Cavco Industries Inc (CVCO) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Cavco Industries, Inc. third quarter fiscal year 2014 earnings conference 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 follow at that time. (Operator Instructions). As a reminder, today's conference call is being recorded. I would now like to introduce for today's conference call, Mr. Joe Stegmayer, Chairman and CEO. You may begin, sir.

Thank you, Kevin. Good morning, everyone. We will begin with Dan Urness, our Chief Financial Officer, reading the required disclosure statement and beginning with the financial report and then we will come back and make a few comments and take your questions. Dan?

Good day, everybody. We respectfully remind you that certain statements made on this call, either in our remarks or in our responses to questions, may not be historical in nature and therefore considered forward-looking. All statements and comments today are made within the context of Safe Harbor rules. All forward-looking statements are subject to risks and uncertainties, many of which are beyond our control. Our actual results and performance may differ materially from anticipated results or performance. Cavco disclaims any obligation to update any forward-looking statements made on this call and investors should not place any reliance on them. More complete information on this subject is included as part of our earnings release filed yesterday and is available on our website and from other sources.

Net revenue for the third-quarter of fiscal 2014 was $138.3 million, up 20.7% compared to net revenue of $14.6 million during the third quarter of fiscal year 2013, primarily the result of increased home sales volume. Sales this quarter included $4.4 million pertaining to the finalization of a multiunit housing project the Company produced mainly during the second fiscal quarter. Net income attributable to capital stockholders for the fiscal 2014 third quarter was $15.9 million, compared to net income of $1.5 million reported in the same quarter of the prior year. The prior year amount was net of $1.6 million of net income attributable to a redeemable noncontrolling interest.

As previously reported, the noncontrolling interest was purchased during the second quarter of fiscal year 2014, such that Cavco now owns 100% of its consolidated subsidiaries, thus all of the fiscal 2014 third quarter consolidated net income is attributable to capital stockholders. Net income was also positively affected this quarter by $0.4 million from a business interruption insurance settlement related to a prior quarter insurance claim.

Net income per diluted share for the quarter ended December 28, 2013, was $0.66, versus $0.21 during last year's comparable quarter. Consolidated gross profit as a percentage of net revenue was 22.8%, which closely approximates the 23.2% reported for last year's third quarter. Selling, general, and administrative expenses in the fiscal 2014 third quarter as a percentage of net revenue was 15.9%, compared to 17.7% during the same quarter last year, primarily from SG&A leverage on higher sales volume.

The effective income tax rate for the third fiscal quarter of approximately 31% was positively impacted by adjustments arising from manufacturing specific deductions and certain income tax credits. The effective tax rate for the third fiscal quarter last year was 43%, which was adversely affected by changes in applied tax rates and tax laws in certain states, as well as the absence of income tax credits that were not enacted until the fiscal 2013 fourth quarter.

At December 28, 2013, the Company's home order backlog stood at approximately $25 million, up from approximately $16 million at the end of the same quarter last year. The higher backlog is the result of more consistent housing demand. Comparing the balance sheets for December 28, 2013, to March 30, 2013, cash was approximately $59.5 million at the end of the quarter. Accounts receivable was higher by $8.3 million, which included approximately $6 million received during January 2014 related to a multiunit housing project that was produced mainly during the second quarter.

Current deferred income tax assets are higher by $3.5 million from the reclassification of certain deferred tax assets to current, a result of the noncontrolling interest buyout during fiscal year 2014. Consumer loans receivable and securitized financings are both lower from the ongoing maturity of the loan portfolios. Accrued liabilities are approximately $6.2 million higher, pertaining mainly to accrued wages and benefits, unearned insurance premiums, and volume rebate accruals at calendar year end.

And, in conclusion, stockholders equity grew 61% to approximately $285.5 million as of December 28, 2013, compared to approximately $176.9 million on March 30, 2013, mainly from the buyout of all noncontrolling interests during fiscal year 2014, and supplemented by earnings from operations. Joe, I will turn it back to you.

Thank you, Dan. We are pleased with the quarter. Business conditions remain fairly similar to the way we discussed them at the last quarter. We are seeing some slight increase in shipments industry-wide. Industry shipments year to date are up 9.4% for HUD code manufactured housing shipments and up about 5% through September for the latest date in which we have data for the modular housing segment of our industry and of our business.

So, we are doing a little bit better than the industry is doing. We are gaining share, somewhat, which is a good thing. Plant operations -- our 15 factories did well for the quarter compared to last year, so we are making continuous improvement in basically at all our locations. Obviously some geographic areas are stronger than others. Texas and the contiguous states being one good example, continues to be a very strong market for us and for the industry as a whole. Florida, we are seeing some improvement in demand in Florida. Not by leaps and bounds, but certainly a steady improvement.

It was interesting to note during the quarter there was an article in the Wall Street Journal that the Carlyle Group, a private equity firm which has interest in everything from oil refineries to vitamin makers, purchased two Florida manufactured home communities from private sellers. And although they didn't comment, I think the deal is evidence that big investors are betting on the demand for low-cost manufactured housing. And that that demand will rise as other housing alternatives become too expensive for a number of Americans, especially senior citizens.

In fact, some other data that we have acquired is that 35% of the Americans over the age of 65 rely almost entirely on Social Security payments alone for income. The average monthly Social Security payment for a retired worker in 2011 was about $1177. So, it has long been the case that the 55 plus market has been a big market for us. As we've mentioned before, it also happens to be one of the largest demographics, and a fast-growing demographic.

And then the millennial, the second fastest-growing and the largest demographic in the population, is also a big market for us, those people that are in the 25 to 34 age group. And it's some information we recently saw from the Brookings Institution talking about the primary migration of seniors and millennials into metro areas. Interesting to note that of those areas they identified, Cavco happens to be the most all of them. Number one destination for seniors is the Phoenix, Arizona, market metro area.

Obviously we are here; we have been based here for nearly 50 years. And then Riverside, California, Southern California area, is the second-largest destination site for migration of seniors. We have a facility in that location as well. Then we go on to Florida, Atlanta, and to some extent in the Denver market, and we happen to be in all those markets as well.

And then for the millennials, the younger people coming up, likewise the primary destinations are in the Northwest; Texas, where we have a strong presence; again, Denver; and the Washington DC corridor, where we have a presence with our Virginia operations. We feel we're well placed strategically and we continue to look for other areas to grow our business geographically.

We certainly could use some help. The consumer confidence levels are still -- really haven't improved much. They are flat with last year at about 70%, at an index value of 100. So that is no better than it was at this time last year, and unemployment, as we all know, has improved modestly but still is at high levels. Those will be very important to the first-time homebuyers and the people trying to move out of an apartment and get a home. If they have a job, if they are fully employed, will be in much better shape, obviously, to be able to afford another monthly payment. We continue to look for improvement in those areas.

Dan indicated our balance sheet remains very strong. Our cash flow is good. Cash flow last quarter was $6.9 million so we continue to generate cash. Our capital spending needs are fairly modest, so that should continue to be the case. With that, we would like to open up to any questions, Kevin. I would be happy to discuss any issues that people may have on their mind.

Brendan Lynch, Sidoti.

Thanks for the color on the business and on the industry. I've got a couple of questions for you here. It looks like the average selling price per unit was about $53,000 in the quarter, on the higher end over the past couple of quarters. Do you attribute this gain to fluctuation between wholesale and retail shipments? Or are you seeing more orders for larger homes with more option upgrades?

Yes, good question. In the past we have seen fluctuation in that average sales price and we continue to see it. Just as a reminder, it's made up of a couple of components that are quite different. One is the bulk of our revenue, which is wholesale invoices, and therefore lower wholesale prices. And then another component is the retail or somewhat larger average sales price for a home at the retail level. And so those will fluctuate quarter to quarter, and then added on top of that we have some light commercial projects that go on from time to time, quarter to quarter -- multiunit housing efforts. And so we see this fluctuation from quarter to quarter, and this one is really not much different. It will just skew average sales price, and so I wouldn't really attribute it to anything other than that regular quarterly fluctuation.

Okay, great. Thanks for the color on that. Another question, the Census Bureau just said manufactured housing shipments for the industry were up about 9% in 2013, while your shipments were up about 16% for the calendar year. Can you comment on your ability to continue growing market share?

Well, first, we do think we will have a continued opportunity to grow market share. But we would also add that that number is -- the comparison you just mentioned is probably not totally clear. That is, we are not comparing like numbers sometimes. Because we have a mix of business. In addition to the HUD code shipments, the increase you referred to, the 9% plus, as strictly manufactured housing or homes built to the federal HUD code. We also, as you know, Brendan, build homes to modular or state and local codes. We build park model homes and cabins that are built to RV code, not covered by the statistics that we referred to, and you just mentioned as well, from the US Census Bureau.

So, although our HUD code shipments are up above the industry shipment level, the comparison is not the 16% you mentioned to the 9%. It a lesser number than that. But, still, we are exceeding shipment levels and we are gaining share in the HUD code market.

Great. Yes, thanks for the clarification. I understand it's not an apples-to-apples comparison there, but can you just go into a little bit more detail on your ability to continue growing market share and some of the initiatives that you have in place to do so?

Sure. I think the key is the things we have been used to doing for a long time now, and that is continue to introduce new product, be flexible, to be able to accommodate customers' needs. When I say customers, it's not only the individual consumer but a lot of business in this industry today is being done with manufactured housing community operators, who lease land -- land lease operators -- lease the land to consumers. Consumer buys the home.

While those operators are buying sometimes in bulk, but they need -- they have different requirements depending on the area of the country they are in, depending on what kind of price point they're trying to hit, depending on what size of the lots they have, or that they are developing in their communities. And so a manufacturer needs to be very flexible to design product that fits their particular needs, to do it quickly, and to do it efficiently.

We have been stressing that considerably and we have very good position with manufactured housing community people. But that is not to say that the same isn't true for the individual homebuyer that comes to a retail sales center and buys a home. They tend to be more specific than has been the case in the past. They need a home that might be custom-designed, and so customization is becoming more common in our business. We have always been quite good and flexible -- at least in the Cavco operations -- and we're obviously trying to spread that approach throughout the organization as we have acquired other entities.

There is a great need for that, so that helps. The other thing, of course, is we have offered inventory financing, floor plan financing, to retailers and community operators. We have been accommodative and creative in that respect. That is helpful to them. I think that has helped us maintain or even grow share among some customers. It's also, frankly, being out there and we have a very good sales force. I think calling and providing supportive services to retailers and community operators to help them market the homes.

We have a very good website presence and we continue to work on that. So it's a combination of things, but I do think we are in position, too, from a geographic standpoint, to offer customers who buy in multiple geographic locations, we can be the one-stop shop. So we can supply their needs in Florida, supply their needs in the southwestern market -- Arizona, California. And there is many operators who have facilities in both locations, so that can help as well.

That's great, that's great. Thanks for the commentary on that. Another issue that has come up significantly over the past couple of years is in regards to consumer financing. From a distance, it seems the situation is improving marginally. I was hoping you could give us an update on what you are seeing on the ground.

Brendan, that continues to be somewhat of a mitigating factor in the industry's growth. That is that we don't have the lending base that this industry really needs to provide homes to consumers. By that I mean we've traditionally had, historically had, a number of lenders who specialize. Who have operations within their businesses that specialize in manufactured home loans. We have today a couple of sources that do that, but not nearly the quantity we once had or that we need today.

We keep hearing and sometimes talk to some folks that are looking at getting into this lending, but to date we don't really have many, or any, new entrants in the retail lending sector. I would say until that happens or until the existing lenders perhaps grow and become more robust than they are, that is going to be a factor that is going to hold back sales to consumers. Most of our buyers, as you can imagine, need financing. They are not cash buyers. Some are, particularly in the 55 market. If they are selling their site-built home they might come in and pay cash for a home.

But most buyers, of course, are -- especially the millennials, those first-time and first move-up buyers -- they need financing. We use FHA financing for a lot of land home transactions. That works quite well. We are competitive with site-built mortgages as an industry. But when it comes to individual home loans on the home only, or what's often called chattel lending. And that is where the capacity is constrained and we need to see that grow, I think, to see more overall growth in the industry.

I think we will see that. These loans perform quite well if they are underwritten properly and serviced well. Historically, I think there is evidence of that, including the two portfolios of securitizations that Cavco owns that we acquired from CountryPlace Mortgage. We made that acquisition about three years ago. Those securitizations, done 2005 and 2007, are performing quite well. Investors are getting their funds back and consumers are paying for their homes.

We are not the only one. There's other mortgage lenders that can show similar performance. The loans do well; the yields are attractive for investors; and I think we will eventually see a secondary market develops for those loans but we have not seen it yet, and that is a problem.

Okay, great. Thanks for the detail on that. A couple of quick modeling questions. The gross margin contracted slightly year-over-year and sequentially. Can you comment on material and labor pricing that you are experiencing?

Yes we can, Brendan. Material pricing is certainly a moving target. We sought it stabilize, somewhat. We saw some elements of commodities stabilize in recent quarters. More recently, we have seen price increase pressure, particularly in anything again related to petroleum. Insulation, for example; gypsum; that in their production process use a lot of energy. We are seeing price increases and price pressure in those elements. Carpets, vinyl flooring.

We are not sure how that is going to shake out, but we are seeing some indications as we go into the new calendar year where we typically see these price increases attempting to be made. We will probably see some price increases and we are not sure how much yet. Basic commodities -- again, lumber, panel products, OSB, and plywood tend to fluctuate, but they have been manageable in recent times.

Okay, great. Just one more quick one. Could you give us a little guidance on what your tax rate will be going forward?

Sure. As you know, it has been a little bit fluctuating here in the last few quarters, but largely that has been because of the -- number one, the buyout transaction, the noncontrolling interest. That had a downward pressure impact on our tax rate. This quarter, as I mentioned in my earlier comments, we were accounting for the availability of domestic production-related tax deductions that are afforded under the tax code.

And then, in addition, the tax credits that come to us in the way of ENERGY STAR and Workers Opportunity Tax Credit. Those, by the way, expired at the end of the quarter and so those won't be available going forward. But what will be available going forward is the ongoing Domestic Production Activities Deduction. As we become more profitable, that will continue to be a component, an element that decreases our effective tax rate. To answer your question, taking that into account, we are expecting a little lower tax rate now that our profitability is up at the level it is right now.

Probably in the 36% to 37% effective tax rate range going forward. Now, if there were to be a renewal of the tax extenders I mentioned, which are the ENERGY STAR credit and the Workers Opportunity Tax Credit and potentially others, then we may get the benefit of that in the future. But based on the current tax law as it stands right now, 36% to 37% going forward.

Albert Sebastian, Prospect Advisors.

Morning, gentlemen. Just two questions. First, on the SG&A line, I see that there was a substantial improvement in SG&A as a percentage of revenue, at 15.9% versus 17.7% for the quarter, year-over-year. Historically, if you go back -- and, of course, this is before the Palm Harbor acquisition, but you had SG&A as a percentage of revenue in the mid-part of the decade and up until about 2008, 2009 -- around 10%. What can we expect in terms of SG&A as a percentage of revenue going forward as you ramp up your volumes?

Well, I think, again, we look back historically, we are really not comparing similar numbers and a similar company. When we had the lower SG&A, we always had the lowest SG&A percentage in the industry from what we can tell from the public companies that were public at that time. But with the new components of business, we've added new segments. We are doing retailing now of homes at our nearly 50 retail stores. Which, by its nature, has a higher SG&A percentage.

And then we have our financial services business, which is generally a higher SG&A business than our other business. So that is going to change the situation considerably on its own. We do feel we manage sales, general, and administrative expenses very closely. We are very keen on that number; our people are motivated; our operating people that is motivated to keep that number down. I think we'll have fairly conservative numbers in those lines, but we don't make forecasts or projections.

Also we are not going to do so here, but I think the number you are looking at, it's going to move around that range, that 16% to 17% range. Probably it might dip down below that, but it's probably going to be in that range in the foreseeable future.

Okay. And just one last question. With regards to CapEx, I see for the third quarter and also for the nine months, that CapEx is up quite a bit. $839,000 versus $177,000 for the quarter last year. What can we expect in terms of CapEx going forward on an average quarterly or annual basis?

Sure. That is a good question, and really we don't anticipate a significant increase there. It will be around $2 million to $2.5 million a year, going forward. Even as we increase utilization of our capacity, we will have what we call maintenance CapEx ongoing and some smaller projects. But we think that is a reasonable estimate going forward -- $2 million to $2.5 million for the year.

Okay. Thank you and congratulations on a good quarter.

I am not showing any further questions. At this time I would like to turn the conference back to over to our hosts for closing remarks.

Thank you, Kevin. Thank you for joining us, folks. I know some of you are living in colder areas of the country and I guess just one comment there. I think January, we have certainly been impacted in some parts of the country by not being able to ship homes, that sort of thing. But I think, given that it is the first month of the quarter, we should be able to make that up. So we don't expect the cold, arctic freeze to be a real major impact on our business, although it has been a temporary impact in some regions. But, with that weather report, we will close this meeting and look forward to talking to you again. Thank you very much.

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