Cavco Industries Inc (CVCO) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Cavco Industries, Inc., third-quarter fiscal-year 2015 earnings call webcast. (Operator Instructions). As a reminder, this conference is being recorded.

I would like to introduce your host for today's conference, Chairman and CEO Mr. Joseph Stegmayer. Sir, you may begin.

Thank you. Welcome, everyone. Glad to have you on our third-quarter conference call.

We will begin with Dan Urness, our CFO, covering the disclosure and giving a report on the quarter. Then we will make a few comments and take your questions. Dan?

Good day, everyone. Before we begin, 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 are 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 or 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 or from other sources.

For our financial report this quarter, net revenue was $146.9 million, up approximately 6.2% compared to net revenue of $138.3 million during the third quarter of fiscal-year 2014. The increase was mainly from higher home sales volume during the quarter.

Consolidated gross profit in the third fiscal quarter as a percentage of net revenue was 21.6%, slightly lower than 22.8% in last year's third quarter. As we have discussed in previous calls, quarter-to-quarter product mix differences cause fluctuations in the gross margin as a percentage of net revenue.

Selling, general, and administrative expenses in the fiscal 2015 third quarter as a percentage of net revenue was 15.0%, compared to 15.9% during the same quarter last year. The improvement was from better SG&A utilization on higher sales volume.

Other income in the third fiscal quarter included a net gain of $1.3 million from the sale of idle properties the Company had obtained as part of previous acquisitions.

The effective income tax rate for the third fiscal quarter was approximately 37%, compared to 31% in last year's third quarter. The lower effective tax rate last year was positively impacted by adjustments arising from manufacturing-specific deductions and certain income tax credits.

Net income attributable to Cavco stockholders for the third fiscal quarter of 2015 was $6.7 million, compared to net income of $5.9 million reported in the same quarter of the prior year. Net income per diluted share for the third quarter was $0.74 versus $0.66 during last year's third quarter.

Now in comparing the balance sheets for December 27, 2014, to March 29, 2014, cash was approximately $92 million at the end of the fiscal quarter, compared to approximately $73 million nine months earlier. A portion of the increase was from the sale of idle properties during the period, along with net income and changes in working capital and related balances during the first three quarters of the fiscal year.

Accounts receivable and inventory balances have generally increased in connection with the higher sales volumes during the last nine months.

The current consumer loan receivable balance has grown from increased loan originations at our finance subsidiary. Assets held for sale is now zero as the result of completing the sale of the underlying properties in this category during the year. Current deferred income taxes are lower from the utilization of NOL carryforwards and stockholders' equity grew to $313.8 million as of December 27, 2014, up $23.3 million from the March 29, 2014, balance.

Joe, that completes the financial report.

Thank you, Dan.

Those of you who follow this industry know that we have been in the depths of the lowest shipment levels in the history of this industry, the 59-year history of this industry, these last several years. This year, 2014 calendar year, while the December number is not quite in yet, estimates are that the industry will be up about 6%, slightly less than we had expected at the beginning of last year. We thought we might be able to hit 10%, but nevertheless showing some growth.

A couple things of note recently. Of course, most of you are aware that the administration announced on January 7 the Federal Housing Administration, FHA, intended to reduce annual mortgage insurance premiums by 50 basis points and that, I believe, went into effect this week and should help a number of typical first-time homebuyers.

There have been estimates that it could create a meaningful decline in mortgage payments for this typical first-time homebuyer in the range of $800 to $900 a year. That would be a big help to our industry's first-time homebuyers, many of whom are payment-oriented buyers, so an additional $40 to $50 per month can make a difference in them qualifying for a mortgage, buying a somewhat more expensive home, or otherwise being able to get into a new home.

So that, we think, will be a positive. Obviously, we have no idea at this point in time what kind of fact that will play, but we think it can certainly be a positive for our market.

Also, we have seen household formation finally begin to increase after being stagnant for a number of years and annualized new household formations hit 809,000 in September, the highest level since May 2013. So that's still a long way from the historical average of about 1 million new households per year, but it is going the right direction. This, as we have indicated before, is an important factor for us, people creating new households, moving out of their parents' home, and so forth.

Household growth has been, as I say, 50-year lows basically since 2006 and we don't think that level is sustainable indefinitely. We expect that growth will have to start being generated as people reach the prime home-buying age.

Job creation, we have seen about 200,000 new jobs each month for the last several months. That's been a positive. It is said by a number of economists a lot of those jobs have been to recover previously lost jobs, but that finally is being achieved and we are starting to create actual new jobs. And it's interesting. A lot of these jobs are full-time jobs, which are good for, again, for our potential buyers, and the new jobs particularly for the younger generation that will be looking at buying their first home.

Also of note is that recent FICO trends in the mortgage industry are favorable, are encouraging. FHA loan FICOs are moving into the sweet spot for the first-time homebuyers of 600 to 700 scores. Nearly a quarter of the US population has FICO scores in this target range, so, again, that should be positive for us.

Overall, we are very pleased with the quarter. We think we are again very well positioned to take advantage of some of these macro trends that are just beginning to take shape. We expect this to be, 2015, that is, calendar year, to be another increasing year for shipments in the industry. We don't expect it to jump substantially, but we do think that low double-digit growth is achievable for our industry shipments this year.

With that, we will be glad to take any questions.

(Operator Instructions). Daniel Moore, CJS Securities.

Thanks for taking the questions. Joe, what are you seeing, maybe go market by market in your bigger markets, Florida, Texas, Arizona, California, what you are seeing in terms of second degree or relative momentum in each of those? And in Texas, specifically, what kind of impact are you seeing or would you expect to see from the drop in oil?

Right. In most of the states you mentioned -- Florida, Texas, Arizona, California -- the industry and we have been seeing increasing levels of interest and shipments. So, in fact, all those states are up from the previous year some fairly substantial percentages, albeit from fairly low bases in the previous year.

So, I think it is positive. We mentioned, I think, Florida and California, Arizona in particular, are destination states, particularly southern California, for empty nesters and retirees. Those states seem to be coming back nicely. Florida shipments -- shipments in Florida are up. More importantly, we are seeing a lot more traffic at our retail operations in Florida in our independent dealers, and the community operators who operate planned communities, land lease communities, in that state are seeing a lot more traffic and we're seeing more sales as a result.

The same can be true of Arizona, and California has seen fairly nice pick-up in both family -- single-family residence for primary residence, as well as the retiree market.

The Texas question you asked is obviously a very important one. Texas is a good state for us. It's a good state for the industry. It's been the number one state for the industry for many years.

We have some concern, of course, about the oil price decline and the subsequent impact on employment in that state. Fortunately, I think some of the mitigating factors of the state is much more diverse than it was during some of the previous downturns in the oil industry. That is to say, there is technology and there is other jobs in the state.

Our particular involvement in Texas is primarily west Texas in terms of the impact we might see. We're also very heavily involved in the Dallas-Fort Worth markets and the Austin-San Antonio markets, which we don't think will be as affected by the oilfield declines. We're involved in the Houston market, but it's not a big market for us. And Houston and west Texas will be probably most affected by the oil price declines.

The other factor, of course, that can help us is, again, people have more disposable income, so how these two factors weigh against each other remains to be seen. Certainly, there will be less workforce housing built for probably oilfield workers, that sort of thing. We have participated in some of that. It has not been an inordinately large part of our business, but we have sold homes to operations that either lease or provide housing for their workforce. We expect that business will slow down considerably.

On the other hand, again, with the typical homebuyer employed outside the petroleum industry having more disposable income, because of the price of gasoline declining, it could have a positive impact for homebuyers as well.

So, Dan, I'm not sure -- we can't, obviously, give you a pinpoint answer. We're watching it very closely. We have not seen any impact to date, other than some demise in orders for the workforce housing, which is not material to us, but we're keeping a very close eye on it, and we have plans in effect to try to mitigate maybe some of the decline in west Texas with some improvement in other areas of the state.

But given your geographic mix, if in fact the city industry were to be up low double digits, any reason why you wouldn't be able to match the industry growth?

No, we don't think so. We think we should certainly be able to match industry growth. We are involved in all the primary markets. There's a couple of markets we are obviously not in, the Midwest and up in the Northeast, but we are involved in a lot of the primary markets, so we should be able to participate in line with the industry and hopefully improve our position somewhat, as we have done in the past.

And maybe just shift gears and talk a little bit about the competitive trends that you are seeing. Are site builders coming downmarket at all or is the landscape relatively unchanged or stable there?

The site builders, there is a lot of talk and probably some actual action on the part of the site builders coming down in price because, frankly, and we have been saying this for some time, it's been a low price point industry in manufactured housing, as well as in site-built housing.

We still maintain that they really can't get to the price points we are talking about. They do come down, but, again, for our typical homebuyer, our average selling prices are still considerably below where the site builders are.

And again, we have the advantage in that our market has typically been more in rural areas where the site builders are not doing large subdivisions. If we were to compete with them in metropolitan areas where they do the 400 to 1,000 tract subdivisions, that would be difficult for us, admittedly. But that's not our market. A lot of our buyers are looking to be out in more rural areas or to be in land lease communities where they maintain a -- where they go for a particular lifestyle.

Excellent, and lastly, just in terms of capital allocation, cash obviously continues to grow, boosted a little bit by the sale of property. Talk about the acquisition pipeline, and absent those, would you consider share repurchases or other forms of capital allocation or to let cash continue to build over the next year or two?

Well, we are fortunate to be a Company that generates good, positive cash flow and we expect that will continue. We certainly continue to look for acquisition opportunities, and there are some areas of the country, as I say, that we could either fill in where we are presently involved, but don't have a strong presence, or in markets we are not involved to any extent, and we continue to look for both those kinds of opportunities.

There are still quite a few privately-owned operations in the industry that we have on our sites or talk to from time to time, and so there may be some opportunities to do something there.

Of course, we also have the ability to do what we call a greenfield. There are de novo factories in new areas, if we choose to get in. That can work perfectly well in areas where we have a modest involvement, but seek to gain market share in a particular area. And we can start by shipping in homes from a different location as we build up some distribution, then actually open a plant in that area. So we look at that as well.

And then, the last part of your question, share repurchases, definitely. We have a share repurchase program the Board has approved and we will look at that opportunistically as we see fit.

Very good, thank you.

Howard Flinker, Flinker & Co.

What is the after-tax effect of the capital gain, either per share or net?

We don't have it specifically broken out, obviously, but it would be just a standard tax rate on that.

35%?

Yes, it would just be in that statutory range and there wouldn't be any unusual tax impacts or anything that would affect that.

Okay, thanks.

(Operator Instructions). Brendan Lynch, Sidoti.

Thanks for taking my call. I apologize, I missed the beginning of the conference call, so if you have covered this, again, I apologize. But I wanted to dig in a little bit on the gross margin. Your volume, obviously, was up, pricing seems to be improving as well, and the gross margin seemed to weaken a bit. Just was wondering what may have caused that and if you see it being a continuing issue?

And, conversely, your SG&A expense ratio was quite good. We saw a lot of improvement there. Just your thoughts on how that is going to trend over the foreseeable future.

Sure, that's a good question, based on these results, and we did mention at the beginning of the call, Brendan, that we do have and we normally have, given our product mix and the variety of homes that we build, variation in the gross margin percent that occurs just by nature of what we do quarter to quarter and also the fact that we are still operating at fairly low levels.

So with that as a backdrop, this quarter in particular we can look at and see that we have got the higher sales occurring, but you mentioned average sales price. It is actually down year over year. This average sale price this quarter is down versus the same quarter last year, although it's right within the range of where we'd expect it and where it's been in the last several quarters.

But that being said, it's subject to typical fluctuation based on the model mix. But the higher sales price and therefore the lower margin is really just a function of the lower price point homes that are incrementally increasing the demand or buy demand, so our higher sales characterized by these lower price point or less amenitized, more economical homes that result in lower gross margins, but they have the benefit -- leading to your next question, they have the benefit of improving the Company's overhead leverage or the SG&A as a percentage of revenue, and we saw that occur this quarter.

So, not an unusual result this quarter, just from the fluctuations in the margin and in the average sales price, but that's the way I would characterize it for the quarter.

Great, that's very helpful. Have you noticed any change in your materials cost just with the drop in oil prices, anything that is oil related, or commodities in general have been selling off. Have you seen any benefit from that?

We haven't seen a large benefit yet. What we also haven't seen is a real increase in the material costs, whether they be related to petroleum or otherwise.

Maybe where we have seen some benefit is some of the shipping costs to get, obviously, raw materials to our factories or shipping our homes from the factory to the home site. That's not a significant impact for us, but nonetheless that's an improvement. It makes an easier -- easier on the expense for the consumer or the buyer of the home, so we're certainly welcoming that. But not a significant change in material prices and therefore not a large impact on the margin this quarter.

Sure, and then just one more. Obviously, your volume ticked up quite a bit in the quarter. Can you comment on how things have been trending in January? Has there been a continuation of that strong volume growth thus far?

Well, we generally don't get into month-to-month kind of discussions like that, Brendan, but we would say that the industry seems to be -- demand seems to be stable. This is -- January, obviously, is a very poor month generally for housing in total and certainly for manufactured housing, but it seems to be modest to somewhat higher in terms of demand this year.

Great. Thank you very much for taking my questions.

Thank you. At this time, there is no other questions in queue. I'd like to turn it back to Mr. Stegmayer for any closing remarks.

I'd just say that we appreciate you all being on the call. We appreciate your attention, and if there is any follow-up questions, feel free to call Dan or myself and happy to try to answer those, and we'll look forward to continuing to discuss our progress here in another three months. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes your program. You may now disconnect. Everyone, have a great day.