Cavco Industries Inc (CVCO) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fourth Quarter and Fiscal Year 2018 Cavco Industries Earnings Conference Call. (Operator Instructions)

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

Thank you, Shelby, and welcome, everyone, to our fourth quarter conference call. We'll begin, as usual, by asking Dan Urness, our Chief Financial Officer and Executive Vice President, to read our disclaimer and cautionary statement and then begin with the financial report. And I'll come back to make a few comments, and we'll take your questions. Dan?

Good day, everyone. 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 and from other sources.

Now for our financial report. Net revenue for the fourth quarter of fiscal year 2018 was $243 million, up 23% compared to $198 million last year. Nearly all of this increase was from the factory-built housing segment, where net revenue grew over $43 million, including $14.8 million of home sales from early commercial loan payoffs previously deferred under Cavco's wholesale lending programs. Factory-built housing net revenue also grew from a larger proportion of higher-priced homes sold and additional sales volume. Financial services segment net revenue increased 7% from higher home loan sales volume and more insurance policies enforced compared to the prior year.

Consolidated gross profit in the fourth fiscal quarter as a percentage of net revenue was 22.4%, up from 21.3% in the same period last year. The improvement was mainly from home product price increases in recent quarters. The gross margin benefit of these increases has been delayed by large production backlogs. The price of homes sold this quarter kept a better pace with rapid raw material cost inflation and higher labor and labor-related costs, which adversely affected gross profits for more than a year.

Our distribution base has generally been able to absorb product price changes, although competitive and mortgage appraisal limitations continue to be worked through. The factories have also gained some additional operating leverage from increased production levels.

Selling, general and administrative expenses in the fiscal 2018 fourth quarter as a percentage of net revenue was 11.7% compared to 12.7% during the same quarter last year. The improvement was related to fixed cost efficiencies gained from higher net revenue. Income from operations was directly benefited in the amount of $1.8 million from the early commercial loan payoffs previously discussed. Additionally, other income increased primarily from $4.5 million in gains realized on the sale of corporate investments.

The effective income tax rate was 27.9% for the fourth fiscal quarter compared to a higher 33.9% rate in the same quarter of the prior year. The lower tax rate is the result of the U.S. government enacting comprehensive tax legislation, commonly referred to as the Tax Act. An annual blended rate was used this quarter since the company had only its final fiscal quarter within the effective period of the new law. The effective tax rate is anticipated to be in the low 20s starting in fiscal year 2019 when the company should benefit fully from the recent tax reform.

Net income for the fourth quarter of fiscal 2018 was $22.1 million compared to net income of $10.9 million reported in the same quarter of the prior year. Net income per diluted share this quarter was $2.40 versus $1.19 in last year's fourth quarter.

Now I'd like to review our balance sheet presentation. The cash balance was approximately $187 million at March 31, 2018, compared to $133 million 1 year earlier. The increase was mainly from net income and net cash provided by operating activities, including the early commercial loan payoffs and also the sale of corporate investments. Total commercial loans receivable decreased from the early loan payoffs, as discussed.

Inventories increased mainly from more home sales in process by company-owned retail stores and higher raw material levels for increased production rates. Property, plant and equipment grew from the purchase of an operating production facility which was previously leased as well as various plant improvement projects.

Accrued liabilities increased from customer deposits, higher volume rebates, accrued wages and accrued warranty, all incident to home sales growth.

Lastly, stockholders' equity grew to approximately $457 million as of March 31, 2018, up nearly $63 million from the April 1, 2017 balance.

Joe, that completes our financial report.

Thank you, Dan. We're very pleased with the results of the quarter and the full year. Our distribution base, let us say the channels through which our homes are sold, consists of home display centers, land/lease community operators, developers and homebuilders, resort operators and others. After many challenging years, it's gratifying to experience the optimism of these wholesale customers. This is as good for the majority of them. They report steady traffic to the retail sales locations and, more importantly, indicate that increasing percentage of the people who are shopping for a new home are ready to make a buy decision and can qualify for a mortgage.

This is most likely because employment levels are high, consumers are more confident about the economic outlook, and there's a certain pent-up demand that may be starting to surface.

The 20-City Composite S&P CoreLogic Case-Shiller Home Price Index showed a 6.8% year-over-year gain in home prices in March. On a 3-month moving average basis, median home prices rose 5% year-over-year to $325,000. These increases, which are at a pace above the general rate of inflation, can favorably impact the value proposition for factory-built homes such as Cavco's. We believe that a relatively small portion of the population recognizes that they can buy a high-quality home for less because if it's built more efficiently. Our company and the manufactured, also known as the factory-built or pre-fabricated home industry, in total, we all are working to generate greater awareness of the inherent benefits of our homes.

Meanwhile, from a macro perspective, nationally, April new home sales fell 1.5% sequentially to 662,000 units. So while the housing market is not yet robust on a year-over-year basis, April new home sales rose 11.6% following March's 5.3% rise and February's 7.2% rise.

New home inventory is 5.4 months of supply, flat with last year and at modest levels historically. Supply has been in this range for about the past 3 years and is down 48% from peak levels. Despite the month's slight sequential sales decline, we continue to view housing demand as healthy as not only do we point to a year-over-year rise but also April single-family housing starts being up 7% year-over-year and the May National Association of Homebuilders survey being up 2%, 2 points that is, sequentially.

Looking forward, we continue to believe the housing market recovery will continue to unfold over the next 12 to 18 months in a moderate pace, led by fairly positive fundamentals as we expect demand to improve, driven by job growth and modestly easing credit conditions. We expect, actually, the next 3 years to be very good for our industry. But looking out for this near term, we do expect the market to improve in the year ahead. We're a very motivated team of talented people who build and market our homes and who provide finance and insurance services as well. We have the capital to support growth, innovation and expansion. In short, we feel well positioned to take full advantage of the opportunities that lie ahead in the housing market.

With that, we'll be glad to take your questions. Shelby, please begin.

(Operator Instructions) And our first question comes from Daniel Moore from CJS Securities.

I wanted to start out -- it seems your ability to pass through rising -- rapidly rising input costs is clearly improving. Given the rising backlogs and demands, are you just -- are you seeing more flexibility in the types of homes that you're -- you can build ASPs? Just help us understand. And I think you mentioned and alluded to a catch-up. Help us understand what's changing in the dynamics there as ASPs are rising faster.

Well, thank you, Dan. Appreciate your question. The story on price increases is that we've been gradually catching up. We saw a fairly inflationary environment for materials last year, and we got behind the curve somewhat because of our backlogs and growing backlogs. And our industry, we really don't have the opportunity to retroactively increase pricing, so we have to work through the backlog, and we've done a lot of that. Although, as most are well aware, inflation still is with us, and we expect continued price increases in commodities and purchase parts. So that will continue to be somewhat of an issue for us, to keep up with the inflationary pressures, both in materials and, for that matter, labor as well. But we think we're finally doing so. It will be a continuing issue, though, because our order -- incoming order rate is strong and our backlogs remain fairly lengthy. So I don't think we're out of the woods yet in terms of keeping up with the inflationary environment, but I think we've made good progress.

Very helpful. And switching gears, where are we now in terms of capacity utilization? How quickly can you grow units given the current labor and capacity constraints? And are you considering restarting shuttered facilities, adding capacity? Are you seeing others in the industry do that as well?

Yes. So that's -- the big question there, of course, is how is the labor environment. And we'd love to increase capacity or increase production -- utilization, I should say, at a faster rate than we're able to do it currently. But there's certainly a lot of constraints, which I'd get to in a moment. Yes, we are seeing some increases in production capacity. We have opened up a shuttered plant that we had in Austin, Texas, our second plant adjoining our operating -- operation. We're also looking and have expanded certain facilities, added more additional square footage. We'll continue to look at that. We're exploring, as we speak -- hope we have another idle facility that's a sister plant to an existing operation. So we're trying to do those sorts of things. We're looking at a larger facility to replace an existing facility in one location. So we look at the kind of brick-and-mortar expansion. We're looking at ways we can attract and retain people, and as we mentioned, we're trying a lot of different ways to do exactly that. It's certainly a challenging environment with virtually full employment. And as I've said before in some of these calls, it's unfortunate that a lot of the secondary school systems have eliminated trade-related curriculum. And so we're finding that the graduates coming out of high school and people looking for production-oriented jobs are not familiar with the process of building things. And so that's an issue. So we're doing more training in-house than ever, which obviously creates more challenges and time constraints. But I think we're making some progress. I feel our competitors are doing the same thing. We talk to them, our peer group. We talk to vendors. Everybody is having the same issue. So we're kind of trying all kinds of means to find the right people and keep them motivated and interested in the opportunities they have in our company, which are substantial because we do promote from within. We can offer good career opportunities for people in production management as they get skilled.

And, Dan, I would just add that our capacity utilization is currently at 80%. That's brick-and-mortar, so that doesn't include some of the things Joe mentioned in considering opening another sister plant that we have and also replacement of a larger facility for a location that we have currently. So it's, as we exist right now, at 80%.

Very helpful. And one more and I'll jump back. But maybe talk a little bit about what you're seeing both in terms of legislation and access to financing. You mentioned folks are better positioned to qualify for a loan. I know Dodd-Frank, there were some regulations rolled back, anything specific that could be meaningful or impactful than any other changes on the landscape that you're seeing.

That was a good win for the industry, I might say, that the President recently signed a reform bill that adjusted some of the Dodd-Frank provisions. And one of them that particularly impacted our industry was restrictions on salespeople at various distribution points being restricted from quoting estimated payments. And that's very important because many of our buyers come in, and they're interested in how much they can budget for a home. So is the home going to be $300 a month, $400 a month, $450, $500? And heretofore, since Dodd-Frank was implemented, people -- salespeople in our industry could not give even an estimate of what the payment might be. That was -- that really hampered them. Other industries can do it. Car stores, boats, electronics, they can always quote payments. We could not advertise or quote payments in our industry, and that's now fixed, and that should not be a problem. And that should help quite a bit in people's understanding -- consumers' understanding of the value proposition for our product and how potentially affordable it is for them. We expect other bills that are currently in consideration in Congress to help us as well, but that was the most recent one. Also, we're finding that HUD is -- from a regulatory standpoint, HUD is taking a look at our industry closer than it has in many years and trying to determine if some of the regulations that are in place are not productive, not efficient. And they have a comment period that they receive comments from all sorts of constituencies. And I think the work that the new Secretary is doing at HUD could be pretty helpful in providing more affordable homes to those that need them, and that's a tremendous need in this country.

(Operator Instructions) And it does look like we have a question from Brian Hollenden from Sidoti.

How many of the homes sold in the quarter were FEMA orders? And how much did the FEMA orders add to the operating margin this quarter?

We had FEMA orders that we built this quarter and the most recent December quarter as well. We didn't break out the number of those homes. It wasn't a large amount, but it was helpful during the winter months. So both last quarter and this quarter, we had them. So I would just note that, the margin contribution, if you will, is fairly similar on a home-for-home basis, but it's helpful during the winter months. So when we slow down in some of our factories that are affected by winter slowdown periods in their regions, it's helpful to add in some of this consistent business. So it did help our margins overall from a utilization standpoint.

And Brian, we certainly wanted to help FEMA and the victims of the hurricanes, and so we did participate. But we also had the challenge that our existing backlogs were lengthy, and we had to serve our long-term customers as well and consumers waiting for their homes to be built. So we did not take as many FEMA orders as we might have otherwise. And we produced those orders, as Dan says, in areas where there was capacity in those winter months.

So at this point, have all the FEMA orders been delivered?

They have, yes. And when I say by this point -- it's actually all contained within the fourth quarter ended March 31. So we're not expecting to build any currently, anyways.

Okay. And then of the homes sold in the quarter, can you provide some color as to what percent were sold to millennials and what percent were sold to baby boomers? Are you seeing similar demand from both demographics?

We really don't have very accurate data on that because, again, Brian, our product is sold through -- we're a wholesaler, basically. We don't sell direct to consumers other than through our own company-owned stores, which are a fairly small portion of our sales overall. So we don't have kind of very solid statistics. Historically, the age 55-plus, the empty nesters, retirees, seasonal livers, people who go to Sun Belt in the winter season, probably accounts for -- in the mid-20s percent of our business. But that's not a hard and fast number. It's more of a guesstimate. As far as millennials go, the same thing applies. We're not exactly sure of the ages of all our buyers, of course. And again, once they come on the store and they're getting financing from a third entity, we're not involved in that application process. As such, we don't see all their data. But again, we are seeing -- from an anecdotal standpoint, we're seeing more the millennial age group visiting sales centers and communities.

Okay. And then just from the demand side, are you seeing pockets of strengths regionally? Or is this sort of strong demand nationwide?

Well, we're fortunate that demand is pretty strong across the country. There are some pockets that are stronger than others. Of course, Florida and Texas, California, the Northwest have been very strong, in particular. But most of the country is doing quite well. The Midwest, the East, Southeast, the Deep South are doing well, perhaps, not quite as strong as the first group I mentioned but very strong indication of interest and support in orders.

And then last one for me. I think you touched on it. But since Fannie and Freddie announced their pilot program, have you noticed any improvement in financing availability? If we get to and sustain 100,000 units, is that the catalyst that brings the GSEs back into the market? Any sort of color there would be helpful.

Right. Well, the GSEs in that -- really started their program. They're still just in the rollout stage, so I don't think it's had any impact yet. And they're pilot programs, so we're not sure how much volume they'll help create, but they will create new volume. What's at issue here is that the GSEs are looking at enabling financing through their entity's (inaudible) with site-built homes. Heretofore, manufactured homes or prefabricated homes had to be appraised comparable to other such homes, and they were not allowed to use site-built homes as comps, which provided some challenges in some markets where maybe there weren't other manufactured homes to compare to. So it created a number of issues with appraisals, not being able to get sufficiently accurate appraisals and high enough appraisals to allow the consumer to get a mortgage. That will be addressed by these new programs because they're -- both the GSEs are looking at allowing the homes to be comped from an appraisal standpoint to all homes, including site-built, in the area, which will allow just more comparables and more opportunity to do a fair comparison. We know our homes will compare very favorably to site-built from an appraisal standpoint if they're allowed to be, and these new programs will enable that. But again, they're very new and no indications yet of their impact. But it's a good step in the right direction. We salute the GSEs for moving on this. I think they're really trying to address their duty to serve obligation, and I think it's finally being recognized by a number of entities, governmental and quasi-governmental entities, that manufactured housing is not the only but certainly a major source to address the critical need for affordable homes in this country. And it's one that's been around for a long time and proven, been regulated for over 50 years. Homes are safe and high-quality. And this is something that's largely not known, and anything we can do to increase that awareness will help our industry.

And we have one last question from Daniel Moore of CJS Securities.

Just touching on that last point, Joe, and you mentioned it in the prepared remarks. Anything specific you can point to that the industry is doing in terms of incremental awareness?

Yes. We're trying to do more of an effort to get the -- some of the press, especially magazines that specialize in housing and home decorating, that sort of thing, to feature our product, our industry's product more in publications. We've long talked about and kind of played a national ad campaign. We haven't gotten full support from all the industry members, but at some point, I think that may be a possibility. Meanwhile, some individual companies -- or one company, in particular, has been running some TV ads nationally, which have been, I think, very good and very well produced and show the benefits of living in a factory-built home. And I think we'll see some benefit from those ads. The industry is trying to, again, make our elected officials more aware of this product at both of the state and federal level. So we really just stepped up our efforts to create greater awareness. This is a product that is very well accepted in areas where it's been used for many years but just not a great awareness in areas where it could be used. And so that is something that we'll continue to push for. I wish we could tell you that we're going to start a major multi-million dollar ad campaign such as some other industries have done like the got milk? campaign and the Go RVing campaign. But I don't think we're quite there yet, and I don't anticipate we'll be there in the next 12 months.

Fair enough. Last one for me. And I know I ask it every quarter, so I apologize. But with cash now up to over $20 a share on the balance sheet, maybe just talk about capital allocation opportunities, whether you'll take more loans on the balance sheet, other potential uses of cash as that continues to build.

Okay. Well, our capital expenditures will step up somewhat but still fairly modest with relation to our cash flow generation. So we'll be spending more, as we talked earlier in this call, about expanding -- trying to expand production capacity of existing plants, upgrading facilities, adding new systems and capabilities to hopefully move production through faster. So our investment will step up in our core business. We will probably invest some money in our -- in fact, we have and we'll continue to invest some of that capital in our CountryPlace mortgage operation as we try to develop securitization sources for loans that we originate in that entity. And we'll continue to look for opportunities to grow our business geographically, either from de novo, building our own facilities or from an acquisition standpoint.

And I'm showing no further questions at this time. I would now like to turn the conference back over to Joe Stegmayer.

Okay. Thank you, Shelby. Thank you all for joining us. We look forward to continuing to talk with you in the quarter ahead, and we look forward to reporting excellent performance for you as we move into the future. Thank you very much.

Thank you. Ladies and gentlemen, this does conclude today's program. You may all disconnect. Everyone, have a great day.