Cavco Industries Inc (CVCO) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen, and thank you for your patience. You've joined the Second Quarter Fiscal Year 2018 Cavco Industries Earnings Call Webcast.

(Operator Instructions)

As a reminder, this conference may be recorded.

I would now like to turn the call over to your host, Chairman, and CEO, Mr. Joe Stegmayer. Sir, you may begin.

Thank you, [Lateef], and welcome, everyone, to the second quarter conference call. As usual, Dan Urness, our Chief Financial Officer, is with me; and Mark Fulser, our Director, Financial Reporting. Dan will open up with our financial report, and I'll make a few comments, we'll take your questions. Dan?

Thank you, Joe. 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. Our forward-looking statements are subject to risks and uncertainties, many of which are beyond our under 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 and from other sources.

For our quarterly report on the financials. Net revenue for the second fiscal quarter was $201 million, up 6.5% from $188 million during the second quarter of fiscal year 2017.

Breaking this increase down by business segment, factory-built housing net revenue increased $11.9 million from a larger proportion of higher-priced homes sold and improved homes sales volume, including incremental sales from our new Lexington Homes factory in Mississippi.

Financial services segment net revenue increased from more insurance policies in force and higher home loan sales volume compared to the prior year quarter. This revenue increase was partially offset by $1.4 million of required payments to reinstate catastrophic reinsurance policies for the insurance subsidiary, causing a direct adverse impact to quarterly earnings.

Consolidated gross profit in the second fiscal quarter as a percentage of net revenue was 17.2%, down from 20.8% in the same period last year. As described in our earnings release, severe hurricane activity this quarter adversely impacted consolidated financial results. The financial services segment loss was caused by high homeowners' insurance claim volume in Texas, although the company's losses on these claims were limited to $1.5 million through its reinsurance contracts.

In the factory-built housing segment, the hurricanes caused substantial new home inventory damage at certain company-owned retail stores as well as limited number of lost production days and delays of home sales in Texas and Florida.

Selling, general and administrative expenses in the fiscal 2018 second quarter as a percentage of net revenue was 13% compared to 13.5% during the same quarter last year. The improvement was related to fixed cost efficiencies gained from higher net revenue levels.

The effective income tax rate for the quarter was 27.3% compared to 28.7% in the same quarter of the prior year. The current quarter contains a benefit related to the required implementation of new accounting standards, requiring the company to record tax benefits from stock option exercises as an income tax expense reduction. Whereas, these benefits were previously recognized in equity. The prior year quarter also had a low effective income tax rate that resulted from research and development tax credits that became realizable during that period.

Net income for the second quarter of fiscal 2018 was $6.2 million compared to net income of $9.3 million reported in the same quarter of the prior year. Net income per diluted share for Q2 '18 was $0.67 versus $1.03 in last year's second quarter.

Comparing the September 30, 2017, balance sheet to April 1, 2017, the balance sheet of Lexington Homes is included in the consolidated balance sheet this quarter. Cash was approximately $137 million compared to $133 million 6 months earlier. This increase was primarily from net income and cash provided by operating activities.

Accounts receivable increased from sales growth during the period. Commercial loans receivable was higher from additional inventory for planned lending during the period.

Inventories increased mainly from the Lexington Homes transaction, delayed sales of finished goods related to the hurricanes and additional stocking of raw materials to facilitate increased production levels.

Prepaid expenses and other current assets increased from reinsurance amounts to be collected. These resulted from higher hurricane-related insurance claim activity at our insurance subsidiary this quarter.

Accrued liabilities grew from similarly high insurance loss reserves as well as increased customer deposits and volume rebate accruals from more home sales. These increases were partially offset by lower salary and wage accruals at the end of the quarter.

Lastly, stockholders' equity grew to approximately $413 million as of September 30, up approximately $19 million from the April 1, 2017, balance.

Joe, that completes the financial report.

Okay. Thank you, Dan. Hurricanes Harvey and Irma were a major setback to us and highly unlikely to be repeated as Harvey was considered a 500-year event and Irma was also similarly very unusual and an infrequent event in the State of Florida.

As Dan mentioned, our reinsurance contracts are proving very effective in limiting our claims expense in our insurance operation to our self-insured retention or deductible, if you will, of $1.5 million. Plus, as Dan indicated, we are required to buyback this reinsurance after a catastrophic event, which cost another $1.4 million.

The sales and delivery of homes that were postponed were particularly impactful to our company-owned retail stores. Fortunately, most of our -- none of our team members, I should say, were injured, although several of our people in the Houston area were trapped and had to be evacuated by boat and a couple lost their homes. For certain of the losses we incurred at our facilities, both retail and manufacturing, we may receive some insurance coverage that is currently in the adjustment phase, but we had to recognize the losses in Q2, irrespective of any tax recovery via our commercial insurance. The better news is that we expect to experience an increase in business in the future as people begin to replace their damaged homes in the Houston metropolitan market.

While tough and challenging the hurricanes were, we avoided major damage to production facilities, which are all in operation and, in fact, we're in operation just couple days after the event. We expect to be back on track for the next 2 quarters and post an excellent 2018 fiscal year.

Macroeconomic trends in the single-family housing market remain favorable. We are well positioned to capitalize what we expect it to be continued, steady growth. We have the team, innovative solutions, balance sheet strength, and growth strategy to continue to drive improved profitability and increased value for our shareholders.

And with that, we'd be happy to take any questions you may have.

(Operator Instructions) Our first question comes from the line of Dan Moore of CJS Securities.

It's Pete Lucas filling in for Dan. You touched on it in your prepared remarks but just wanted if you can provide some more color on the impacts of the hurricanes, specifically Harvey. Elaborating on, first, to quantify the impact of financial services profitability and do you expect to raise rates as a result?

Well, I'll take the second part first and Dan can take the first part. Typically, after these major claim events, we do apply to the regulatory authorities, in this case, primarily in the State of Texas, Texas Department of Insurance, for rate increases based on the losses that we incurred. That takes some time for everyone to get approved. I think we hesitate to speculate, but one would think that there'd be an opportunity to increase rates. However, that will take some time to get approved. And then, of course, we have policies that are typically of 1-year duration. So to get those increases through, it doesn't happen immediately as it happens as the policies renew. Our policies do not go beyond one year. So within a 12-month cycle, we would have all the rates in place in all the policies. We did -- in past catastrophic events, we had some serious hailstorms about a 1.5 year ago. We were able to get rate increases, and those have now been largely implemented in our policies. So that's the answer to your question on rate increases. And Dan?

Sure. Yes, just to pick up on the cost of the hurricanes that occurred with respect to insurance company, the 2 numbers I mentioned in my notes, $1.4 million for the buyback of the reinsurance policies or reinstatement of the premium was a direct impact. So $1.4 million there. And then $1.5 million was our self-insured retention. So the total, that's $2.9 million related to the hurricanes for the quarter for our insurance company. Of course, then we had some additional impact that we mentioned related to our homebuilding business from property damage. And then some delayed sales that we discussed in our earnings release as well.

And I would add to that, Peter, that in addition to the losses, direct reinsurance and deductible losses at Standard Casualty Reinsurance Company, you also have increased operating expenses because, of course, we had our claims adjusters out full time traveling in the Houston market, where hotel rates are very high during a situation like that. So we see increased SG&A expenses during the event like that, which are above the normal. So there were some ancillary impacts to our income statement in addition to those 2 larger numbers that we've covered.

And then, I'm sorry, what was the cost incurred for the factory-built housing in the quarter?

Well, we haven't quantified.

Yes, as you can see, we haven't outlined. This is Dan speaking. Specifically, we wanted to make sure that it was understood what it was that it's the property damage at the sales centers on new home inventory that was just caught in the flooding as well as some damage at the factory locations. That's still going through that insurance review. So we've recorded our worst-case scenario as required by GAAP. We may be able to do a little bit better than that, but that will take time to work itself out. So we've got that full impact recorded there. We just haven't outlined the specific number because it's moving still a little. And then the delays in shipments that occurred as well, obviously, we had a certain number of homes. It's had to quantify exactly what that is. But those homes that were in process to be sold were delayed because of the weather and disruption in the areas. And we expect that those will be able to be booked through in ensuing quarters.

And then staying on that topic, if you could just touch on the longer-term implications of incremental demand from FEMA, and more generally, from what you expect back to see from potential rebuilding efforts?

Right. Well, it's -- certainly, we've already started to see some increased traffic at our stores in that Houston market. Some people can look at replacing their homes fairly quickly. They had proper insurance coverage. Others might have to wait for some government assistance of one sort or other of loan programs that have historically been done by the federal government, and in some cases state is involved. So that's for private replacement of homes. The FEMA activity and potentially State of Texas activity as well to provide temporary living units for victims of the hurricane, that had started and probably will continue for some time. By started, I mean FEMA has ordered some homes from the industry. We are participating somewhat in that effort. We want to try to help out. But frankly, with the backlogs we have at our plants and they need, of course, to fulfill our commitments to existing customers, we couldn't take everything that was available, but we did take a number of those homes and we will be building them. Actually, not at facilities in Texas, we're building at facilities that have some additional capacity available.

Great. And then staying on the topic of capacity and then the labor with that, labor, obviously, remains a key constraint. Can you update us on the current capacity there and where you're seeing the bottlenecks? Obviously, it's Texas there. But given that, how far can you grow as demand increases, given labor constraints?

Yes, labor is a challenge, and we find that to be the case for our peers. Our vendors, tell the same thing. And people outside our factory-built housing industry, we hear the same thing. I think it's a macro issue for the economy, for this country. And we're trying to combat it or deal with it in a variety of ways. It's sometimes wages. So we've certainly been increasing wages, increasing incentive programs, encouraging our employees to refer other people to our facilities and they'll get a bonus for that. So there's a lot of things we're doing to try to attract and retain people. But frankly, there's just the dearth of availability of labor in most markets. And so we're trying to step up our recruiting efforts. We've hired a full-time recruiter just to spend time doing that. But it's kind of a moving issue, and we're trying to figure out solutions. But I don't think there's an easy answer. The good part about our business is that we can provide good, steady employment to people. And they can come to one location, work there every day. They'll get employee benefits and paid vacation and so forth. And that's not often the case if they work in a subcontracting environment for on-site construction activities. So we do have some advantages. We expect and be able to get labor locally and to keep the people. So that's not something we can resolve, but we certainly can say we'll handle in the medium term. But we are making some progress. And we're obviously doing the best we can with our existing workforce. It does constraint us from trying to expand production capacity or in some cases actually open up facilities or expand facilities of existing operations, but it's something we just have to deal with. Let's say, it's a macro issue. It's not something that it's just impacting us. And we'll do whatever we can to mitigate the effect of reduced labor force.

And in terms of that your ability to pass-through increasing labor costs and protect margins?

Well, I think that we generally have an ability in this industry, not just us, but I think most of the participants in this industry will -- because of the typically short build time, although backlogs are somewhat longer now, we can announce price increase based on material cost elevation, inflation or labor cost inflation, and we generally pass that on. And keep in mind, of course, this is going to be the case with other forms of construction as well, commercial and residential site build. They are all facing the same issue. So I think we're in the inflationary environment with respect to materials and labor. And we're generally able to pass that through, sometimes not as quickly as we'd like. And sometimes with backlogs, we think, it will pass quickly because we don't generally increase pricing retroactively. So it sometimes takes a little while, but eventually, we're able to get it through as a pass-through. Peter, we'll stop and see if somebody else has question.

Our next question comes from the line of Brian Hollenden of Sidoti.

What's the right way to think about revenue growth over the next few years, just given the strong customer demand and the labor availability constraints?

Well, we don't make forecast, public forecast. We -- internally, we feel very positive. I said about the outlook and our ability to serve growing market. I think we'll do that in a combination of ways. We'll add facilities. We just usually did in Mississippi. We'll look at expanding existing operations. We have sister plans in a couple of our facilities here, sister buildings to our current operating facilities that are not operating. So we have some brick-and-mortar, if you will, that's currently unused. We're looking expanding into those operations. They are contiguous to our existing plant. And then of course, we'll continue to look at other acquisition and/or greenfield or de novo plant possibilities to expand reduction capacity. So we think, given that and the fact that not only is residential construction, residential home sales expected to do well, we believe that the factory construction within that segment of single-family residential will grow at better rates than it has in the past. So that is there will be more interest in factory-built construction because of the affordability, the energy efficiency and the shorter lead times eventually for that product. So we feel -- and the fact that a lot of the new buyers are not looking to put all their money into home and other investment ideas. And so we think the market is moving towards more efficient homes and perhaps a more modestly sized homes, which should benefit our industry as we go forward.

And can you talk a little bit about the Lexington acquisition? Has the integration been smooth? What's the operating capacity of the plant? Where do you think you can take that? And then also, talk about Lexington's distribution capabilities and what your plans are there.

So again, we don't talk about individual capacity by plant for a couple of reasons, one, from a public disclosure standpoint, but also from competitor standpoint. But the Lexington plant has -- is a good facility. We actually have 2 facilities there. One is operating, the other one is idle. So as we increase production and demand, as demand increases there, we have that potential to open up a second plant. But the existing plant has substantial unused capacity. From a distribution standpoint, they had an existing customer base. We are adding to that with some of our relationships. And then we're helping them increase their marketing efforts. We have a broader, robust marketing presence than a private individual company such as Lexington had. And so we can help them there. The biggest issue there is change in the culture somewhat as with any acquisition. And we're doing that. We're changing the product, somewhat product design. We've already done that, and we've introduced new product to our distribution base, which has helped us gain new shelf -- more shelf space. So I think it's going fairly well. It's not a contributor at this point wasn't expected to be, but it's not a contributor. We bought it knowing that we had to turn it around, and we're working seriously on doing that. It's good workforce there, good people. And so we're going to work with that. So good market to be in. But as with any acquisition and/or greenfield, if we were to greenfield a plant, it'd be fairly long period of time before that plant would turn profitable. And so we always weigh our options. Do we greenfield the plant, do we acquire something that needs to be -- need some attention or do we pay something more for something that doesn't need maybe perhaps needs less attention. In this particular case, that's where the market is. This was a very good opportunity for market we want to be in. And so we'll take our time. We'll get it right, and it will be a contributor down the road. But as I say, it is not today.

And then last question from me. What's your current backlog?

Our current backlog at the end of the quarter is $199 million, Brian. And that compares to $63 million, the same time last year.

(Operator Instructions) We have a follow-up question from Dan Moore of CJS Securities.

Yes, just one more from me in terms of the balance sheet. Given that the cash continues to build here, how close are you to redeploying some of that cash in the form of more aggressive lending to potential MH buyers? And update us on how and when you would consider flexing that balance sheet?

Yes, Peter, it's -- I like the question. We are looking at expanding our presence in the mortgage financing business. We have a good platform, a very good operation in CountryPlace Mortgage, which has been in business for quite number of years. Very good people, good team. We're primarily have been originating traditional land home mortgages for manufacturing homes. And we're now expanding into personal property loans for manufactured homes, or commonly called chattel loans, where the home is the only collateral. There's no land involved. And we are deploying some of our capital and some investor capital into that effort. We're going to take it slow. And we're going to be careful in our underwriting and expansion of that business. But we do think it's an opportunity for us to serve a lot of our retail base more with kind of one-stop operation where they could buy the home and finance the home through our company. And it's certainly also a good profit center business for us because you make money in the origination loan and you make money servicing the loan after the loan is originated. So again, we -- we're not prepared to say how much money we'll invest in that. It will be fairly modest amount vis-à-vis our cash balance. But it will be some use of our cash. We're also, again, listing or has solicited third-party investor money. We're modestly successful in attracting some of that. We have more work to do there. Preference would be to originate these loans and sell them and retain a portion of the equity in that loan portfolio, and that's what we're excited to do. But it'll involve some investment of our funds initially to produce that portfolio of loans, which we then would sell to third-party investors. Hope that helps.

And gentleman, there appear to be no further questions in queue at this time.

Okay. Thank you, [Latif], and thank you, everyone, for joining. We appreciate it. And be happy to talking to your follow-up questions and be reporting to you next quarter with better results. Thank you very much.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day.