Cavco Industries, Inc. (CVCO) Q3 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Cavco Industries Inc. Third Quarter Fiscal Year 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce our host for today, Mr. Joseph Stegmayer, Chairman, President and Chief Executive Officer.

Thank you, Karen. Good morning. With me today is Dan Urness, Cavco's Vice President and Chief Financial Officer. And of course, first, we must begin by mentioning that we speak today under the umbrella of the Safe Harbor rules. Certain comments we will make are forward-looking statements within the meaning of a number of Securities Acts. Cavco disclaims any obligation to update any forward-looking statements, and investors should not place any reliance on any such forward-looking statements. The complete statement on this subject is included as part of Cavco's third quarter news release filed on Form 8-K yesterday and available on our website, as well as through many other sources. Let's begin by talking about the industry. For the month of November, the latest month for which data is available, manufactured home shipments were up 53% from November 2010. This represents the fourth consecutive month to which shipments were higher than the comparable prior year period. Year-to-date through November 2011 calendar year, shipments are just 1% above the same period for the prior year. It's important to note that industry shipment figures were impacted from the purchase of approximately 1,735 manufactured homes by the Federal Emergency Management Agency. The FEMA homes were built and shipped in October, November and December of 2011. While breakdown by month is not available, if we make some artificial assumptions, we estimate that shipments for November and December -- I'm sorry, October and November were up approximately 30% for the period versus the prior year, excluding the FEMA homes. So the improvements from these months is still significant. For November, shipments showed increases in 30 states, reductions in 10 states, and 10 states with no significant change. Looking to housing industry in total, that is including all forms of construction, this down cycle so far, now 70 months from peak to trough, is the longest of any of the 9 cyclical declines, post-World War II. For the mobile home industry in particular, we've experienced 10 years of weak shipments and with the most recent 4 years, having recorded the lowest shipment levels in the 53 years which data is available. We watched a number of data points and trends that we view as encouraging for our business in the future. First, the supply and demand equation of housing has improved significantly. Demand for new housing stock is estimated to be 1.3 million to 1.6 million units per year. While housing starts a bid in the $500,000 range for each of the past 3 years. The expired new homes for sale is at very low levels. Secondly, apartment vacancies are low in many areas of the country. Rental rates have been rising, making the purchase of a manufactured home an increasingly attractive alternative, both from an economic standpoint and certainly from a quality of life perspective for the homebuyer. With our homes, people get more space for their money than with apartment living, more privacy, the convenience of parking a car at their door, and at least some outside space around their home for outdoor living. Another trend is there are homes that are being built in a wide variety of designs that appeal to an increasingly diverse range of home buyers. We expect that people now and for the foreseeable future, will not necessarily be looking for the biggest home they can find but rather for the style and features they prefer. Energy efficiency and low cost of maintenance will also be important factors. All of these characteristics are ones that our ”systems-built” homes have long employed. A fact we watch closely and have spoken about in the past is the largest 2 demographic segments, the echo boomers and the baby boomers, make up more than 50% of the nation's population. People in these 2 age categories represent the 25, 34-year-olds forming a new household and aged 55 to 69-year-olds looking for a different home, and/or a location more suited to their changing lifestyle. Both of these age categories have always been the industry's prime buyers for manufactured homes. So the fact that these segments are large and the fast-growing segments in the nation's population, I think, bode well for our industry. Of course, the current problems that exist are -- remain impediments to meaningful industry growth. #1, we feel, is the unemployment and underemployment situation. #2, is consumer confidence. And this is particularly significant among the baby boomers, who witness swings in their 401Ks, their concerned with Social Security and other age-related benefits. And while they might have good credit and the ability to buy a home, they're delaying that purchase, pending improved confidence in these issues. Thirdly, of course, the availability of financing. We combat these largely noncontrollable factors by offering a wide range of residential homes and commercial structures that we're able to pursue -- where we're able to pursue more markets and appeal to a greater number of potential buyers than we have been able to in the past. We believe that we are well positioned geographically across the country with plants in most of the major markets. We have the capability to satisfy a broad spectrum of price points. We do both production and custom home building more efficiently than can be done on site. We offer the latest design technology for maximum energy efficiency, lower environmental impact, even to the highest levels of green-building standards and alternative energy homes. In fact, our homes were once again featured, or selected to be featured at the International Builders Show put on by the National Association of Homebuilders. This is the building industry's biggest event which attendance of more than 50,000 builders, developers and others in related fields. In addition, we currently teamed with noted architects to build new modern designs, 0 energy homes, that we introduced on a major event for professionals in the design, technology and entertainment fields, being held later this month. So while we're pleased to report the positive results in this challenging economic environment, which Dan will cover here in a few minutes, we are planning for and focused on the opportunities for growth we see in the future. We feel we're extremely well positioned both as an industry and Cavco in particular, to capitalize on these opportunities. Dan, please cover the financials, and then we'll be happy to take any of your questions.

The third quarter financial results include a full 3-months of activity for Palm Harbor Homes compared to the prior year actual results, which preceded the Palm Harbor transaction. Net sales for the quarter were $114.6 million compared to $39.6 million during the same quarter last year, an increase of 189%. The company sold 1,972 homes during the third fiscal quarter, up 73% compared to 1,139 homes in the prior year quarter. Consolidated gross profit as a percentage of net sales this quarter was approximately 23.5% versus 13.5% in last year's comparable quarter. The percentage increase arose mainly from the non-manufacturing business obtained in the Palm Harbor transaction. The retail and finance businesses, in particular, have inherently higher gross margins. Quarterly SG&A costs were $20.5 million or 18% of net sales, an increase of $15.3 million compared to $5.3 million or 13% of Q3 net sales last year. The percentage increase was largely from the Palm Harbor retail and finance businesses, which, in addition to having higher gross margins, carry higher SG&A costs as a percentage of net sales. Other income was primarily comprised of interest from inventory finance notes receivable. The effective tax rate this quarter was 38%. Net income attributable to Cavco stockholders in the third quarter of fiscal 2012 was $1.7 million compared to last year's third quarter net income of $24,000. With diluted earnings per share of $0.24 versus $0.004 last year. Order backlog stood at approximately $11 million at December 31, 2011 compared to approximately $2 million at the same time last year. Now, we'll go over the balance sheet comparisons for December 31, 2011 versus March 31, 2011. Cash was down $41 million in connection with the Palm Harbor cash purchase price. Restricted cash was higher as the balance included amounts managed by the finance subsidiary related to consumer loan servicing activities. Accounts receivable was higher given the larger enterprise. Note that we presented a classified balance sheet so a certain of the amounts were broken out between current and long-term. Short-term investments was one of those balances and was part of the overall investment portfolio standard insurance maintained in accordance with state regulatory guidelines. Consumer loans receivable represented the securitized and sold loans of our finance subsidiary as well as loans held for sale. Inventories were higher, mainly from retail home inventory at Palm Harbor sales centers as well as materials and work-in-process at Palm Harbor factories. Assets held for sale was primarily comprised of idled factory locations. Prepaid expenses were higher mainly from the annual renewal of commercial insurance policies and also from prepaid income taxes. Inventory finance notes receivables higher from the seasonal increase in the Park Model and Cabin businesses. Property plant and equipment increased mainly from the addition of the operating Palm Harbor factories. Approximately $13 million of net intangible assets pertain to the various Palm Harbor businesses. Accounts payable also grew in connection with the acquisition and larger operations. Accrued liabilities were larger by way of increased customer deposit levels, unearned insurance premiums, accrued compensation and other accrueds. Construction lending lines were used in our finance subsidiary for short-term financing in the mortgage loan origination process. The current and long-term portion of securitized financings pertains to debt on the securitized loan portfolios included in consumer loans receivable. Redeemable non-controlling interest increased from an additional $36 million from our Fleetwood Homes investment partner and the applicable portion of net income so far this year. Likewise, retained earnings grew by Cavco's applicable portion of a year-to-date net income. Joe?

Thank you, Dan. And Karen, we'll be happy to take any questions at this point.

[Operator Instructions]. And our first question comes from the line of Michael Corelli of Barry Vogel & Associates.

Just a couple of questions for you. One, when do we start out with the FEMA units? Could you tell us the number of units you may have shipped, in your quarter to FEMA?

Unfortunately, we did not participate in FEMA shipments for a couple reasons. But we did not get any of those 1,735 units that were shipped.

Okay. Was it that, you didn't think it was profitable enough for you to do or?

Well, it wasn't so much that -- we -- FEMA has a very unusual procurement process that doesn't seem to be inclusive of the entire industry. In fact, Jersey's working with FEMA to try to improve that procurement process. So the orders went to, in some cases to brokers, who actually don't have manufacturing capacity and then those brokers parsed out those orders to several manufacturers, and we were not one of those manufacturers. So we -- the other part of it is geographically, a lot of those orders were in the East. Now we do have plants in the East now, but we just -- we're not able to capture any of those units. We are a little bit optimistic for the next round but again it's fairly difficult to work with the government on this project. They seem to have somewhat unusual procurement procedures.

That's very surprising.

Sure.

Just 2 other things, one in the backlog. Obviously, tough significantly versus a year ago. I think the last 2 quarters, it was closer to $20 million so it's down a little bit from the 2 prior quarters. What can you say about that?

That's largely seasonal, Michael. It's - this is our slowest season of the year, for homebuyers just don't buy much in the winter months. So that's fairly typical.

Okay. And then lastly, obviously the industry saw some good increases in recent months. According to your estimate, they were still pretty -- still very strong even if we strip out the FEMA impact. So was it just that we've gone to a point where the comparisons are so easy that it wasn't going to take much to do better? Or are there signs that we're beginning a sustainable recovery, you think? And that we should look for stronger shipments to continue? What is your thought process there?

I certainly think you're correct in the first point. It's -- the comparisons are fairly low hurdles to go overcome. But we do think that inventories at the -- in the distribution pipeline are pretty low levels. So we're starting to get business from retailers who have little on their inventories. And now if they sell a home, they need to order one, as opposed to selling from inventory. I think that's a major factor. We can't really point to, obviously, the economy getting stronger, home buying generally getting better. So I think that is yet to come. It's really the fact that the industry is streamlined and people are now buying homes when they have an opportunity to sell one to a consumer.

And our next question comes from the line of Howard Flinker of Flinker & Company.

Please clarify. Would you say about 70 months and 10 years? I didn't understand clearly or didn't hear clearly.

Sure. If one looks at the housing decline since 1950, in this overall housing, of course. This downturn, this cycle has been 70 months in length. There are actually a little bit more in that starting in January of '06.

All housing. All housings in 70 months because I thought the mobile home business is longer.

No, no. We've actually have a longer down cycle if you look at it that way. But housing in general is the longest cycle. So the point being that we feel we're getting closer to a turn. This is the lowest level houses gotten into also during all those cycles. 9 of them -- 9 downturns since 1950. Never before has new housing starts gotten to this trough level of 450,000 units. So the deepest and longest decline which certainly has been terrible to live through but certainly indicates that we may be near the end of it.

Okay, that I understand. Don't say that I don't know but I was confused by the 70 months and the 10 years. And mobile homes business has been down for about 10 years. Right? Okay, I just wanted to clarify that.

Yes.

Our next question comes from the line of Patrick Todd of Gabelli & Co.

Some of the traditional builders have reported increased traffic in the first 3 weeks of January relative to last year. And obviously, it's a slow time of the year but I was wondering if you can comment on the traffic at your retail stores through January?

Patrick, it's very geographically different. In Texas for example, we're seeing both an increase in traffic and what we call, instant traffic, people that are really looking to buy. And we see that in certain other parts of the country, too. We've been seeing some increased traffic here in the Southwest, which has been one of the most hard-hit areas of the country. But we're not seeing a lot of increased buying interest here, we're seeing more traffic. So it's -- it kind of varies all over the geographic map, if you will. We're seeing some improvement in Florida, although Florida has been very hard hit. We are seeing some increased interest both in traffic and the quality of that traffic. So I don't think we can point any strong trend nor can we point to being across the board. But yes, we are seeing some improvement in both the numbers of people visiting retailers and community operators and the quality of that traffic.

Okay, great. My second question was you mentioned this earlier, the prototype lead infill house you're building at the Durango facility. What was the final shipped cost on that home? And I guess what was it going to retail for?

So that home is designed to be sold, completely installed foundation and so forth, and -- in the $200,000 range. That home, though, is really specifically designed for an upscale buyer. It is 0 energy, 0 carbon footprint, 0 water usage. It has actually 6 zeroes in front of it. And it's obviously a specialty kind of product to hit a critically niche of perhaps young professionals or even empty nester professionals who want a very trendy design with all the features that they're looking for today. For example, it has all recyclable materials and not only the materials built from recycled materials to begin with, the materials can be recycled once again which is becoming an increasingly important factor that many people are looking for, from an environmental standpoint. So it's not a home for all people, it's certainly not our mainstream home but it demonstrates what we can build in the factory to meet a wide variety of needs and interest.

Okay, great. My final question is do you have -- it's kind of a guess, about the average capacity of utilization was across your factories for the quarter?

We remain in the 30%, the mid-30% to upper 30% range as we have been for some time. It fluctuates somewhat, we probably increased a couple of percentage points to the high 30s but it's still a very low level of capacity utilization.

And our next question is a follow-up from the line of Michael Corelli of Barry Vogel & Associates.

Just 2 numbers questions. One, is CapEx going to still remain around the depreciation level looking to fourth quarter and into next fiscal year? And they're around at 38% tax rate, is that something we should continue to use?

On the CapEx, it's probably going to be a little lower than depreciation. I would put it that at the $1.5 million to $2 million range, while depreciation runs at about $2.4 million to $2.5 million. So little lower on CapEx. The effective tax rate in the high 30s is what we expect going forward, yes.

And I see no further questions in the queue at this time.

Very well. We thank you for joining us today, folks. And appreciate your interest in Cavco Industries. We'll be available as always for any follow-ups. Have a good day.

Ladies and gentlemen, thank you for your participation in today's conference. This does include the program, and you may now disconnect. Everyone, have a good day.