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Cavco Industries, Inc.

CVCO US

Cavco Industries, Inc.United States Composite

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Q2 2017 · Earnings Call Transcript

Nov 9, 2016

Executives

Joe Stegmayer - Chairman and CEO Dan Urness - CFO

Analysts

Robert Magic - CJS Securities Michael Conti - Sidoti

Operator

Good day, ladies and gentlemen and welcome to the Cavco Industries’ Second Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only model.

[Operator Instructions] As a reminder, this conference call may be recorded. I would now like to turn the conference over to Joe Stegmayer, Chairman and Chief Executive Officer.

Please proceed, sir.

Joe Stegmayer

Thank you and welcome everyone. As usual, we’ll become with the financial report.

Dan Urness, our Chief Financial Officer is on the line with me. I’m actually travelling in Texas, visiting some customers.

Dan is in Phoenix. So Dan, would you please begin?

Dan Urness

Yes. 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 the 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 the subject is 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 second fiscal quarter was $188.3 million, down 1.9% compared to $192 million during the second quarter of fiscal year 2016. The decrease is mainly from lower quarterly home sales of approximately 1% as there were 3242 homes sold this quarter compared to 3264 homes sold during the comparable period last year.

Consolidated gross profit in the second fiscal quarter as a percentage of net revenue was 20.8%, up slightly from 20.6% in the same period last year from minor fluctuations in the product mix of homes sold. Selling, general and administrative expenses in the fiscal 2017 second quarter declined as a percentage of net revenue to 13.5% compared to 13.8% during the same quarter last year.

The improvement was primarily from somewhat lower salary and incentive compensation expense during the period. Income before income taxes was $13.1 million this quarter, a 4.9% increase from 12.5 million during the same quarter last year.

Net income for the second fiscal quarter of 2017 was $9.3 million compared to net income of $8.1 million reported in the same quarter of the prior year. Net income per diluted share for Q2 ‘17 was $1.03 versus $0.89 during last year’s second quarter.

The current quarter includes $755,000 for certain research and development tax credits that became realizable by the company during the period. Comparing the October 1, 2016 balance sheet to April 2, 2016, cash was approximately $115 million at the end of the fiscal year compared to 98 million, six months earlier.

The increase was primarily from net income and cash provided by operating activities. Accounts receivable increased mainly from 5.6% higher net revenue during the first six months of fiscal 2017.

Total consumer loans receivable increased $3.1 million and more consumer loans were classified as current this quarter, primarily from the timing of when loans are sold. Accounts payable and accrued liabilities increased primarily from vendor payment activity as well as high customer deposits and increased accrued rebates.

Other asset and liability accounts remained relatively consistent. Stockholders equity grew to approximately $371 million as of October 1, 2016, up nearly $18 million from the April 2, 2016 balance.

Joe, that concludes the financial report.

Joe Stegmayer

Many thank you, Dan. And I would just add that we were pleased with the performance in the quarter, although we certainly would have liked seeing our sales tick up somewhat more, but really two things that had the primary effect; one is the impact of Canadian dollar weakness and that certainly affects our business to that country and we do a fair amount of business to Canada typically from our plant specifically in the Midwest and also in the Northwest.

Secondly, certainly, shipments related to the oil industry were down as well from last year. On the other hand, we’re doing extremely well in outpacing industry growth in some of our primary states, Arizona, California, Oregon, Washington, Idaho and so we’re seeing a pretty much consistent growth with the industry in our primary states and where some of the states are somewhat lower, our numbers were somewhat lower as well.

We continued to generate excellent cash flow. Our business model is working well, we continued to expand our points of distribution among retailers and communities and we feel very good about where we’re positioned and we think that the next several months will show return to growth in our sales dollars and we look forward to a good third quarter.

With that, we’ll be happy to take any questions.

Operator

[Operator Instructions] Our first question comes from Dan Moore with CJS Securities. Your line is now open.

Robert Magic

Good afternoon. This is actually Robert Magic filling in for Dan today.

Manufactured housing shipments in Texas has been lagging the industry average for several quarters now, how much of that reflects a delayed impact in the declining oil and gas activity or are there other factors that might explain that softness and kind of when do you expect manufactured housing shipments impact [indiscernible]?

Dan Urness

Right. So the industry doesn’t really have numbers on where the homes are going or what they're used for ultimately, but -- so there's no real hard stats that are available in that regard.

But certainly we know from our own experience and talking to others that our business with -- related to not only oil worker and petroleum related worker housing, but also some typical single family home or for people living in those areas, that volume is down somewhat as well. We do think that there's an opportunity for that to improve as oil prices increase and they have recently, so but we don't expect it to come back to levels it was this time last year any time soon.

Meanwhile, the demand for homes in Texas for single-family residential is stable to somewhat improving and actually we expect that Texas will be a fairly stable market going forward. I don't expect it will see significant growth in shipments, because they have been the strongest state.

So the comps are very difficult, but I think shipments will be good and our performance impact [Technical Difficulty]

Robert Magic

Thank you. And has there been any noticeable changes in financing or the availability of credit for the typical manufactured home buyer?

Dan Urness

No. We would not say there's been any significant changes, I think the same basic finance companies are still involved in the business, no one new has entered.

The GSCs that is Fannie and Freddie Mac are still contemplating some involvement in manufactured housing to meet their affordable housing needs and criteria. But nothing specifically has happened in that regard.

So basically steady as you go in the financing sector. For land home traditional mortgages, financing does not appear to be a real issue.

There are a number of banks and other lenders who are doing traditional land home mortgages for manufactured housing. There's some issues from time to time on appraisal matters and comparables that sometimes present some more challenges than maybe we would cite those homes, but by and large, land home mortgages are available.

The challenges of home only mortgages are where the constraint exist to some extent, but no more so than has been and recently in the last couple years.

Robert Magic

Thank you. And just the last one from me.

Industry shipment growth has gradually improved over the past few years and then this year, obviously it accelerated in the first half and it’s slowed since. Where are we in the cycle I guess from your perspective and what's your outlook for growth for the remainder of the year and into 2017?

Dan Urness

Well, we've maintained that our expectation for calendar ’16 has been about a 10% shipment growth and we expect that the industry will probably commence somewhere around that might better it slightly. And then in to 2017, we're looking at the same sort of growth because we don't see any particular catalyst that will reduce that growth rate at this point nor do we see any major changes that should increase it more.

We tend to be conservative in those assumptions and I think there's certainly some upside, but until people feel more comfortable with the economy and we start seeing the 55 plus demographic open up there for us to buy more homes, and until we see housing in general improve, I think we’ll be at this kind of modest growth. But I think it provides opportunity for us to show good growth and to continue to generate cash as I mentioned and to look at possibilities for expansion.

Operator

[Operator Instructions] And our next question comes from Michael Conti with Sidoti. Your line is now open.

Michael Conti

Just question with, I FEMA is ordering a bunch of manufactured homes in place of trailers just for some of the flood victims down there in the south, is the expectation that you guys just see any benefit from that and if so when?

Joe Stegmayer

So for the benefit of others that what Michael is referring to is, does FEMA does traditionally order a manufactured factory build units for emergency housing and they're doing so now after both the problems well. Continuing issues in Louisiana and most recently of course hurricanes in the east coast.

We did - we are not a contractor with FEMA and we do not choose to be because we did not want to tie up potentially our capacity and prevent our service - our timely service to our longstanding customer base. Because when FEMA want homes they want them very quickly and typically that means we have to put off home production for your other customers, your traditional customers [indiscernible] in fact that's what the contracts generally dictate We will however get some FEMA as a subcontractor, FEMA has asked us to help to see if we can produce some units and so we're working with others who have contracts with FEMA to be a subcontractor.

So we will see some production but again we want to be careful that we don't delay deliveries to our long time royal customers, but we do want to try to help out obviously for these hurricane victims, so we'll be producing some. And with respect to timing we'll see some of that in the third quarter.

Michael Conti

And I imagine some of those homes are more of the entry level lower margin type homes?

Joe Stegmayer

They're fairly basic homes, yes, they're smaller in size and pretty basic in amenities as you might imagine. They're fairly solid sturdy home obviously used to be so they can move them around repeatedly and so there's - that changes the price point upward a little bit.

So I would say your statement is correct. It's not a higher end price point unit but it's a unit that it can be modestly profitable for us.

Michael Conti

And then, with the operating margin performance on the factory house side, what drove that 80 basis point increase? Did the product mix or is it easier comp year to year and how should we think about going forward?

Joe Stegmayer

Dan, do you want start with that, because I didn't quite hear the question on my end.

Dan Urness

Sure, I’d be happy to. With respect to the operating margin improvement, it's a function of a couple of things, we had a positive increase - slight positive increase in the gross margin from our product mix this quarter but that was also combined with better SG&A leverage.

And so those two combined are really what drove that, but I really appreciate how you phrase that it's fairly modest increase but it's an increase and going the right direction as we expect.

Joe Stegmayer

I think Michael too, this quarter demonstrates that we’re able to control cost quite well. Dan mentioned SG&A as percent of sales is actually down slightly.

So we're pretty fast to reacting to any even subtle changes in production and sales.

Michael Conti

And then just turning to capital spending, can you just give us some insight there what's it being used towards, is it more increasing efficiency where existing assets or also how should we think of CapEx following for the rest of the year and maybe next year.

Joe Stegmayer

I'll take the first part, Dan can take the other. Our CapEx is generally used to either help increase production levels at plants, obviously sometimes the replacement of worn out components and machinery, but primarily what we've been spending for is to add equipment to try to bolster production and in fact also to try to make the production process somewhat better ergonomically for our workers.

So we are installing lift devices and other carriers that would try to take some labor component, the heavy labor component out of the construction. So, we continually look at ways to do that.

That's primarily the CapEx would do.

Dan Urness

And also Michael, the run rate right now on CapEx is right around $6 million per year.

Michael Conti

And then just last one with respect to M&A. Are you seeing any other opportunities with other manufactured housing builders or just mom and pop shops that are either available to be acquired, are there any I guess geographic areas that you hope to get better exposure to, some of the areas that are seeing, I guess accelerated growth or faster growth in the industry over the next three to five years?

Joe Stegmayer

Well, there are certainly some markets that we are not involved in that it would be - would make sense for us to consider being involved in. The question really is do we find the right partner that can fit our culture and our style and also has distribution in their market.

it's fairly easy in this industry to start a plant, the real issue is what the reputation of that - of an existing operation might have in the market, what their market share is, what their form has been over longer term. And they're good quality companies out there, independent and smaller sized company.

And so certainly, we have an interest in continuing to look. We don't have anything at this point to talk about but we'll certainly continue to look.

And it's always been our objective to grow from a geographic standpoint which we've been doing certainly over the past eight years significantly. And also look continually at a product line expansion we might look at, that is a code modular and our the RV side, our park model business.

And so we look at the opportunities [indiscernible] some particular operation might have some capabilities that we don't have or strengthen capabilities in certain area. Now is the case with our Chariot Eagle acquisition last year in Florida builds park models primarily to strengthen our position in the park model business particularly in the East Coast.

So you look for kind of fillings like that as well.

Operator

Thank you. And I'm showing no further questions at this time.

I’d like to turn the conference back over to Joe Stegmayer for closing remarks.

Joe Stegmayer

Well appreciated those of you who have joined the call today and we look forward to talk with you in a few months and expect that to be a good discussion and if there are any follow-up questions, feel free to contact us. Thank you very much, have a good day.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program and you may now disconnect.

Everyone have a great day.

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