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Cavco Industries Inc. (NASDAQ:CVCO)

F3Q09 Earnings Call

January 30, 2009 11:00 am ET

Executives

Joseph Stegmayer – Chairman and Chief Executive Officer

Dan Urness – Vice President and Chief Financial Officer

Analysts

David Walsh – Avondale Partners

James McCanless – FTN Midwest Securities

Michael Corelli – Barry Vogel & Associates

Dax Vlassis – Gates Capital Management

Jeffrey L. Gates – Gates Capital Management

Michael Ware – Praesidium Investment Management

(Operator Instructions) Good day everyone, and welcome to the Cavco Industries Incorporated third quarter fiscal year 2009 earnings call and webcast. Today's call is being recorded. At this time for opening remarks I would like to turn the call over to the Chairman and Chief Executive Officer, Mr. Joseph Stegmayer, please go ahead sir.

Joseph Stegmayer

Thank you, [Gwen]. Welcome everyone. We reported the results of the third quarter ended December 31st 2008, yesterday and they were posted on our Web site cavco.com, and of course widely available on other public domains.

The figures that Dan will give in a moment represent our poorest performance for any quarter in nearly six years as a public company. We are certainly disappointed with the results. We believe that we’ve always prepared our company to expect the unexpected. We think that we are nimble and that we can quickly adjust to market demands and changing environments and we feel our product line is very competitive and our distribution base is good.

Still there’s only so much a team can do when faced with the unimaginable events in the economy that we have witnessed and the resulting freefall in consumer confidence. In Arizona, for the three month period ended in November, the latest period for which industry statistics are available, industry-wide shipments of factory-built homes were down 33% from the prior year period, which was at that time the lowest shipment level in some 15 years.

For California, the shipments were down 45%; these states represent our two largest markets. In Texas, our third biggest market, shipments faired is better; however, they were still 13% less than the previous year period.

Even for those buyers who do not lack confidence, consumer financing is a big challenge. Those that can qualify often face long lead times to get approved and to close their loan, and a new and significant development occurred during the quarter, and that was the announcement by Textron Financial Corporation, one of the major providers of home inventory lending to retailers and developers, that they intend to cease lending operations by the end of next month.

While there are other sources of lending for the distribution chain, this exit is expected to adversely affect the ability of some retailers to buy homes for resale, which could have a negative impact on the industry as a whole. We’ll discuss this more later during the call.

And before Dan reviews the numbers, I wanted to state that our people have done an extraordinary job steering the company through the myriad of problems we all face. They’ve been steadfast in their commitment to customers, and to the company.

We’ve had to make some very difficult decisions, including reducing our team via attrition and some lay-offs. We have consolidated or eliminated some positions to bring operating expense more in line with current business levels, and while further adjustments maybe necessary depending on the economic environment, we have and we will continue to affect these changes without compromising our ability to custom design homes, to introduce new models, to support our retailers, and to service our home buyers.

Dan, please review the numbers, if you would.

Dan Urness

Thank you, Joe. Cavco’s net sales for the third quarter of fiscal year 2009 were down 21% to $25 million from the prior year’s Q3 net sales of $32 million. That’s on a 20% decline in module shift, while the average selling price per floor was relatively flat, with prior year at $26,535.

The company’s gross profit margin for Q3 ’09 was $2.7 million, or 10.6% of net sales, versus $4.6 million or 14.4% of net sales for the third quarter of last year. The margin decrease was principally from reduced production efficiencies we are experiencing at our current low production levels, with capacity utilization just under 50%.

The company operated with a minimal backlog throughout the quarter and the backlog of orders was negligible as of December 31st 2008.

We successfully reduced our selling, general, and administrative expenses for the quarter by $464,000 to $2.9 million, compared to last year’s third quarter SG&A of $3.3 million. As a percentage of net sales, SG&A was 11.4% in Q3 ’09, versus 10.4% in Q3 ’08.

Interest income was lower by $532,000, mainly the result of generally lower interest rates from the company’s investments in U.S. Treasuries. The current income tax benefit is the result of the current quarter adjustment for excess tax expense in prior quarters and the true up to our recently filed tax return for fiscal 2008.

For the nine month period ended December 31, 2008 and 2007, the effective income tax rate was approximately 32% and 30% respectively. Fiscal 2009 third quarter net income was $110,000 or $0.02 per diluted share, compared to $1.4 million or $0.20 per diluted share last year.

In comparing our balance sheet at December 31, 2008, to March 31, 2008, our cash and cash equivalents balance increased over $500,000 to $74.1 million, from $73.6 million at the beginning of the fiscal year.

Trade receivables are down nearly $2.4 million, compared to the beginning of the fiscal year, resulting mainly from lower sales volume. Inventory is approximately $600,000 lower, by reduced work in progress levels and finished goods units.

PP&E is up due to the $537,000 purchase of a retail sales lot in New Mexico, which we previously leased. This is the location of an existing company owned retail outlet.

Trade payables are roughly $1.8 million lower and there is a limited purchasing activity during the plant holiday shutdown at the end of the quarter.

Accrued liabilities are down by almost $3.3 million, largely the result of a $1.4 million reduction in salary, wage and benefit accruals, and a $1.4 million drop in customer deposits.

The balance sheet maintains adequate liquidity and continues to be debt-free, positioning us to provide options to retailers affected by recent fall-out in the manufactured home inventory finance arena, which Joe will mention further during his comments, Joe.

Joseph Stegmayer

Thanks, Dan. So the good news is that we are solidly positioned in markets with good, medium and long term potential. Sure they are very difficult now, however, consider that in addition to the large number of traditional land and home private site home sell opportunities in California and Arizona, states with growing populations, those states also have a large number of land lease communities, planned specifically for factory built homes.

For example, California has more than 4,700 communities with nearly 400,000 home sites. Re-sales alone in these communities average more than 40,000 homes per year.

Many of the homes three are quite old, often built even before the Federal HUD building code was in action in 1976. These homes will be replaced over time. Furthermore, living in a new low maintenance home in a lifestyle community, is a desirable choice for many people in the large and growing age 55 plus demographic.

The price point of manufacturer-built homes should appeal to an increasing number of buyers as the economy goes through this deleveraging process. The energy efficiency, the ability to build green homes, the flexibility of systems-built homes, and the great value they represent, are among the important factors that merit the consideration to potential home owners.

As the financial market has become more liquid and the economy begins to stabilize, we would expect to see increased levels of consumer interest. This time, people will not be able to buy homes above their means, which should result in our industry eventually advancing towards its historical share of new single-family home sales.

Meanwhile, Cavco is fortunate to be in sound financial condition, as Dan pointed out. We'll use our financial means to support our distribution base as a seek inventory financing solutions. We’ll continue to invest in product development and pursue market share gain opportunities in our geographic areas, and we will judiciously consider expansion, if we can identify an attractive opportunities that are manageable until the general economy and housing markets improve.

And before I open it up going for questions, I inadvertently spared you the disclaimer, which I probably should go back to now, to the beginning of the call, and that is that we are speaking today and we’ll be answering your questions under the umbrella of the safe harbor rules, and these comments that we’ve made and will make in answer to your questions, are forward-looking statements in many cases.

Cavco disclaims any obligation to update any forward-looking statements, and our investors should not place any reliance on such forward-looking statements, because they may not materialize.

With that [Gwen], please open it up for questions.

Question-and-Answer Session

Thank you. (Operator Instructions). We’ll go first to David Walsh – Avondale partners.

David Walsh – Avondale Partners

First off, just thinking about Textron, what percent of the total market did they represent in terms of their floor plan business?

Dan Urness

Well, that’s somewhat hard for us to determine, probably a better question for them, but I would think that they were in the 30 plus percent range.

David Walsh – Avondale Partners

Okay.

Dan Urness

But it’s kind of a tough number to get to David because there are e there have been generally three major or specialized lenders to the industry, but a lot of distribution in this industry find other sources that are not really countable in the database. That is they are financing through their local bank or they’re using other credit lines they might have, and they’re not using the specialized floor plan lenders.

So that number reflects – that I just said – reflects what the specialized lenders have in assumed outstandings, not the total amount of floor plan that might be going on in the industry.

David Walsh – Avondale Partners

Sure, and have you gotten a sense then if some of the other sources, like local bank or a credit unions, are they picking up some of the slack proverbially in the industry? Or is it, is that capacity just going away entirely?

Dan Urness

No, I think definitely many retailers and distributors are turning to their bank relationships or establishing credit lines. So yes, I think some of that void is being picked up by other sources outside the traditional lenders ,and some is being picked up by, I think by other – the remaining floor plan lenders in some cases.

David Walsh – Avondale Partners

Looking at your cash balance it was down slightly from the second quarter, was that due to a timing difference with just payables or is that – was there an actual operational cash burn in the quarter?

Dan Urness

That was mostly due to the fluctuation in the balance sheet line items, operating accounts. At these low levels of operating income though, we're more subject to – and we’re going to have a larger change in our cash flows, due to just the fluctuation of the accounts.

David Walsh – Avondale Partners

Okay and how should we think about the tax benefit in the quarter on a go forward basis? Is that something that we expect to continue, or what should we use or be thinking about, as a more normalized tax rate?

Dan Urness

A more normalized tax rate going forward is going to be in the high 30s.

David Walsh – Avondale Partners

Okay.

Dan Urness

So no, this wouldn’t be expected to continue.

David Walsh – Avondale Partners

All right, and is – are we reaching a circumstance where you would see the need to potentially impair the goodwill on the balance sheet?

Dan Urness

Well, we’ve looked at that as we always do. We have scheduled time that we look at that annually, per the GAAP standards, which is at the end of our fiscal year, upcoming March 31, but given the stock market in general has decreased, and our market capitalization has decreased, we’ve watched that and so we’re going to continue to watch that going forward, but we haven’t taken any steps in that regard at this point.

David Walsh – Avondale Partners

Okay. All right, and what are you seeing in terms of raw material prices and just any color that you could give there would be helpful?

Dan Urness

Raw material prices have, in some cases have come down. It’s been still a mixed bag. We’re certainly not seeing the pressure, the upward pressure that we saw as an industry the last several years that has subsided. But it doesn’t mean that some vendors have not been asking for price increases, some have been able to achieve them.

Others have had to roll back or not get the increase that they had anticipated. Obviously, for builders like ourselves, we’re not able to really get price increases up either in the market place, so we’ve had to work with the vendors on not taking some increases, and on making other adjustments. I would say on balance, it’s kind of a draw at this point.

I would expect it might some opportunity to see some further softening. Obviously, steel pricing has come down, which should affect not only the steel we buy directly to build the homes, but obviously to, the steel involved in a lot of the component parts we buy.

So copper is down, so wiring should eventually come down, but some of these things take a while to get through the pipeline we’re told. So they don’t come down quite as fast as they seem to go up, but we do expect some additional relief in the months ahead.

David Walsh – Avondale Partners

And looking back over the third quarter, was there any variation in sales trends on a month-to-month basis, or was it fairly consistent over the quarter?

Dan Urness

I would say it was fairly consistent, it was increasingly weak during the quarter but that’s – number one, that’s not too unusual, December is always a very slow month, but in this case December was particularly slow.

David Walsh – Avondale Partners

All right, and then any change since the quarter’s end that you can comment on there?

Dan Urness

I don’t – we don’t make forecasts and such, but obviously business conditions haven’t really changed much. It’s an extremely tough environment. As I said, my comments that consumer's lack of confidence in the environment and the economy is taking its toll on, I think, all sellers of durable goods, and I don’t see that changing in the short-term.

David Walsh – Avondale Partners

All right and then I guess the last question is, given continued weakness in the market and especially in your core markets, at a similar revenue run rate going forward, do you feel like you can maintain profitability, without tax benefits and things like that?

Dan Urness

Well, that sounds like that would be making a forecast to me. We’re certainly going to try our best and, but I don’t think anybody who says they know where this economy is going; I don’t think is in sync. We have no way of knowing what housing demand is going to be.

Typically later in the spring, we’ll see some typical spring buying patterns, but we’ll have to wait and see if that occurs. We’ll have to wait and see if the liquidity issues are addressed by the government, and so the banks start lending a little bit again.

So I think there’s too much uncertainty, we didn’t make these forecasts when times were a little bit more stable, we’re certainly not in position to make them now.

David Walsh – Avondale Partners

All right, great. Thank you very much.

Dan Urness

Okay.

Operator

We’ll go next to James Mccanless – FTN Midwest.

James Mccanless – FTN Midwest Securities

Wanted to touch on the retail distribution finance that you discussed in the prepared text from the release, wanted to find out first, how much of your $74 million in cash your wiling to commit to this effort, and also just some details in terms of, do you get any interest benefit for the amounts that you invest in it? So if you could walk us through the mechanics of it, I'd appreciate it.

Dan Urness

Sure, first I would like to say Jay, that we have a fairly – a more modest floor plan lending balance for our size than many companies in this industry. We find that a lot of the people that we deal with, the developers, plant community operators, even some retailers, have other non-traditional financing arrangements, their banks or equity capital in some cases, so we have a, probably a lower portion of our sales funded through traditional floor plan sources.

Okay, having said that, we do think that, and we are willing to commit some of our capital to support qualified distributors, qualified retailers, with floor plans, and we’re doing this through one program now and in answer to part of your question, yes, we do receive a return on the amount of money we invest in that floor plan.

It's a return based on a slight premium to LIBOR, and we earn that on the funds we employ in that floor planning process, and we by the way, do not do any of the underwriting and we don't do the collection effort. That's all handled by the lender, and they do all the compliance work and so forth.

Beyond that, we're certainly willing to look at committing an increasing portion of our capital to this process. But if you look at our contingent liability for the entire company it's in the range of $27 million. So, as you can see, even if we were to floor all the activity we've traditionally had in that area, it would be a portion of our funds and we don't anticipate flooring all of that activity. Does that give you some flavor?

James Mccanless – FTN Midwest Securities

Yes it does, thank you. I guess the next question is, if you're going to expand the Texas operation and try to grow what you're doing in [Sanger]? Is this part of that strategy or are you mostly trying to do this on the folks in Arizona and California?

Dan Urness

James, when you say do this, do you mean provide floor plan?

James Mccanless – FTN Midwest Securities

Yes, provide the floor plan for the folks in Arizona and California.

Dan Urness

Well, I think we'd do it for any, as I mentioned, qualified retailer. The retailer has to be a good going business operation that we've had a relationship with, and we feel confident in and they have to – they'll have to have some skin in the game, so to speak also. But, yes, we won't do it based on geography; we'll do it based on the need in a particular area and the ability of that retailer to borrow.

James Mccanless – FTN Midwest Securities

In terms of – how does this relate to the buy back that you all have authorized? Are you pursuing this rather than the buy back at this point? Is the buy back on the shelf? What are you thinking about that?

Dan Urness

I think your first comment is a fair one. I think we'll focus on these other needs right now, rather than buy our stock. It's always a possibility, but right now with the rapid changes going on in this industry and in the economy in general, we think it's wise to look at employing this capital within our business operations, and this lending environment is a major one right now.

James Mccanless – FTN Midwest Securities

With Textron's announcement with them exiting the industry, and GE, I guess, doing a little bit of lending, but not much right now, what does that make the used market for manufactured housing look like? Is it more of a threat now than it was three months ago, six months ago? And are you all seeing decent turnover in that market?

Dan Urness

A threat from what standpoint, James?

James Mccanless – FTN Midwest Securities

In terms of competitive threat, people looking at a used unit rather than a new Cavco unit.

Dan Urness

Instead of? I don't – we have not seen any discernable trend towards more used sales activity. I think the issue is more the fact that customers aren't shopping right now, traffic levels, although we've had indication they've increased here recently somewhat, but traffic levels have been very slow.

Buyers are – the buyers that do show up are not acting, they're more looking and waiting, and some of this, of course, in addition to the financing problems also goes back to the issue of trying to resell their existing home in many cases, especially with the 55 and older demographic, where they're looking at changing a lifestyle.

A lot of these people put off their decision based on not wanting to sell their home at current prices, or perhaps not being able to sell it in the timeframes they expected; it's taken longer. I think those are more the issues, and we have not seen the used market for manufactured homes really take place of any new home sales, and I don't think there's a tremendous quantity of used manufactured homes in the pipeline.

James Mccanless – FTN Midwest Securities

My last question, the first time homebuyer tax credit was passed in July of last year. As I understand, it applies for manufactured housing and can be used to buy a new manufactured home. Are you all seeing the lenders, retail lenders in the space getting active with that program, trying to entice people to use that credit to look at manufactured housing, especially with the higher limits now for FHA insured mortgages?

Dan Urness

Right. Certainly we've seen a number of retailers try to promote that, in their advertising on their Web sites. The extent that buyers have used it, we really don't have that data, but obviously the sales activity, the sales level certainly wouldn't suggest it's creating a big wind at our back in terms of sales activity. It hasn't. I think with respect to FHA Title I, that has been pretty slow in taking off.

I think they're trying to get more banks signed on to participating and it seems to have a fairly slow start. Hopefully that'll build steam as we go through the year.

James Mccanless – FTN Midwest Securities

Is there any thought in your mind, of using some of the cash from your balance sheet to finance folks through Title I and getting your FHA certification?

Dan Urness

Well, James, we will and do consider a lot of options, and doing something retail financing is a possibility. We don't have any immediate plans to do what you suggest. Rather, we think we participate with existing finance companies that have the mechanisms in place to handle the compliance issues, and the servicing operations, and the conduit for selling those loans. So I think we probably would be more apt to team with somebody, than to start it ourselves.

Operator

We'll go next to Michael Corelli – Barry Vogel & Associates.

Michael Corelli – Barry Vogel & Associates

You said you purchased a retail lot in New Mexico, what was that price again?

Joseph Stegmayer

That price was $537,000.

Michael Corelli – Barry Vogel & Associates

Okay and what was behind the decision to do that?

Dan Urness

That was just, Michael, we've been there for a number of years. That location's been consistently successful for us. It was just an opportunity to buy versus lease, and the numbers worked out that it made sense to buy; nothing more than that.

Michael Corelli – Barry Vogel & Associates

And then, as far as just on the tax rate again, so if you had a pre-tax loss, like you did in this quarter again, will you use a 30 some odd percent tax benefit against that loss?

Joseph Stegmayer

Well, when I mentioned that we'd be in the high 30s going forward, that would be on the presumption of an income. In the event of a loss, it would just – it would be potentially zero, and then in the event that we were able to obtain carry backs or things like that, it could drop again. So it's a tough one for me to tell you what it would be.

Michael Corelli – Barry Vogel & Associates

Okay and I know you said the backlog was negligible, but do you have a number?

Dan Urness

No. Negligible means negligible.

Michael Corelli – Barry Vogel & Associates

No number? Okay and, Joe, at this point, and I know it's hard to predict things, but do you see any coming in the not too distant future that will change what we're seeing in the industry?

Joseph Stegmayer

Do I see anything coming, you said?

Michael Corelli – Barry Vogel & Associates

Yes.

Joseph Stegmayer

Well again, I think it really depends on the progress that the country makes, but certainly with every month goes by there are people who need homes that are putting it off, people want to make a change in their home that put it off, and so that's the difficult part.

We really can't tell when those changes in the macro picture will occur, but I think the evidence is pretty clear that people will not be able to stretch the way they have been, and that will, again, attract people to look at our product.

I think you Michael, are familiar with the numbers. Other people are, but we typically, as an average as an industry, would be up in the high teens to 20% range of all new single-family homes sold, and we haven't been in that range for a number of years. We're starting to move back into that range, but that's by default, that's because not many site built homes are being sold either.

But eventually, as the housing market improves in aggregate, I think we will gain a better share of the pie again, and I think it was taken away from us really by the financing more than anything, and that doesn't seem like that's going to reoccur in the foreseeable future anyway, and I think that's the most positive thing about our business.

The other positive things are some of the trends, people getting away from the McMansions, wanting a simpler lifestyle. Our homes are modern, efficient. They have all of the features and can have all of the bells and whistles that people want to put on them, depending on the price points they want to pay, yet they're very manageable.

And I think that the second home market will also increase over time, as things stabilize, but other than those kinds of broad brush points, no we don't have any silver bullet we can tell you that it's going to change in the short term.

We, I think, have a very competitive product and we're very flexible in our production environment. We can build anything people want us to build and that's a big advantage today.

Operator

We'll go next to Dax Vlassis – Gates Capital Management.

Dax Vlassis – Gates Capital Management

Hey Joe, I was just wondering, from what you said, the contingent liability is at $27 million. I think that was up a couple of million from last quarter. Are you saying that part of that $27 million that – I believe you just have guarantees on those, I guess secured by the actual assets – are those going to turn into actual loans that you're going to make?

Can you explain what you meant by that? And if I heard you right it was somewhere in the neighborhood of zero to $27 million kind of range you would consider for allocating towards the financing component of this new venture.

Joseph Stegmayer

Dax, thanks. That's a good opportunity for me to clarify and make sure we send you the right message. First of all, our floor plan contingent liability is actually down from the prior quarter, from 29 to 27, but all that I was saying was that just gives one potential – people looking at us – an idea of the max amount.

As I said, we're no way suggesting that we're going to go to $27 million in the floor plan outstanding, on behalf of the company, with company funds any time soon; it may never get to that point.

I was just saying even if one considered, if we put all the product that's typically been floored by our retailers, that would be a number, but obviously this number is not going to change much. It's out there now, the lending doesn't get pulled away, so that – we would replace that business, we'd add to that business over time.

Did you have a question?

Jeffrey L. Gates – Gates Capital Management

Joe, it's Jeff Gates. Just to clarify, are you talking about additional guarantees or are you talking about actual funded loans where you would actually earn more on a portfolio of receivables? And can you tell us of your existing $100 million, $140 million of sales or whatever it is, how much is currently in total floor plan?

Joseph Stegmayer

No, we're talking here about – probably not guarantees – although that could be an instrument to use.

What we're talking about is going forward if there's a lack of floor plan lending and a finance company says, listen, we're having trouble obtaining funds to lend to our customers, but we like the business, we like – we have the servicing model set up, and the whole operation, we're compliant in all of these states. If you provide the funds or a portion of the funds, we will continue to lend to Cavco distributors, and that's probably where we more enter the picture.

So it might be a portion, or it could possibly be all of a particular lender's funding of our customers' inventory purchases. Or it could be as you say, I guess, it could also be some sort of guarantee of those funds, but it would probably be more of the funds, because the problem is right now many of the finance companies are having trouble in the commercial paper markets, getting the money to lend to their customer base.

Jeffrey L. Gates – Gates Capital Management

Great and what percent of your businesses currently do you see being floor planned? And how does that compare to the industry?

Joseph Stegmayer

Well we have about 40% of our business typically is floor planned. The rest we don't use, we're not getting paid by floor plan lenders. We're getting paid in cash in effect.

Jeffrey L. Gates – Gates Capital Management

And the inventory is that retail? Have the retailers just been selling the homes that they have on their lot and basically not re-ordering if they don't have the financing for it?

Joseph Stegmayer

Well first, yes, they have been reducing inventories in the lots for a number of reasons, not just because of the floor plan. Initially they're reducing them because business is down, and they're trying to cut overhead.

So that certainly exacerbates the sales problem for us, because the retailer might have, let's say they have seven homes, and they were getting good turns out in better times, they might reduce that to four or five homes, and it takes awhile sometimes to sell those couple of models.

That's part of it, and then as you say, the issue that now they might not be able to get floor plan to add stock units. And that is a challenge and that's why we're looking at what we're doing, because let's say a retailer has reduced their inventory, and they've generally obviously sell the ones that are both saleable and most popular models.

Well they want to get those most popular models back, even if they have some other models in stock. They need the more popular ones because those are the ones that are going to create turns for them, and that's where we can help assist in getting some floor plan for them to make sure they have models that are popular in their particular market area.

And eventually they'll sell the other ones that are slower movers, of course, but in the meantime they need to re-stock with the popular ones.

Jeffrey L. Gates – Gates Capital Management

Joe, one follow up, are you seeing significant numbers of opportunities to grab dealers that might have been affiliated with other manufacturers? And should we expect your number of dealers to, where should we expect your number of dealers to go? I guess there is the negative, as far as the shake-out of dealers everywhere, but would you be able to pick up enough of other dealers to offset what you might lose in your existing base?

Joseph Stegmayer

Well again that's kind of a little too specific of a forecast for us, but I would say that's obviously what we're trying to do, and we historically have been able to gain market share in down markets. And yes I think we do have a competitive advantage vis-à-vis some of our peers in that we have this floor plan availability potential.

Some people may not be in position, or might not choose to participate in the floor plan lending, and I think that does give us some leg-up. But it's a very competitive market out there from price standpoint and obviously all manufacturers are struggling to keep plants running.

So it's a very price competitive market, so I don't take anything for granted. I do think that we are in a solid position to be able to offer our retailers, and prospective retailers that we might bring on, some advantages in their doing business with us.

Jeffrey L. Gates – Gates Capital Management

The last question – as far as the other manufacturers in your geographic area that you compete with, is this last or this, I shouldn't say last leg down, but this additional leg down in number of units, does that wash any more of the actual manufacturers out? And do you see your competitive position improving, given the financial strength of the company's balance sheet?

Joseph Stegmayer

Well I would say first, that we don't look forward to the peer group going out of business. I don't think that ever does any good for the industry as a whole. I would say that further consolidation in the number of factories would be helpful to the industry.

Obviously, based on the shipment levels and the capacity that is presumably outstanding now with the number of plants still open, that's a challenge, and that of course creates more price competition as people struggle again to keep a plant running.

I think we'll see, as an industry, we'll see more plant consolidation, more plant closings, and companies individually consolidating their manufacturing operations to fewer production facilities, and that will be healthy.

I don't know what companies will face other challenges and so forth. Certainly some companies have more leveraged balance sheets that we do, most do. But whether they'll be able to overcome those issues or not, I don't know. I do think that we'll again be able to use our strength as a competitive advantage currently.

Operator

(Operator instructions) We'll go next to Michael Ware – Praesidium Investment Management

Michael Ware – Praesidium Investment Management

Question on pricing, you touched on it briefly. Just wondering if you could give us a little more color as to what's going on on the pricing side. You obviously saw your ASPs stabilize in this quarter. Wondering if there's a mix element behind that, if the competitive environment has stabilized such that we're not seeing more pricing degradation, and kind of what your expectations are in the pricing side going forward?

Joseph Stegmayer

Okay, Michael, the pricing environment is, I would say fairly stable, not withstanding my previous comment that it's very competitive. The homes have gotten to such a competitive level that there's not a lot of room for manufacturers to drop pricing as such much further.

More of the average selling price fluctuations you will see – for us certainly and probably for other companies in the industry – is more a product mix issue. Right now we're seeing what buyers are out there are, buying smaller homes or lower price point homes.

That will impact our average selling price. I don't think it will be so much just price declines overall. I think we've been through most of that at this point, and I don't see a large drop in overall wholesale price decline.

And I'm sorry, I'm not sure I've answering all points of your question. Was there another point there?

Michael Ware – Praesidium Investment Management

No, you covered it, that's great. Thank you, guys.

Operator

And there are no further questions. At this time, I'd like to turn things back to our speakers for any closing remarks.

Joseph Stegmayer

Well, thank you, [Gwen]. Thank you, everyone for joining us today. We look forward to talking to you more, hopefully about more pleasant news ahead. We feel we're very well set to take advantage of whatever opportunities come our way. And we look forward to sharing those with you in the next quarter. Thank you.

Operator

Thank you everyone. That does conclude today's conference, you may now disconnect.

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Source: Cavco Industries Inc. F3Q09 (Qtr End 12/31/08) Earnings Call Transcript
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