Cavalier Homes Q3 2008 Earnings Call Transcript

Oct.22.08 | About: Cavalier Homes, (CAV)

Cavalier Homes (CAV) Q3 2008 Earnings Call October 22, 2008 9:30 AM ET

Executives

Mike Murphy - Chief Financial Officer and Principal Accounting Officer

Bobby Tesney - Interim Chief Executive Officer and President

Analysts

Kathryn Thompson - Avondale Partners

James McCanless - FTN Midwest

Michael Correlli – Barry Goodwin Associates

Bruce Baughman - Franklin Templeton

Ralph Marash - First Manhattan

Operator

Welcome to the Cavalier Homes third quarter 2008 results conference call. (Operator Instructions) It is now my pleasure to introduce your host, Mr. Mike Murphy, CFO of Cavalier Homes. Thank you, Mr. Murphy. You may begin.

Mike Murphy

Thank you. Before we get started, I need to read the following statement: during the course of this conference call, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. We caution you that such statements are only predictions and that actual events or results may differ materially from those included or contemplated by the statements.

We refer you to the documents the company files from time to time with the Securities and Exchange Commission, specifically the company’s last Form 10-K and quarterly reports on Form 10-Q. These documents, including the section in the 10-K entitled “Business Risk Factors” and the safe harbor statement appearing on page 30 describe important factors that could cause the actual results of the company’s operations to differ materially from those contained in or contemplated by our projections or forward-looking statements.

In addition, the information given in the statements made in this conference call are current and reflect our views only as of the time of the conference call, October 22, 2008, and not of any subsequent time or event. We disclaim the responsibility to update any forward-looking statements or other statements or information as a result of developments occurring after this conference call.

I would like to take a second to introduce Bobby Tesney, our Interim President and Chief Executive Officer. Bobby is an Alabama native. He has been a director of Cavalier Homes since 2003 so he is familiar with our company and has served as Audit Committee Chairman most of those five years. He has financial and manufacturing background in the furniture industry in both a private and a public environment.

Bobby.

Bobby Tesney

Thank you, Mike. I appreciate this opportunity and the confidence our Board of Directors has placed in me to help guide us through this difficult time in our industry. As I am sure you all know and can appreciate the tightening credit standards, fluctuating material prices and the ongoing crisis in the financial market makes predictions about the future of manufactured home sales very difficult.

Based on information from MHI, home sales in the month of August decreased 24% from August of 2007 with shipments of single-section homes down 18% and shipments of multi-section homes down 27%. On a year-to-date basis, industry-wide home shipments are down 10%.

The press release we issued on August 18th announcing the change in management mentioned that this change was needed to provide a new direction for Cavalier. Overall the new direction is a fresh look at Cavalier and how it operates. Our team will focus on the revenue opportunities with a goal of getting at least our share of the market. However, our team will also continue to look at the way we do business and to right-size our company based on market conditions as we see them.

I would now like to turn the call over to Mike for his review of the operating results for the third quarter.

Mike Murphy

Thanks, Bobby. As usual, I am going to try to give some color to the press release. There will be a lot more detail in the 10-Q which we will file either Thursday or Friday of this week. Overall, almost any comparison of 2008 to 2007 is favorable; that is, any individual quarter or the year-to-date numbers are all pretty much favorable. If you compare the third quarter of this year to the third quarter of last year cash is up, inventories are down, gross margin improved a ton, SG&A expenses are down significantly. Even though we are reporting a loss of $168,000 it compares favorably to last year’s loss of $2.7 million in the quarter.

You might recall in the third quarter of last year we had a really hard time in the early production of MEMA product. The one negative is our revenue is down about $12.7 million for the quarter compared to last year.

One other note, during the quarter we were able to sell a small idle facility here in Alabama for a small profit and it eliminated about $30,000 of carrying costs annually.

The year-over-year comparison is also favorable, all in the same areas except revenue was down 11%, or $18 million. But the best comparison is that last year for nine months we lost $7.5 million and this year we are reporting a profit of $1.2 million so not all bad news.

A couple of words about gross margin. Compared to last year’s third quarter our gross margin was up from 11.7% to 18.9%. A big improvement from the last year and there are really two things in there. One was we didn’t have the MEMA that we really struggled through last year in this quarter. But in addition to that, for the third quarter of ‘08 we’ve had better labor efficiency. We are beginning to see some stabilization in some raw material prices so it kind of eases the pain a little bit.

The third quarter’s 18.9% gross margin was the same as Q2 even on $6 million less revenue. Additionally, we are experiencing some higher sales allowances to sell product almost to all of our markets, that’s pretty current. In recent weeks, our raw material prices have been mixed. For example steel, copper and panel products are down a little, steel just happen this week, adjusting the steel up a little while shingles continue to rise. Lumber has remained stable over the last couple of months, to give you a feel for that.

On average our home selling price for the third quarter was down about 2.2% from last quarter, that’s the second quarter, and that excludes any MEMA production or sales. The change is all product mix driven. We have not had any price decreases, but some of those dealers were finding a lower priced product to meet their price point demand.

To review SG&A a little bit, the year-to-date comparison ‘08 to ‘07 shows a decrease of $4 million SG&A. There are really two major reasons for that. One is a $1.7 million lower people costs, that’s wages, benefits and that was driven primarily by two plant closings compared with last year. Lower levels of dealer support cost, about $2.2 million including some trade shows that we either didn’t go to or they weren’t held and some other dealer promotional items.

When you compare 3Q08 to 3Q07 the decrease is still pretty substantial, $1.3 million. There are really four items included in there. The same people costs of salaries, wages and benefits of about $800,000 and that has to do with both plant closings and some overhead reductions. Lower levels of dealer support, including trade shows, of $711,000. We have a reduced audit and accounting cost of $132,000. Those were offset by an increase of $600,000 of severance which was mentioned in the press release.

When you compare a more current comparison, when you compare 3Q08 to 2Q08 the news is still pretty good. The cost is actually down $845,000 and that’s again wages, salaries and benefits $870,000; $400,000 for the dealer costs and that is offset by $510,000 of the change in severance costs. So, SG&A, still room for more work as always, but the results have been okay.

On the interest expense line, a $47,000 reduction in interest expense for the third quarter of this year compared to last year is really based on last year we had $8 million worth of debt outstanding to support the MEMA production, so it is really less debt.

For the quarter the other net line is all interest income of $150,000. The 3Q08 to 3Q07 comparison of $150,000 versus a $122,000 reflects higher deposits but at a lower interest rate. The change in earnings of equity method is due to last year’s sale of one of the entities, there wasn’t a big change in that.

A couple of words about repurchases. During the quarter we didn’t have – that is good news, although for the first nine months we’ve had ten homes compared to last year for the first nine months there were 14, so not huge numbers there. However, we do have three dealers that are currently in repurchase for a total of nine houses. Not big numbers but still there is a little activity there and they are spread out. There is one dealer in Louisiana, one in Florida, one in Georgia.

Our total contingent liability, that is product that’s on dealers lots that is covered by a repurchase agreement. At the end of the quarter it was $55 million, that’s down from $60 million last year at this time and that really reflects the overall reduction of our dealer inventory. The dealer inventory is down to $78.4 million from $83.9 million at the end of last quarter.

Also at the end of the quarter we had about 315 dealers with Cavalier product; that is down slightly over the last few quarters. Our exclusive dealer locations, there are 55 of them which are down from 57 last quarter and those two remain Cavalier dealers, they just are not exclusive any longer. Sales to our exclusive dealers were 51% compared to 52% last quarter and that of course excludes MEMA. Those numbers have been around 50% for the last couple of years, three years.

There are some comparative shipments stats, this is based on floors. The first one is nationwide and its HUD code only. Floors nationwide, HUD code only. NHI’s shipments are down 12.9% for the eight months which is all that is available, and our business was down 9.8% so we compare a little bit favorably there.

For shipments in our core 11 states which is 93% of our business this year, again HUD code only for eight months NHI is down 4.8% and we are down 6.5%. As you might expect we only had three states that had positive increase in shipments for the nine months over last year: Louisiana, Tennessee and Mississippi. Mississippi without MEMA would have been about even.

Some market share information again, this is HUD code only based on floors, our market share for the first eight months in ‘08 was 4.7% and that compares to 4.5% for all of last year, so we are still hanging in there on that. In our core states, again 93% of the HUD business, HUD code only based on floors for eight months is 9.5% and that’s about the same as it was for all of last year.

Modular business information, there is not much news about that except its down. Last year at this time it was about 10% of our business, this year its about 5%. Financing for that product is in hard times, even at today’s level 60% of our modular production is in North Carolina.

Product mix based on units for nine months our multi-section were 59% and 41% for singles; without MEMA it would have been 65%, 35%. NHI for eight months is 64%, 36%. So if you take MEMA out we are about where the market is.

A couple of words about our workforce. The workforce at the end of quarter was down 36% from last year. The third quarter was down 19% from Q2 this year, that’s 260 workers and that really reflects our continuing work to adjust our capacity to demand.

Production backlog for the third quarter our production averaged 25 floors a day, that’s down from 30 for Q1 and Q2; 25 floors a day represents 46% of practical capacity. So far this quarter – and that was through let’s say 16 production days -- we have averaged 23 floors a day which is about 42% of capacity. Our current backlog is less than a week which is the lowest it’s been in a while and it’s a little over $3 million worth of sales value.

With respect to inventory on our balance sheet, when you compare total inventory on our balance sheet this quarter to the same quarter last year we are down $6.8 million, a pretty good improvement there and that really is especially driven by the two plants that we closed during the fourth quarter of ‘07.

The total inventory at the end of quarter versus last quarter is actually up $750,000 and that’s really based on our supply division importing in advance of demand, a temporary situation. A couple of words about liquidity. We ended the quarter with $23.4 million in cash, up from both $10.8 million at the end of the same quarter last year and $20.9 million at the end of last quarter, so cash is hanging in there pretty good.

$9.6 million in accounts receivable at the end of the quarter did not include any MEMA, all the MEMA was paid during the quarter. The balance of MEMA was paid during the quarter. You will get a little bit more detail on cash when we file the Q.

Our working capital has been around $24 million for the last three quarters, no real change there. Our CapEx for nine months is only $348,000 the lowest I can ever remember, compared to last year’s $2.165 million. The current plan for CapEx for the rest of 2008 is we are only going to spend what is necessary for health and safety reasons.

Depreciation expense for the first quarter is $1.593 million compared to last year’s $1.731 million, down a little bit. I expect that total depreciation for the year is going to be about $2.1 million.

A little bit about debt. At quarter end we had total long-term debt of $3.758 million; that’s down compared to last year in the same quarter, down by a $1.050 million and that was really primarily scheduled payments during the year.

Additionally last year at the end of the quarter we had $8 million outstanding under the revolver which of course is not outstanding this year. Also at the end of this quarter, we reclassified $500,000 of long-term debt to current which related to the call over at IDB we have outstanding. Due to recent market uncertainties our bank was unable to re-market the bonds as they have for last ten years. So based on the bond documents the remedy of the bank is to call the bonds, which the bank has done with a payment date of January 5th.

With that I will turn it back to you for some Q&A.

Question-and-Answer Session

Operator

Our first question comes from Kathryn Thompson - Avondale Partners.

Kathryn Thompson - Avondale Partners

You said that backlog was a little over $3 million. What was it last year? Of last year’s number how much of that was MEMA?

Mike Murphy

I don’t know if I have that handy, I can get it for you. I know that at the end of the third quarter we had several hundred MEMA units in the backlog. I don’t know the answer to that. It was more than a week, I’m sure.

Kathryn Thompson - Avondale Partners

I meant for last year. I’ll follow up after the call.

Mike Murphy

That will be fine. Sorry about that.

Kathryn Thompson - Avondale Partners

No problem. Just stepping back, taking a broader look, how have your volumes trended sequentially since the quarter end? In other words, how meaningful has the impact of the economy affected your unit order?

Mike Murphy

I will take a shot at that one. The backlog on $3 million you are talking about three or four days at the end of the quarter and I can tell you it hasn’t gotten better. Every day has been a struggle to get those orders. We’ve had some plants that have missed some days, but I don’t know that we’ve had a significant decline from quarter end on that. Business is really hard, in case that hasn’t come through.

Kathryn Thompson - Avondale Partners

Yes, loud and clear. Shifting over to the finance side, any status changes on inventory financing trends?

Mike Murphy

We’ve heard from one lender that they are going to cut dealers floor plan to LIBOR instead of prime, which is going to mean a pretty good increase in their monthly interest but we don’t have but one lot, so we don’t have firsthand knowledge of that.

I did hear from one finance company, two weeks ago now I guess, that called and said that they were raising their retail rates, this is a chattel lender, primarily.

Kathryn Thompson - Avondale Partners

I heard that too.

Mike Murphy

They are raising their retail rates 200 basis points and expect retail volume to tail off pretty good, but that’s the only thing I’ve heard.

Kathryn Thompson - Avondale Partners

That is pretty much the top independent financier, is that correct?

Mike Murphy

Yes.

Kathryn Thompson - Avondale Partners

Any word on your outlook for next fiscal year?

Mike Murphy

We are having a hard time predicting next week. Now there is just no visibility. There is nothing that I can see in the short term that would give you any reason to know whether it’s up, down or sideways.

Operator

Your next question comes from James McCanless - FTN Midwest.

James McCanless - FTN Midwest

If you back out the MEMA results this year and last year, it looks like the price per floor on your regular business has actually gone up. I wanted to see if those price increases with the raw material declines you discussed, are they sustainable going forward? What’s been the pushback from dealers so far on that?

Mike Murphy

What we are going to do is to keep that there as long as we can. But really we price a lot like other people do, that’s with a material surcharge which tries to track raw materials. We will have to look at that weekly or every other week, or something like that. I don’t know if that’s going to hold, depending on what happens to material.

James McCanless - FTN Midwest

Switching over to modular for a minute, with modular seeming to get worse every quarter, what is the current thought about potentially closing more plants, getting out of modular? Can you give us a sense of what you are thinking there?

Mike Murphy

What I said on there was that most of our modular is North Carolina and today they are used to building both HUD product and modular product. Honestly we don’t want to turn down an order for either one today. As long as there is some reasonable business factored in the mods we are going to try to build it; I don’t see us getting out of that business, there is not nearly much demand down here, as there is in North Carolina for it. I mean even at 5%, 5% is 5%.

Bobby Tesney

We are still running about two mods per day in the Nashville facility right now.

James McCanless - FTN Midwest

You were also saying Mike about the financing for mods is getting more difficult. Is that just a function of site built financing in general getting tighter?

Mike Murphy

I am truly no expert on that but I think that business is really going away with subprime.

James McCanless - FTN Midwest

You talked about Louisiana, Tennessee and Mississippi being the stronger states in the quarter. Has that continued into the fourth quarter and are any other states showing strength right now?

Mike Murphy

I don’t have any information on that after the end of the quarter. I kind of live and die off of those quarterly numbers. We’ve only got 16 production days after that with virtually not much backlog. So, if it’s happened I don’t know it yet.

Bobby Tesney

We’ve seen no change.

James McCanless - FTN Midwest

With the amount of net cash that you have now on the balance sheet, any thoughts potentially repurchasing shares, giving some cash back to shareholders?

Mike Murphy

We’ve talked about that from time to time. That is really a board decision and I am sure that the next meeting at least there will be some discussion on that, that’s really not something I can address here. I don’t know of any move to do it or not do it.

Operator

Your next question comes from [Michael Correlli – Barry Goodwin Associates].

Michael Correlli – Barry Goodwin Associates

You said you had a sale of a small facility. What kind of proceeds and was there any kind of a gain in the quarter related to that?

Mike Murphy

A little over $20,000 and we actually got a 5% down payment and are carrying a note, a 6 3/4 % note. There will be more information on that I think in the Q.

Michael Correlli – Barry Goodwin Associates

So $20,000 was that a gain?

Mike Murphy

It was a gain.

Michael Correlli – Barry Goodwin Associates

Where was that?

Mike Murphy

It’s in SG&A.

Michael Correlli – Barry Goodwin Associates

So the 5% down, how much was that?

Mike Murphy

Should I say that, I wonder? Probably not. The guy that bought it probably doesn’t want the price published out there, but it would have been $25,000 or $30,000.

Michael Correlli – Barry Goodwin Associates

I think you had a couple of other plants for sale, any status on those?

Mike Murphy

We from time to time have tire kickers and people that would give us contracts and then back out and all that. We may have one that we are working on at one of the plants, but really until the money goes hard until it closes there is really no conversation much about that. We are actually marketing both of the big ones, one in Georgia and one in Conway, Arkansas. We are actually working on it.

Michael Correlli – Barry Goodwin Associates

I just had a strategic question. If you look at the company stock price at $1.20, you have over $1 a share in net cash, a $2.79 book value and you are doing a nice job here, you’ve got your costs right-sized. You managed to actually reduce the profit before your severance costs in this quarter which was a pretty bad quarter for the industry. And obviously the stock market just doesn’t really care because you are such a micro cap stock and your trading volume, liquidity and all that stuff. What’s the strategy for the company longer term in order to really get some value for shareholders?

Bobby Tesney

It seems like you have asked that recently again, haven’t you? I think that if there is anything working on that the board has got to look at it. I don’t know that there is anybody that’s out kicking tires with us today, but any of those alternatives that come up, we’ve got an obligation to review them and look at them whether it’s buying or selling either one. That is really all I can say about that.

Operator

Our next question comes from Bruce Baughman - Franklin Templeton.

Bruce Baughman - Franklin Templeton

The estimated warranties line has become a bigger number on the balance sheet as some of the other lines have shrunk. Can you give us a feel for what the actual liquidity demands might be coming out of that line as we go forward?

Mike Murphy

In the broad-brush picture the way that works is that our warranty, although it’s a one year limited warranty, doesn’t start until our dealers sell at retail. So that liability is generally -- I use the term loosely -- generally paid out over seven or eight quarters with the first two quarters after its retail sold being heavier than the remaining five.

Bruce Baughman - Franklin Templeton

To get an understanding of how the actual estimation and liquidation process works on that, if you said theoretically there were no more sales, let’s say theoretically there were no more sales with any warranty on them, would you expect actual cash payouts of $11.2 million over the next seven or eight quarters and this line coming down to zero?

Mike Murphy

I would. Now we do a lot of that service with our own technicians. I mean it’s not like we are paying somebody else to do it, generally. We do pay other people to do it, but we actually have employees that do most of that. That’s the theory. Yes, sir.

Operator

Our next question comes from Ralph Marash - First Manhattan.

Ralph Marash - First Manhattan

The buyer of the plant that you just sold, is he going to use it for manufactured housing?

Mike Murphy

No sir.

Ralph Marash - First Manhattan

That’s good. On the finance side, any color there as to anybody exiting or increasing activity?

Mike Murphy

I haven’t seen any. We really just have a couple of outlets for chattel and the rest of the stuff is either Fannie, Freddie or FHA so that’s really it on the finance side, as far as I know, except for local banks which is what a lot of dealers do.

Ralph Marash - First Manhattan

You haven’t seen any change in 21st Mortgage and what they are doing?

Mike Murphy

Other than the change in pricing.

Ralph Marash - First Manhattan

The IRB that comes due in January, I assume you are just going to pay that off?

Mike Murphy

That makes sense. There may actually be some other alternatives, but the amount of it’s really not prohibitive.

Ralph Marash - First Manhattan

The other alternatives would be?

Mike Murphy

I mean there is always a chance the market could settle down, the bank could be able to remarket them like they have done for the last 10 years or the bank could just treat it as a direct loan.

Ralph Marash - First Manhattan

The interest rate on that?

Mike Murphy

The interest rate when it was a low floater was around 3, the interest rate today is prime; I don’t know what it would be if we decided not to pay it all. If we could work something else out. Bob you can correct me if I am saying something I shouldn’t over here, but I believe that our plan is for $610,000. We will pay that puppy off.

Ralph Marash - First Manhattan

Given the cash on the balance sheet, that sounds like a good idea.

Operator

We have a follow up question from James McCanless from FTN Midwest.

James McCanless - FTN Midwest

I don’t know what the status is right now of Patriot Homes bankruptcy, but are there any market opportunities for Cavalier as a result of that?

Mike Murphy

Yes, we are working on that now as we speak. We are addressing those customers to try to pick up that volume.

James McCanless - FTN Midwest

How much overlap do your products have with what Patriot was selling? I know that you all have low to mid and I don’t know where the Patriot was, mid to high, or can you give us a little color there?

Mike Murphy

I think the facility that is here in Alabama is pretty much a competitor. I think we build about what they build or in the same price range, anyway.

Bobby Tesney

I think we are direct competitors.

Mike Murphy

At least that one plant. I don’t know how much we compete with the one in Texas, but we probably don’t have any relationship with the one in Indiana, or the two in Indiana, whatever they had left.

James McCanless - FTN Midwest

Since you did say that you are going to have to do some repurchases, potential repurchases this quarter, what does the rebuild market look like at this point? Is financing available, is there an active market, just a little color there?

Mike Murphy

What we found is the only real way we have to judge that is what we have to do to resell those. I mean those are new houses, it is not like they have been lived in or anything, they are new homes which we have to generally find a dealer in the same area to sell them.

It depends on the age of the house, if the house is let’s say 18 or 20 months old, our repurchase agreement allows us to take a pretty good size credit where we don’t get hurt to bad on it. If it is a fairly new house, generally under 12 or 14 months, we will end up buying it back, what we paid for it. It’s just a function of who is in the area and what you can sell it for. In decent times it is going to cost us 20% or 25%; in hard times it is going to cost us 30% or 35%.

Occasionally you’ll get one that does better than that, but it just depends on what you buy it back for. But it’s not a huge issue today unless it is in an area where you don’t have any dealers.

James McCanless - FTN Midwest

But that’s not the case with these that you are having to buy back?

Mike Murphy

No, no.

Operator

Mr. Tesney, there are no further questions in the queue at this time. I would like to turn the floor back over to you for closing comments.

Bobby Tesney

Mark and I thank each of you for your interest in Cavalier. We look forward to talking with you on our year end call in February and I hope everyone has a good day. Good bye.

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