Cavco Industries Inc (CVCO) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Cavco Industries, Incorporated third quarter fiscal year 2016 earnings conference call. At this time, all participants are in a listen-only mode. (Operator Instructions) As a reminder, this conference call may be recorded.

I would like to turn the conference over to Joe Stegmayer, Chairman and CEO. You may begin.

Thank you. Welcome, everyone. We will begin with Dan Urness, our Chief Financial Officer, providing required disclosure and into the financial reports. 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 remarks or in our response 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.

While 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.

In addition, this presentation will include certain non-GAAP financial measures. Investors should consider non-GAAP financial measures in addition to, but not as a substitute for, financial measures prepared in accordance with GAAP. For complete information on these subjects as well as the reconciliations from non-GAAP to the most powerful GAAP financial measures, are included as part of our earnings release filed yesterday and is available on our website and from other sources.

For our financial report this quarter, net revenue for the third fiscal quarter was $181.4 million, up 23.5% from $146.9 million during the third quarter of fiscal year 2015. The increase was primarily from incremental home sales activity of the Fairmont Homes and Chariot Eagle operations acquired during the first fiscal quarter, as was higher sales volume core for existing operations during the quarter.

Consolidated gross profit in the third fiscal quarter as a percentage of net revenue was 20.1%, down from 21.6% in last year's third fiscal quarter. The decline was from lower gross margin homes sold during the quarter, within normal product mix fluctuations. And lower gross margins from financial services.

Selling, general and administrative expenses in the fiscal 2016 third quarter as a percentage of net revenue was 13.1% compared to 15.0% during the same quarter last year. The improvement was from SG&A utilization on higher sales volume from the new operations and our pre-existing business.

Other income in the third fiscal quarter is lower than the prior year amount, which included the 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 32.5% compared to 37.1% in last year's third quarter. The lower effective tax rate was the result of tax credits, including Energy Star and workers opportunity tax credits renewed by Congress for 2015 and 2016 during the quarter and manufacturing-specific deductions.

Net income for the third fiscal quarter of 2016 was $8.1 million, up 39.7% compared to adjusted net income of $5.8 million reported in the same quarter of the prior year adjusted to reflect net income before the $1.3 million net gain on sale described previously. Net income per diluted share for the third quarter was $0.89 versus $0.65, as also adjusted during last year's fiscal quarter.

Comparing the December 26, 2015 balance sheet to March 28, 2015, cash was approximately $96 million at the end of the third fiscal quarter compared to approximately $97 million nine months earlier. The decrease was primarily from cash paid on acquisitions completed during the year, largely offset by net income and cash provided by operating activities. Several balance sheet accounts increased, primarily from Fairmont Homes and Chariot Eagle transactions. Commercial loans receivable also grew from additional inventory floor plan lending activities during the period.

Lastly, stockholders equity grew to just over $344 million as of December 26, 2015, up approximately $24 million from the March 28, 2015 balance.

Joe, that completes the financial report.

Thank you, Dan. Industry shipments for calendar 2015 should come in at about 9% over calendar 2014. We have yet to see December's numbers, but we think that it should be nearly 9%. That is following a calendar 2014 increase of about 7%.

Last quarter on this call we indicated that some modest increase in our optimism, and I think that proved to be warranted. Business was quite good for the quarter. We are certainly not out of the woods yet in terms of some of the challenges the industry and housing in general and the economy face, we think that manufactured housing in general should continue to improve, and we are quite optimistic for the year ahead.

We think calendar 2016 should produce growth again in industry shipments of 10%, and we would expect that to have some upside potential.

The increase in family housing starts and new single-family home sales is also encouraging. Still at fairly low levels of historically, but indicating improvement in demand. A major consulting company indicates that there is a need for 3.2 million new homes and we think that this is again a good indicator of future demand for manufactured homes as well.

The trend seems to be for lower price point product, and again, as we mentioned in the past, our industry excels in that venue. A lot of our homes go to rural areas where building site-built homes is increasingly expensive, and disproportionately expensive to building in urban areas. So that is also a good sign for us.

I know there is certainly some concern about oil pricing, obviously, and the economy in general. And particularly in states like Texas, where we are operating and have operated for many years and have four factories, considerable involvement in the state of Texas. We would tell you that to date, we have not seen significant impact from the effects of oil price declines.

In West Texas certainly, where we have some retail operations and sell homes in that West Texas market, which tends to be more oil -- petroleum-based, we have seen a decline in sales. But in Texas overall, our retail sales are actually up over the third quarter last year.

So, we have not seen a significant impact at this time. Obviously we are watching that closely. We would point out that while the oil price decline can cause the loss of jobs, the countermeasure for us at least, we believe, is the reduction in fuel prices for consumers can be very important -- particularly to our buyers, who are oftentimes, as I said, living in rural areas and driving more miles and fuel costs can be a considerable part of their budget. So as their fuel costs decline, that can create more disposable income for the affordable home buyer.

With that, we will open it up to any questions and be happy to try and answer them.

(Operator Instructions) Daniel Moore, CJS Securities.

You have a lot of detail. Greatly appreciated your outlook for 10% growth in fiscal 2016 for the industry you mentioned with potential upside. Maybe talk about what are some of those things that could drive a little bit of upside. And what are your expectations for Cavco's growth, relative to that opportunities to take share, headwinds relative to the industry, those types of things?

The upside we referred to is largely based on employment growth. We continue to see employment growth and full employment as people are working full-time jobs. That would certainly be a positive for us. People are not going to enter into a large consumer durable purchase like a manufactured home that is obviously on a payment kind of basis without solid job prospects and solid employment.

Likewise, I think the other thing that continued to help us is that, as people continue to repair their credit from the Great Recession, as months, quarters go by, people's credit background can and should be improving. And I think we will see more people over time qualify to enter into a loan agreement to buy a home. I think that is a time issue, but I think if the economy stays relatively stable or improves somewhat, those folks will be seeing their credit scores improve, and then, thus be able to qualify for a home purchase.

Lastly, I would say that hopefully the financing picture will continue to improve. Seems to be opening up a little bit, but still, for many of our buyers, financing can be somewhat challenging.

For land homes, traditional mortgages, most buyers can get credit. But for the channel business, the personal property loans on homes where a home is the only collateral for the loan, that is still somewhat restricted.

The FHFA has been talking about the new plan that should help -- could help our industry. They are suggesting that Fannie and Freddie can do some trial programs on channel lending and that could certainly be a boost if that happens.

The problem is that there is not a good secondary market for the sales channel lending. I think that's why it is being done limited, limited arenas and limited amounts. So those are some factors that could help us. Sorry for the long answer.

No, it's very helpful. And then just a quick follow-up on that topic, what is it that is restricting the secondary market for securitization? Is it just lack of size, scale, or just general interest?

For those not familiar with our industry on the call, traditionally or historically, channel lending in the manufactured housing space has been securitized and sold in the public market. Of course that went away during the Great Recession. It [hasn't] returned for our industry, surprisingly, although it has returned for many other industries.

So, we still have a lack of an ability to gather those loans together in a portfolio and sell them in a securitized fashion. Why that has occurred, we are not exactly sure. It could be a sign the industry is not large enough. It could be the issue is just not getting enough recognition or attention.

But we continue to try to talk to fixed income investors and others about these loans for possible relationship to sell loans, even in the private market. We expect that maybe at some point we will have some success. We are seeing more interest. The loans can perform very well when underwritten properly. They are attractive yields, yield spreads.

So we think it will eventually happen. But it certainly has been disappointing that it has taken quite a lot longer than it should.

Got it. Dan, maybe just switching gears. Gross margins, you mentioned mix and financial services. Can you give us a little bit more detail on both?

Sure. With mix, it's just continued demand on the lower price point side, even in our product offering, and resulting somewhat lower gross margins on that product. But, a larger -- a large piece of that also is on the financial services side of that, as I mentioned. We had higher claims activity this quarter in our insurance subsidiary compared to last year's third quarter, and that was in the form of rain and wind damage in Texas, even including tornado activity in the Dallas area in late December. So it drove claims higher than in the prior year.

So, still a profitable quarter for that entity, but not where it should have been.

Got it, very helpful. Last question and I will jump back in queue. Obviously, despite two acquisitions this year, we are sort of back to where we were at the beginning of the year in cash and it continues to grow.

So, barring additional acquisitions, when is the earliest you might start to think about alternative uses of capital, like dividends or share repurchases?

Well, we are constantly looking at alternative uses, and one of those uses has been our lending programs we are doing with customers. Dan referred to it in his comments. Our commercial lending numbers are increasing.

So we use cash net. That does two things. It [employs] our cash at reasonably attractive rates and it helps us sell homes, sell more homes. So, we will deploy money in those areas. We will also look at deploying money in consumer lending if we can again see an outlet for a secondary market to sell those loans, we will start warehousing them, and that would take some cash to warehouse them.

And then, I think, as you might be alluding to, is a stock repurchase or dividends, and we will certainly -- we certainly have that on our list as well. We don't think we're quite at the point where we are going to start a dividend program certainly. We think that is still a little bit off. The stock repurchase is an ongoing decision we will make from time to time.

But again, given the size of our Company and our growth pattern, and the fact that we expect to see substantial growth over the next five years, we like the availability of the cash and the flexibility it gives us, not only from a corporate development and acquisition standpoint, but from expansion of our existing business.

Very good, thank you again.

(Operator Instructions) Chris Stanzione, Stanzione Advisors.

Good quarter. Quick question regarding the mix that you mentioned earlier. I guess the gross profits reflect more single line. What do you think has to happen and what is your expectation for the next mix in 2016 and do you expect to see maybe more double as part of that mix? Thanks.

I would think so. Again, as the economy continues to improve, as people's personal situations, personal financial situations get better, I think people tend to want to a larger home, home with more amenities if they can afford it. So I think we will gradually see that. It has obviously been a more price point market in the last couple of years. We are seeing it gradually change. There will still be fluctuations quarter to quarter, but I think you'll see -- over time you'll see a mix of somewhat higher price point products continuing to develop.

Great, thanks. And then, on the SG&A line, I guess you did some operating leverage there and you expect that you will be able to continue to see those improvements on the income from operations.

We do. We have brought in the integration processes and continue to work on those with the new operations and been able to realize some SG&A leverage off of that, and we expect that that will continue, and it is good to see the percentage go as planned. So, yes.

Okay, thank you.

(Operator Instructions) I am showing no further questions at this time. I would like to hand the call back over to Joe Stegmayer for any closing remarks.

Okay, thank you. Well, no further questions, we will be happy to talk to anyone individually. Feel free to contact us and we look forward to a good quarter and to talking to you again in a few months. Thanks for joining us today.

Ladies and gentlemen, thank you for participating in today's conference. That does conclude today's program. You may all disconnect. Have a great day, everyone.