Cavco Industries Inc (CVCO) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Cavco Industries Inc. third quarter fiscal year 2012 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 be given at that time. (Operator instructions). As a reminder, this conference is being recorded. I would now introduce a host for today, Mr. Joseph Stegmayer, Chairman, President and Chief Executive Officer. Sir, please go ahead.

Thank you, Karen. Good morning. With me today is Dan Urness, Cavco's Vice President and Chief Financial Officer. And of course, first we must begin by mentioning 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 the subject is included as part of Cavco's third-quarter news release filed on Form 8-K yesterday and available on our website as well as through many other sources.

Let's begin by talking about the industry. For the month of November, the latest month for which data is available, manufactured home shipments were up 53% from November 2010. This represents the fourth consecutive month in which shipments were higher than the comparable prior-year period. Year-to-date through November 2011 calendar year, shipments were just 1% above the same period for the prior year.

It's important to note that industry shipment figures were impacted for the purchase of approximately 1735 manufactured homes by the Federal Emergency Management Agency. The FEMA homes were built and shipped in October, November and December of 2011. While a breakdown by month is not available, if we make some artificial assumptions, we estimate that shipments for November and December -- I'm sorry -- October and November were up approximately 30% for the period versus the prior year, excluding the FEMA homes. So the improvement for these months is still significant.

For November, shipments showed increases in 30 states, reductions in 10 states and 10 states with no significant change.

Looking at the housing industry in total, that is including all forms of construction, this down cycle so far now 70 months from peak to trough is the longest of any of the nine cyclical declines post-World War II. For the mobile home industry in particular, we have experienced 10 years of weak shipments with the most recent four years having recorded the lowest shipment levels in the 53 years for which data is available.

We watch a number of data points and trends that we view as encouraging for our business in the future. First, the supply-demand equation for housing has improved significantly. Demand for new housing stock is estimated to be 1.3 million to 1.6 million units per year while housing starts have been in the 500,000 range for each of the past three years. The supply of new homes for sale is at very low levels.

Secondly, apartment vacancies are low in many areas of the country, rental rates have been rising, making the purchase of a manufactured home an increasingly attractive alternative both from an economic standpoint and certainly from a quality of life perspective for the home buyer.

With our homes, people get more space for their money than with apartment living, more privacy, the convenience of parking their car at the door and at least some outside space around their home for outdoor living.

Another trend is that our homes are being built in a wide variety of designs that appeal to an increasingly diverse range of home buyers. We expect that people now and for the foreseeable future will not necessarily be looking for the biggest home they can find, but rather for the style and features they prefer. Energy efficiency and low cost of maintenance will also be important factors. All of these characteristics are ones that our systems-built homes have long employed.

A fact we watch closely and I have spoken about in the past is the largest two demographic segments, the echo boomers and the baby boomers, make up more than 50% of the nation's population. People in these two age categories represent the 25-34-year-olds forming a new household and the age 55- to 69-year-olds looking for a different home and/or location more suited to their changing lifestyle. Both of these age categories have always been the industry's prime buyers for manufactured homes. So the fact that these segments are large and the fastest-growing segments in the nation's population, I think, bode well for our industry.

Of course, the current problems that exist or remain impediments to meaningful industry growth -- one, we feel is the unemployment and underemployment situation. Number two is consumer confidence, and this is particularly significant among the baby boomers who have witnessed swings in their 401(k)s, they are concerned with Social Security and other age-related benefits. So while they might have good credit and the ability to buy a home, they are delaying that purchase pending improved confidence in these issues. Thirdly, of course, is the availability of financing.

We combat these largely noncontrollable factors by offering a wide range of residential homes and commercial structures that we are able to pursue -- where we're able to pursue more markets and appeal to a greater number of potential buyers than we have been able to in the past. We believe that we are well positioned geographically across the country with clients in most of the major markets. We have the capability to satisfy a broad spectrum of price points. We do both production and custom homebuilding more efficiently than can be done on-site. We offer the latest design technology for maximum energy efficiency, low environmental impact even to the highest levels of green building standards and alternative energy homes.

In fact, our homes were once again featured or selected to be featured at the International Builders Show put on by the National Association of Home Builders. This is the building industry's biggest event with attendance of more than 50,000 builders, developers and others in related fields. In addition, we currently teamed with builder-architects to build new modern-design zero-energy homes that will be introduced at a major event for professionals in the design, technology and entertainment fields being held later this month.

So, while we are pleased to be reporting positive results in this challenging economic environment, which Dan will cover here in a few minutes, we are planning for and focused on the opportunities for growth that we see in the future. We feel that we are extremely well-positioned both as an industry and Cavco in particular to capitalize on these opportunities.

Dan, please cover the financials and then we will be happy to take any of your questions.

The third quarter financial results include a full three months of activity for Palm Harbor Homes compared to the prior-year actual results, which preceded the Palm Harbor transaction.

Net sales for the quarter were $114.6 million compared to $39.6 million during the same quarter last year, an increase of 189%. The Company sold 1972 homes during the third fiscal quarter, up 73% compared to 1139 homes in the prior-year quarter.

Consolidated gross profit as a percentage of net sales this quarter was approximately 23.5% versus 13.5% in last year's comparable quarter. The percentage increase arose mainly from the nonmanufacturing business obtained in the Palm Harbor transaction. The retail and finance businesses, in particular, had inherently higher gross margins.

Quarterly SG&A costs were $20.5 million or 18% of net sales, an increase of $15.3 million compared to $5.3 million or 13% of Q3 net sales last year. The percentage increase was largely 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 sales. Other income was primarily comprised of interest from inventory financed notes receivable.

The effective tax rate this quarter was 38%. Net income attributable to capital stockholders in the third quarter of fiscal 2012 was $1.7 million compared to last year's third-quarter net income of $24,000 with diluted earnings per share of $0.24 versus $0.004 last year. Quarter backlogs stood at approximately $11 million at December 31, 2011, compared to approximately $2 million at the same time last year.

Now I will go over the balance sheet comparisons for December 31, 2011 versus March 31, 2011. Cash was down $41 million in connection with the Palm Harbor cash purchase price. Restricted cash was higher as the balance included amounts managed by the finance subsidiary related to consumer loan servicing activities. Accounts receivable was higher, given the larger enterprise. Note that we've presented a classified balance sheet, so certain of the amounts were broken out between current and long-term. Short-term investments was one of those balances and was part of the overall investment portfolio of standard insurance, maintained in accordance with state regulatory guidelines.

Consumer loans receivable represented the securitized and sold loans of our finance subsidiary as well as loans hold held for sale. Inventories were higher, mainly from retail home inventory at Palm Harbor sales centers as well as materials and work in process at the Palm Harbor factories. Assets held for sale was primarily comprised of idled factory locations. Prepaid expenses were higher, mainly from the annual renewal of commercial insurance policies and also from prepaid income taxes. Inventory financed notes receivable was higher from the seasonal increase in the Park Model and cabin businesses.

Property, plant and equipment increased mainly from the addition of the operating Palm Harbor factories. Approximately $13 million of net intangible assets pertained to the various Palm Harbor businesses. Accounts payable also grew in connection with the acquisition and larger operations. Accrued liabilities were larger by way of increased customer deposit levels, unearned insurance premiums, accrued compensation and other accrueds. Construction lending lines were 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 interests increased from an additional $36 million from our Fleetwood Homes investment partner 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?

Thank you, Dan. Karen, we will be happy to take any questions at this point.

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

Just a couple of questions for you -- one, why don't we start out with the FEMA units. Could you tell us the number of units you may have shipped in your quarter to FEMA?

Unfortunately, we did not participate in FEMA shipments for a couple reasons, but we did not get any of those 1735 units that were shipped.

Okay. Was it that you didn't think it was going to be profitable enough for you to do?

Well, it wasn't so much that. FEMA has a very unusual procurement process that doesn't seem to be inclusive of the entire industry. In fact, the industry is working with FEMA to try to improve that procurement process. So the orders went to, in some cases, to brokers who actually don't have manufacturing capacity. And then those brokers parsed out those orders to several manufacturers, and we were not one of those manufacturers.

So the other part of it is geographically, a lot of those orders were in the east. Now, we do have plants in the east now. But we just were not able to capture any of those units. We are a little bit more optimistic for the next round. But again, it's fairly difficult to work with the government on this project. They seem to have somewhat unusual procurement procedures.

That's very surprising.

Yes, sure.

(Laughter). Just two other things, one on the backlog. Obviously it's up significantly versus a year ago. I think the last two quarters it was closer to $20 million, so it's down a little bit from the two prior quarters. What can you say about that?

That's largely seasonal, Michael. This is our slowest season of the year for -- home buyers just don't buy much in the winter months. So that's fairly typical.

Okay, and then lastly, obviously the industry saw some good increases in recent months. According to your estimate it was still very strong, even if we strip out the FEMA impact. So was it just that we have gotten to a point where the comparisons are so easy that it wasn't going to take much to do better? Are there signs that we are beginning a sustainable recovery, you think, and that we should look for stronger shipments to continue? What is your thought process there?

Well, I certainly think you are correct in the first point, that comparisons are fairly low hurdles to overcome. But we do think that inventories in the distribution pipeline are at pretty low levels, so we are starting to get business from retailers who have whittled down their inventories. And now, if they sell a home, they need to order one as opposed to selling from inventory. I think that's a major factor.

We can't really point to, obviously, the economy getting stronger or home buying in general getting better. So I think that is yet to come. It's really the fact that the industry is streamlined and people are now buying homes when they have an opportunity to sell one to a consumer.

Okay, great, thanks a lot.

Howard Flinker, Flinker & Co.

Please clarify what you said about 70 months and 10 years -- I didn't understand clearly or didn't hear clearly.

Sure. If one looks at the housing decline since 1950, this is overall housing, of course, this downturn, this cycle has been 70 months in length -- actually a little bit more than that; it started January of 2006.

So all housing has been 70 months, so that's not the mobile home business as long as (multiple speakers) --

No, no. Actually -- we've actually had a longer down cycle if you look at it that way. But housing in general is the longest cycle. So the point being that we feel we are getting closer to a turn. This is the lowest level housing has gotten to also during all those cycles, nine of them, nine downturns since 1950. Never before has new housing starts gotten to this trough level of the 450,000 units. So this is the deepest and longest decline, which certainly has been terrible to live through, but certainly indicates that we may be near the end of it.

Okay, that I understand. Those data I know, but I was confused by the 70 months and the 10 years. The mobile home business has been down for about 10 years; right?

That is correct.

Okay, I just wanted to clarify that. Thanks.

Patrick Todd, Gabelli & Co.

Some of the traditional builders have reported increased traffic in the first three weeks of January relative to last year. And obviously it's the slowest time of year, but I was wondering if you could comment on the traffic at your retail stores through January.

Patrick, it's very geographically different. In Texas, for example, we are seeing both an increase in traffic and what we call interested traffic, people that are really looking to buy. And we are seeing that in certain other parts of the country, too. We are even seeing some increased traffic here in the Southwest, which has been one of the most hard-hit areas of the country. But we are not seeing a lot of increased buying interest here; we are seeing more traffic.

So it kind of varies all over the geographic map, if you will. We are seeing some improvement in Florida, although Florida has been very hard-hit. But we are seeing some increased interest both in traffic and the quality of that traffic. So I don't think we can point to any strong trend, nor can we point to it being across the board. But yes, we are seeing some improvement in both the numbers of people visiting retailers and community operators and the quality of that traffic.

Okay, great. My second question was -- you mentioned this earlier, the prototype of the in-fill house that you are building at the Durango facility. What was the final like shipped cost on that home, and I guess what it's going to retail for?

That home is designed to be sold completely installed, foundation and so forth, in the $200,000 range. That home, though, is really specifically designed for an upscale buyer. It is zero energy, zero carbon footprint, zero water usage. It is actually six zeros in front of it. And it is obviously a specialty kind of product to hit a particular niche of perhaps young professionals or even empty-nester professionals who want a very trendy design with all the features that they look for today. For example, it has all recyclable materials, and not only are the materials built from recycled materials to begin with, the materials can be recycled once again, which is becoming an increasingly important factor that many people are looking for from an environmental standpoint.

So it's not a home for all people. It's certainly not our mainstream home, but it demonstrates what we can build in a factory to meet a wide variety of needs and interests.

Okay, great. My final question is, do you have -- it's kind of a guess at what the average capacity utilization was across your factories for the quarter?

We remain in the mid-30 to upper 30% range, as we have been for some time. It has fluctuated somewhat. We have probably increased a couple percentage points to the high 30s, but it's still a very low level of capacity utilization.

Okay, great, thank you.

Michael Corelli, Barry Vogel & Associates.

Just two numbers questions. One, is CapEx going to still remain around depreciation level, looking to fourth quarter and into next fiscal year? And around a 38% tax rate -- is that something we should continue to use?

On the CapEx, it's probably going to be a little lower than depreciation. I would put that at the $1.5 million to $2 million range, while depreciation runs at about $2.4 million-$2.5 million. So, a little lower on CapEx. The effective tax rate in the high 30s is what we expect going forward, yes.

Thank you.

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

Very well. We thank you for joining us today, folks, and appreciate your interest in Cavco Industries. We will be available, as always, for 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 you may now disconnect. Everyone have a good day.