Cavco Industries Inc (CVCO) 2012 Q4 法說會逐字稿

Good to you and thank you for standing by, and welcome to the Cavco Industries Inc. fourth-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 sessions and instructions will be given at that time. (Operator Instructions). As a reminder, today's conference may be recorded. And now it is my pleasure to turn the program over to Joseph Stegmayer, please go ahead.

Thank you, Hugh. Welcome, everyone. With me today is Dan Urness, our Vice President and Chief Financial Officer. And of course, we want to take advantage of the Safe Harbor rules, so we speak today under those 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. Complete statement on Safe Harbor rules is included as part of Cavco's third-quarter news release on Form 8-K yesterday it is available on our website as well as through many other sources. I'd like to start by asking Dan to review the quarter and the financial results, and then I'll come back and make some general comments about the industry, and we'll take your questions. Dan?

Net sales for the fourth quarter of fiscal 2012 were $99.5 million, compared to $38.8 million during the same quarter last year, an increase of 156%. The quarterly results include activity from Palm Harbor homes compared to the prior-year actual results, which preceded the Palm Harbor transaction. The Company sold 1,890 homes during the fourth fiscal quarter, up 73% compared to 1,095 homes in the prior-year quarter. Consolidated gross profit as a percentage of net sales this quarter was approximately 24.8%, versus 13.7% in last year's comparable quarter. The percentage increase arose mainly from the non-manufacturing businesses obtained in the Palm Harbor transaction, the retail, finance, and insurance businesses have inherently higher gross margins.

Quarterly SG&A costs were $20.7 million, or 20.8% of net sales, an increase of $15.3 million compared to $5.3 million or 13.8% of Q4 net sales last year. The percentage increase was largely from the Palm Harbor retail and finance and insurance businesses. While these operations typically generate higher gross margins, as I just mentioned, they also carry higher SG&A costs as a percentage of net sales. Other income was primarily comprised of interest from inventory-financed notes receivable. Income tax expense was offset by a $1.2 million tax benefit, creating a net tax benefit of $502,000 for the quarter. The adjustment was the result of recognizing the estimated benefits from an IRS election that allowed the Company to step up the tax basis of the acquired in insurance subsidiaries assets to fair value.

Net income attributable to capital stockholders in the fourth quarter of fiscal 2012 was $1.7 million, compared to last year's fourth-quarter net income of $1.6 million, with diluted earnings per share of $0.24 versus $0.23 last year. Order backlogs stood at approximately $14 million at March 31, 2012, compared to approximately $6 million at the same time last year. Comparing the balance sheets, for March 31, 2012 to March 31, 2011, cash was down $35 million in connection with the Palm Harbor cash purchase price paid early in the fiscal year. Restricted cash was higher as the balance now includes accounts managed by the new finance subsidiary, related to the consumer loan servicing activities. Accounts receivable was higher, given the larger enterprise.

Note that we 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 the new insurance subsidiary, maintained in accordance with state regulatory guidelines. Consumer loans receivable represented the securitized loans of the new finance subsidiary, as well as loans held for sale. Inventories were higher, mainly from the addition of retail home inventory at Palm Harbor sales centers, as well as additional materials and work in process at the Palm Harbor factories. Assets held for sale was primarily comprised of idled factory locations.

Inventory-financed notes receivable was higher from expanded use of our wholesale financing programs. Property, plant, and equipment increased mainly from the addition of the operating Palm Harbor factories. Accounts payable also grew in connection with the acquisition and larger operations. Accrued liabilities were larger by way of increased customer deposit levels, un-earned insurance premiums, accrued compensation, and other accrueds.

Construction lending lines of $4.5 million at March 31 were used by the new 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 non-controlling interests increased, based on an additional $36 million invested by our Fleetwood Homes investment partner and the applicable portion of net income, likewise, retained earnings grew by Cavco's applicable portion of year-to-date net income. Joe?

Thank you, Dan. Shipment trends have definitely been up, shipments for the period of January through March, the first calendar quarter and our fourth quarter, the latest data that is available, were up 32% for the entire industry to 12,780 homes, that is more than 3,000 homes increased from the prior-year period. It is also a seasonally-adjusted annual rate of 57,000 units, up from 49,000 units last year. Most geographic regions are doing better than the comparable prior-year first calendar quarter, although some are still challenging, such as the mountain region and the Pacific regions. While the current industry shipment figures compared to historically low levels last year, the improvement is still welcome, and we believe is sustainable. A couple of factors lead us to feel we've stabilized at these levels, at least for the time being. Home inventories, among manufactured housing distributors, that is sales centers and planned communities, are quite low, and much of the aged product has been sold, although again, in certain areas of the country, this problem still persists.

Competition with site-built new home inventory, that is distressed inventory that has been around for some time, since the boom days, has dwindled substantially. And with respect to repossessed homes for sale, both in manufactured homes and site-constructed homes, the alternative still exists for repossessed homes. However, the product that is available in these categories, both manufactured housing and site-built has also declined substantially. In fact, in the manufactured housing world, there is very little used distressed or repossessed homes in most of the major markets that is aggressively priced. So, we have seen that product pretty much shrink to a very low levels, which is a good sign. And for those reasons, we do feel the market has substantially stabilized.

Unfortunately, there are no current catalysts such as significant improved employment levels, or consumer confidence levels to spur sales, except in special situations, we are seeing some special forces at work in petroleum-producing areas for example, the need for work force housing has created increased demand for factory-built product. In North Dakota alone, for example, shipment levels for the first quarter were up over 230% from the prior year's first quarter. We have benefited from demand in North Dakota, and also in Texas. From a traditional business standpoint, we are receiving reports from our retail home centers and community customers of increased consumer traffic, and we will probably see in the next few months how that traffic translates to greater sales volume, as those traffic counts incubate into sales potential.

The fourth quarter was certainly exciting from a product introduction standpoint. We received a lot of publicity and attention from new homes we introduced and displayed at two significant events. In February, we displayed three of our homes at the International Builders Show in it Orlando Florida. This event is the premier convention and exhibition for professional builders of all types and sizes. We had more than 700,000 people to our models during the four-day period of the convention. This venue provides the Cavco Companies an opportunity to showcase the vast capability of systems-built housing. At the show, we demonstrated and displayed a 3,500 square foot two-story home for traditional family use, a two-story duplex for urban areas, and a net zero energy solar-powered cottage, for green minded buyers. It was a very good event, and we generally get a lot of follow up leads from that event, and we look forward to pursuing those in the ensuing months and even years, as developers considers using systems-built product.

Also during the quarter, on the opposite coast, we showed two homes at the TED conference in California. TED stands for technology, entertainment and design, and it is an invitation-only gathering of thousands of innovators in a variety of fields. We built two modern-style totally green homes, designed by award-winning architects, Living Homes of California. We teamed with these folks who are well known for their modern designs in all forms of construction, site-built as well as factory-built and we came out with homes that were lauded and praised, and in fact received quite a lot of publicity in such magazines as House Beautiful, Better Homes and Gardens, and a number of airline magazines featured the homes that we displayed at TED.

So, we are continuing to make an effort to display the capabilities of our product to a wide variety of audiences. While this doesn't necessarily have immediate impact, it does have a long-lasting effect of bringing new types of customers and developers to consider factory-built product. We feel we are in a very strong position at this time, as Dan indicated, our balance sheet is strong, we are generating cash in a positive manner. We certainly have a lot of work yet to do. We celebrated our, basically our first anniversary of the Palm Harbor acquisition. We made a lot of progress there, but there is still work to be done. To get operations where they need to be, from a consistently profitable standpoint, so I think that will provide in this fiscal 2013, additional opportunities for us to have internal growth. Our Fleetwood operations continue to do quite well and our Cavco operations are likewise.

So, we feel we are in a very strong position from a marketing standpoint, from a geographic standpoint, and are pretty excited about the year ahead. We are concerned of course that the economy is not showing any great signs of improvement, but nevertheless, we think there are opportunities for us to grow, notwithstanding with a fairly difficult environment. With that, we will take any questions you have. Hugh, if you would like to queue it up?

(Operator Instructions). Our first questioner in queue is Howard Flinker with Flinker & Co. Please go ahead, your line is now open.

I got a couple of accounting questions, that I'm not too sharp at accounting. Is that $22 million mark to market, is that a pre-tax and post-tax item, or is that just pre-tax?

You are referring to the $22 million bargain purchase gain that is a separate line item on our P&L?

Right.

Yes, to answer that question that number is not taxable.

So, it appears in both the pre-tax and post-tax lines?

That is correct.

Okay. And separately, if I were to use a regular tax rate for the year and fourth quarter, what would the taxes have been? Instead of a $500,000 credit in the fourth quarter and a $2.5 million debit in the year?

Sure, well our effective tax rate for the quarter, excluding the income tax benefit that we received, was 29%.

Okay.

And for the year it was 36%. That is excluding both the bargain purchase component that you described as well as the fourth-quarter tax benefit we received.

Okay, so that I can just pull out my handy calculator and work it out myself. Those are the only questions I have. As I said before, this is a tough environment, and considering the environment, you guys are doing a great job.

Appreciate it, Howard.

My pleasure. Thanks.

Thank you, sir. The next questioner in queue is Greg Cole with Sidoti & Company. Please go ahead, your line is now open.

Can you talk little bit about why, or guess what drove down the data by sequentially? And can you give a little insight as to why I guess there was a preference shift toward single units? Or if there was a preference toward single units?

There is a trend in the entire industry towards greater single section shipment. Last year and into this year, the percent right now for the first calendar quarter is running about 50/50, and last year for the full year, it was about 46%, I believe, let me just check, to 54%, and so it has shifted somewhat. We think some of that is goes by the homes in the petroleum-producing states, that tend to be single section homes. But there is probably also a trend, because of the economy and the push towards the interest on the part of consumers for the slightly lower price point.

Okay, all right, and then you spoke a little bit about that you thought the level of shipments was sustainable. Did you mean the level itself or the growth rate?

Well, we think, we generally don't make predictions, Greg, but from the industry standpoint, right now running at, I said the seasonally-adjusted annual rate of about 57,000, we would expect the industry to be able to do 55,000 to 65,000 shipments this year, which is still a very anemic level for us, but it is certainly up from the 50,000 shipment level last year, so would be an improvement. Could we do more than that? Again, it depends on what the economy does, but we think that level is sustainable, given the current conditions we see.

Okay, and I guess since we are most of the way through the first quarter, is there anything you can give us about how that is going?

Well, let's see if we can make a general comment, because, again, we've had a practice through our history of, we don't really give guidance. But we do see that, say there is interest, there seems to be more traffic at retail. Hopefully, we will see some of that translate to traffic to actual sales activity, which is not always the case. People can go and look at homes, but not pull the trigger to buy, but we do think some of that will translate that entire sales. We have our own opportunities internally to address, I think that can, through the year, can make some significant improvement on our profitability.

So, we are fairly positive, but again, it's very dicey, the economy, and it is something that we obviously have no control over, but we don't see employment levels improving substantially, and that is a key for our Business. Greg, if people are not employed or if they're underemployed, they are generally not going to go out and buy a new home, and that's been the industry's problem, the whole housing industry's problem for some time.

Combine that with consumer confidence levels, even those people who do have the credit or the financial capability of buying a home, they hesitate as well, because they are concerned about which direction the economy is turning, or going from the standpoint of selling their existing home, and moving it to a new home or from the standpoint of they're concerned about Social Security or other benefits they might have, or 401-K plans.

And we see that, we've seen that for some time, that is still the case for the 55-plus buyer, for example, who buys in age-restricted communities generally, they have hesitated to buy for those very reasons, not because they don't have the money, it's because they have other confidence issues that they are waiting to see how they pan out. So, it's a long answer to your question, but we think the year should be progressively better as we push through it.

Okay, all right, thank you. And your gross margins were excellent this quarter. Can you comment a little bit as two how they increased sequentially despite the lower revenues?

Well, the margins have been moving up, generally, since the purchase of the Palm Harbor Group. And as those entities have come online, and we streamlined some operations, the margins have improved. The level we hit this quarter was stronger than last quarter, and the level the quarter before that, sequentially. But, we don't believe that is necessarily a trend that we should be looking at following going forward. We think that we are going to be in that low 20% range, kind of on a consistent basis until we see some meaningful improvement in shipment levels.

Okay, so it wasn't -- it's just streamlining, it's not anything in particular, that mix shift or anything like that?

As Dan mentioned, Greg, in his comments, the sequential trend is probably not a good thing to really look at anymore, because with the addition of our retail business at Palm Harbor, and the ancillary businesses of financial services, they inherently generate higher gross margins, and so that has impacted our overall gross margin to certainly an extent from a comparative standpoint to prior quarters. And that comparison now will be better year-to-year as we move forward, and you will be able to, I think start to compare apples-to-apples, but right now, I would not pay a lot of attention to the sequential changes. And as we get Palm Harbor fully integrated and established, I think then you can look at ongoing gross margins. And as Dan said, they will certainly be influenced by volume, as well.

And then I have one last question. Your premiums at Standard Casualty have been increasing substantially, over from when it was at Palm Harbor. Are you able to leverage the financial arm pretty substantially with your, I guess your existing Cavco and Fleetwood units? Or can you talk a little bit about where you're going with that?

Well, we've had some continued growth in that area. They've expanded their footprint through expansion of their distribution chain for the retail sales and growth in the products at the insurance entity, both geographically and in the types of products. And they will continue to do so, but as they do it, they will continue to look for opportunities to grow without increasing risk. They've run a pretty conservative, stable organization, and that will continue to be their process going forward.

Okay, all right, thank you.

(Operator Instructions). Presenters, I'm showing no additional questioners in the queue. I'd like to turn the program back over to you for any additional or closing remarks.

Thank you, Hugh. We thank you all for joining us today. As always, we are available for follow-up questions and we look forward to talking to you in the next quarter. Thanks very much for your interest. Have a good day.

Thank you gentlemen, again ladies and gentlemen, this does conclude today's conference. Thank you for your participation, and have a wonderful day. Attendees, you may log off at this time.