Company sold 2,147 homes during the second fiscal quarter, up 74% compared to 1,236 homes in the prior year quarter, and up 16% over the most recent quarters 1,851 home sales.

Consolidated gross profit as a percentage of net sales this quarter is approximately 22%, compared to 16% in last year's quarter and 16% sequentially. The percentage increase arises mainly from the addition of non-manufacturing businesses obtained in the Palm Harbor transaction. The retail and finance businesses in particular have higher gross margins by nature.

Quarterly SG&A costs were $21.6 million or 17% of net sales, an increase of $16.1 million compared to $5.5 million or 12% of Q2 net sales last year. The percentage increase is primarily from the Palm Harbor retail and finance businesses, which in addition to having higher gross margins, carry higher SG&A costs as a percentage of net sales.

Interest expense is for debt service on securitized financings connected to the manufactured home loan securitization portfolios of the financial services segment. GAAP requires us to record interest expense separately on the P&L, even though the offsetting interest income is included in net sales. Other income is primarily comprised of interest earned from inventory finance notes receivable. The effective tax rate this quarter was 36%, compared to 39% last year.

Net income attributable to Cavco stockholders in the fiscal 2012 second quarter is $1.7 million, compared to last year's net income to Cavco stockholders of $680,000.

Now we'll review the balance sheet comparisons for September 30, 2011, versus March 31, 2011. Cash is down approximately $41 million in connection with the Palm Harbor cash purchase price paid. Restricted cash is comprised of amounts held by the financial services segment related primarily to consumer loan servicing as well as home buyer deposits in bank trust accounts in accordance with state laws. The accounts receivable is higher given the larger enterprise.

Note that we have a current -- or classified balance sheet, so certain balances are broken out between current and noncurrent. Short-term investments is one of those balances and is part of the overall investment portfolio of our insurance subsidiary, maintained as security for policies written in accordance with state underwriter guide lines. Consumer loans receivable represent the securitized and held for sale loans of our finance subsidiary.

Inventories are higher, mainly from retail home inventories at Palm Harbor sales centers in addition to material and work in process at the Palm Harbor factories acquired. Assets held for sale is primarily comprised of idled factories. Inventory finance notes receivable is relatively flat. Our PP&E increased mainly from the addition of the operating Palm Harbor factories. Approximately $14 million of net intangible assets pertain to the various Palm Harbor businesses. Accounts payable grew in connection with the acquisition and incremental business improvement.

Accrued liabilities are larger by way of increased customer deposit levels, unearned insurance premiums, accrued warranties, deferred revenue, compensation related balances, and others. The construction lending line is used by our finance subsidiary 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 loan portfolios included in consumer loans receivable.

Redeemable noncontrolling interest increased as a result of an additional $36 million investment from Third Avenue and the applicable portion of net income so far this year. Likewise, retained earnings grew by Cavco's applicable portion of year-to-date net income.

Joe?

Thanks, Dan. Karen, we'll be glad to take any questions now.

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

Good morning.

Good morning, Michael.

Congratulations on a good quarter in a tough environment.

Thank you.

Just a couple of questions for you. One, what's the Company's backlog?

The Company's backlog is in the $20 million range at the end of the quarter and currently.

Okay. And as far as tax rate, Dan, what do you think we should be using for this year?

Consistent with where we have been in the past, which is in the high 30s. 38%, 39% range.

And how about on a cash basis?

Cash basis we're still working out, but it will be in the low 20s.

Okay. And then how about capital expenditures for this year?

We expect capital expenditures will run consistent with levels we have been at currently.

And so I am just looking here in the press release. Looks like you're about $800,000 in the quarter.

Yes, so we would be --

$1.8 million year-to-date.

We would be $2.5 million to $3 million run rate currently.

Okay. And the loans that are held, I mean, I know there is some -- if we look at the balance sheet, obviously some of them are loans that have been securitized, but I know there is a portion of loans that are just held by the Company. What's the size of that portfolio?

Let me pull that number for you here. We have that in our Q, which will be released next week. That number is running right around $15 million.

Is it plan to hold those? What's the plan at this point?

Yes, the plan is to continue to hold those loans.

Okay. And as far as business conditions, Joe, is there anything -- I mean, obviously you talked about seasonality heading into the next quarter. Is there anything positive or negative outside of seasonality that you would expect to occur versus what just happened in the second quarter?

I don't see anything more negative than what we have discussed. I think on the positive side we have introduced a host of new products, which we think can appeal to various buying groups. For example, we are just introducing the latest in our line of green homes and solar powered homes, and we're taking a unit on tour in California.

So we have been working on design elements, operating elements such as the solar powered, wind powered units, but particularly designing units that can appeal to a younger generation who might want to invest as much as housing, as I mentioned, but still want something that's very contemporary. Chic if you will, and so we're working to pursue some of those niche markets.

I think we have also working on our modular home product that we have acquired with Palm Harbor and using some of their design capabilities throughout our organization. So I think we'll have a broader product line, and we're obviously more geographically dispersed. So I think can we continue to do a better job battling this economic situation given those factors than we have been able to even in the past.

Okay. Thank you.

You bet.

Thank you, sir. (Operator Instructions). I do see another question now from the line of Howard Flinker of Flinker & Co.

Hi, Joe.

Howard, how are you.

Good. You're one of the last Mohicans. Maybe the last Mohican, besides Buffet.

That's a good company to be in I suppose.

Well, being the last Mohican means you are going to prosper when the market changes, and it is probably not that far off. I have one question I've probably asked before. What are these investments --long-term investments on the balance sheet?

These are investments that are held by our insurance subsidiary, and they are effectively a large part of the equity of that operation, which is -- supports the policies underwritten.

Sure. And I take it there are short-term liquid investments? Relatively short-term.

Yes. There is a combination of course, but, yes, most of them are very liquid investments.

If they're absolutely short-term, you earn nothing on them, so you have to fight that argument in your own minds as to how far you [want to stretch] to get yield.

Exactly. That's right. We have some mix, but it'sall fairly conservatively invested, and most of it is of short duration.

Yes, the insurance industry is going through the same problem. They can't earn anything on investments, and their premium rates are extremely low. They might earn 2% or 3% or 4% on capital worldwide this year.

Right. Well, the good thing about our insurance company, and it has been this way historically for Standard Casualty, the subsidiary, they have been very conservatively managed. The risks they take are very measured, and they don't, for example, write in coastal areas that are highly prone to hurricanes, that sort of thing. So they have been very careful, and of course they reinsure a lot of the risk, too, so we cap out or maximum risk. So it is not only have they been conservative on the investment side, but they have been conservative on the underwriting side, too, and it has proven to be a beneficial for their consistent profitable performance.

Now they did have recently some unusual claims with the wild fires in Texas, and also previous to that a few months earlier they had hail storms in Texas, so their performance has been somewhat hampered. But even with those disasters, they still come out looking very good.

Perversely luckily that there are a few mobile homes in the Northeast. The claims from the snowstorm are going to be much larger overall than Hurricane Irene. And now that you mention it, I take it you layoff the earthquake risk as well?

Yes.

Okay. Fair enough. Thanks. Keep fighting.

Thank you, Howard.

We also have a question from the line of James Fronda from Sidoti & Company.

Hey, guys, how are you?

Good morning, James.

I just had a question. I guess in terms of the 20% gross margin for the quarter, would you say that it is a good run rate to use? I mean, based off of the combination of the volume and the financing sector? Would it be less going forward?

I think James it is a reasonably good number to use. The reason we hesitate is that in this environment so -- it is difficult to predict, because capacity utilizations at the factories have a fair amount to do with that. As Dan indicated, we're benefiting by the non-manufacturing parts of our business, and that should continue to generate somewhat higher gross margins. So I think, if you use that 18% to 22% range, we're going to be in that range in the quarters ahead.

Okay. Great. And I guess, is there any timeline of when you might sell [at] factories, or do you feel like you need to? Because the SG&A didn't seem like it spiked up too crazy. I guess if you just can give me a little more color on that?

I didn't understand the first part. I couldn't quite hear. Sell what the factories?

Do you have a timeline of what you might sell off any factories, or do you intend to? Or do you feel you need to?

No. We have 15 factories operating now. We have no plans to close any of them. We do have idle properties that we acquired both with the Fleetwood and Palm Harbor acquisitions, and we have those listed -- most of those listed for sale, and we have been selling a couple of those here and there. But the 15 plants we're operating, we have no plans to change anything there.

All right. Okay. Good quarter. Thanks, guys.

Thank you.

Thank you, sir. I see no further questions in the queue at this time.

Okay. Thank you, Karen. And thank you, everyone, for joining. We'll be happy to talk to you live on the phone if you have any follow-ups. Have a good day.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and youmay now disconnect. Everyone, have a good day.