Seeking Alpha

Home » US Market » Transcripts

Palm Harbor Homes, Inc. F2Q10 (Qtr End 9/25/09) Earnings Call Transcript

October 28, 2009 | about: PHHM

Font Size:
Print
Email
TweetThis
- Single Page View

Palm Harbor Homes, Inc. (PHHM)

F2Q10 Earnings Call

October 28, 2009 10:00 am ET

Executives

Larry H. Keener – Chairman and Chief Executive Officer

Kelly Tacke – Executive Vice President and Chief Financial Officer

Greg Aplin – President of CountryPlace Mortgage

Lyle Zeller – Executive Vice President of CountryPlace Mortgage

Analysts

James McCanless - FTN Equity Capital Markets

Presentation

Operator

Good day and welcome to the Palm Harbor Homes, Inc. second quarter conference call. Today’s call is being recorded.

At this time for opening remarks and introductions I would like to turn the call over to Chairman and Chief Executive Officer, Mr. Larry Keener.

Larry H. Keener

Thank you Marvin and good morning everyone. Thank you for joining us today. I have with me on our end of the call Kelly Tacke, OUR Executive Vice President and Chief Financial Officer; Greg Aplin, President of CountryPlace Mortgage; and Lyle Zeller, Executive Vice President of CountryPlace Mortgage.

Before we begin today, our attorneys have required me to remind you that all comments made today are made within the context of Safe Harbor rules, that past performance is no guarantee of future results, and that any comments about improving performance may not occur.

Now onto the specifics of the quarter. Revenue for the quarter was $74.8 million compared to $110.7 million prior year, a decrease of 32.4%. The decline in revenue for the quarter resulted from a 32.8% drop in homes sold and a 3.9% decline in average selling prices for factory built homes.

Year-to-date revenue was $157.2 million compared to $240.7 million prior year, a decline of 34.7%. The decline in year-to-date revenue resulted from a 35.9% drop in homes sold and a 1.6% decline in average selling prices for factory built homes. The decreases in average selling prices for both the quarter and year-to-date are due to customers moving down market and buying smaller, less expensive homes.

Additionally, appraisal values for home sales financed have declined significantly due to foreclosure and short sale values being used as appraisal comparables. On a positive note, the 35.9% decline in homes sold year to date compares favorably with the 43.2% decline in HUD [code] homes shipped year to date and the 50.4% decline in modular homes shipped year-to-date.

Despite the decline in revenues and average selling prices, margins for the quarter remain solid at 24.1%, flat with last year. Year to date margins are 23.7%, down modestly from 24.3% prior year.

Operating efficiencies improved in all nine of our operating factories. These improvements, in addition to consistent strong operating margins from our finance and insurance operations, accounted for the company’s margin performances.

SG&A expense was $24.7 million for the quarter, a decline of $6.4 million or 20.7%. Year to date SG&A expense was $49.0 million compared to $62.3 million prior year, a decrease of $13.2 million or 21.3%. The company is operating two fewer factories and nine fewer retail locations than this time last year. Additionally, overall company head count is down 26.6%.

Loss for the quarter was $10.4 million or $0.45 per share compared to $7.8 million prior year or $0.34 per share. Year to date the loss is $20.4 million or $0.89 a share compared to $8.4 million or $0.37 per share prior year.

Prior year included a $3.8 million or $0.17 a share gain from the repurchase of $14.4 million of the company's convertible debt at a discount. For the quarter, the loss from operations was only $6.6 million compared to $4.4 billion prior year. I say only because the revenue drop for the quarter was $35.9 million. The $2.2 million difference in operating income is only a small fraction of lost income to the 32% drop in revenue would normally produce.

However, improved operating efficiencies and the large SG&A reductions narrow the operating loss significantly. Perhaps more importantly, the reductions in SG&A expense and improvements in operating costs mentioned earlier coupled with significant reductions in working capital required produced operating cash flow through the first six months of $13 million.

I will now turn the call over to Kelly Tacke who will have more specifics on this point and other key information.

Kelly Tacke

Thanks, Larry. The financial story this quarter continues to be one about cash management. In light of the current economic conditions and with no near-term signs of a quick recovery for the factory built housing industry, our top priorities remain cash generation and cash preservation in every area of our business.

Cash totalled $17.3 million at the end of the quarter, an increase of $5 million since the beginning of the fiscal year. For the first six months of fiscal 2010 net cash provided by operating activities totalled $13 million. We continue to manage our inventories down.

Total inventories declined $11.2 million or 12% since the beginning of the fiscal year. Accounts receivable and new home inventory for company-owned retail and builder location was approximately $1.2 million, a decrease of 20% compared to the second quarter of last year.

Consumer loans receivable totalled $184.2 million, a decline of $7.4 million since the beginning of the fiscal year which is due solely to customer payments. CountryPlace is currently servicing approximately 3,200 loans with an average FICA score of 709, average down payment of over 16% and an average balance of approximately $63,200.

Accounts payable and accrued liabilities increased approximately $4.3 million compared to the beginning of the fiscal year due solely to the timing of the quarter end and compared with our monthly check run.

The convertible debt bears interest at 3.25% and it's due May 2024. However, the debenture holders may require us to repurchase the debt on certain dates. The earliest is May 15, 2011.

Our four plan agreement is with Textron to announce during the third quarter of fiscal 2009 that they are in the process of an orderly liquidation of their housing inventory finance business.

In June of 2009 we amended our agreement with Textron and extended the expiration date to June 30, 2010 and lowered the committed amount from $50 million to $45 million and further lowered it to $40 million by December 31, 2009. We were in compliance with all of our financial covenants as of the end of the second quarter. While no guarantees can be made in this regard, especially in light of the overall economic conditions, we do expect to replace Textron before the facility expires.

This quarter, our interest expense included a non-cash charge of $589,000 for the adoption of new accounting rules which relates to the accounting for convertible debt instrument that may be settled in cash upon conversion. The non-cash interest expense included in the second quarter of last year was $676,000.

These accounting rules require that the liability and equity components of our convertible debt be separately accounted for in a way that reflects a non-convertible debt interest rate. This means that the equity component is reflected as in increase to additional paid in capital and the debt is reduce by an equal amount.

The reduction in debt is treated as a debt discount which will increase interest expense and [accrete] the debt to its face value over time. At the end of the day the adoption of this new accounting rule has no impact on total shareholders equity. It's simply geographical movement between paid in capital and retained earnings.

In summary, we remain laser focused on maintaining and strong balance sheet during these very tough economic times.

Larry H. Keener

Thank you, Kelly. The company ended the quarter with 78 operating retail sales locations, down from 81 prior year and at the end of the first quarter. The three stores closed were in Texas, Arizona and Delaware.

Unit sales through company stores were 596 down from 828 prior year, a decline of 28%. However, company store sales increased for the second consecutive quarter. The first quarter sales were up 7% from the fourth quarter and second quarter sales were up 3% from the first quarter. These increases in unit sales are significant since they occurred in a declining industry shipments market during a time when operating company stores declined from 86 to 78.

For the quarter, same store sales declined 24.2% in units and 35.5% in dollars. The greater decline in dollars is due to a decrease in average selling prices at company stores year over year.

Unit sales to independent distribution declined 45.5% down to 170 homes versus 312 prior year. Although off significantly, independent distribution deliveries were also up for the second consecutive quarter. Independent distribution continues to be constrained by the overall lack of wholesale or floor plan financing.

For the quarter HUD [code] homes sold declined 30% while modular sales declined 31%. Multiwide HUD [code] homes declined 36% while single section homes declined only 10%. The smaller decline in single section homes is consistent with customer movement down market mentioned earlier.

Modular residential homes sold represented only 21.4% of total units sold and 27.2% of total revenue. This is the lowest quarterly share of units and revenue for modular in years. Again, this reduction in higher priced modular home deliveries reflects current customer preferences for lower priced homes and the availability still of heavily discounted site built homes.

The company shipped only 11 commercial modular buildings during the quarter worth $1.7 million. We have received a notice to proceed on a $14 million military job mentioned last quarter and should begin production in either December or January.

Backlog at quarter end was $22.5 million, down from $37.3 million prior year and $30.4 million at the end of the first quarter. The backlog does not include the military project just mentioned. Backlog is down despite greater unit sales due to two factors, number one, the decline in average selling prices and secondly the increase in sales from retail inventories versus factory production which has resulted in $11.2 million retail inventory reduction through six months and a $31 million reduction in inventories year over year.

Capacity utilization during the quarter was 33% compared to 54% prior year. Sequentially, capacity utilization was flat with our first quarter. The company currently operates nine factories and has six idle facilities.

Both Standard Casualty and CountryPlace mortgage continued to outperform their respective industries. Standard wrote 3,167 policies during the quarter at a renewal rate of 76% and ended the quarter at 11,676 policies enforced, an increase of 3% versus last year.

CountryPlace originated 81 loans for the quarter, a 50% improvement versus prior year, all of which were either FHA or Fannie Mae mortgages. CountryPlace no longer originates for its own portfolio and will not until a private secondary market for factory built home loans reemerges.

CountryPlace is servicing $237.5 million portfolio of which $67 million represents either wholly owned loans by the company or the over collateralization portions of our 2005 and 2007 securitizations. CountryPlace's delinquency rate is running at 28% of the national mortgage delinquency rate and their default rate is only 38% of the national mortgage default rate.

CountryPlace's performance this decade is a noteworthy indicator that good factory built lending performs well even in difficult economic times. Both Standard Casualty and CountryPlace remain solidly profitable.

Summing up one year ago what is now known as the credit crisis was just reaching its full intensity. We all know what the full impact of the credit liquidity crisis has meant for our national economy.

What it means for the factory built housing business was that distribution through independent retailers and builders has been squeezed to a choke point and that retail home financing for customers has been likewise limited.

Given these developments we decided a year ago to focus our energy on accomplishing important objectives to ensure our survival. Number one, create enough liquidity from reduced working capital needs to provide adequate liquidity for operations and to pay down debt.

Number two, decrease both our marginal operating costs and SG&A expenses so we can improve operating income despite an anticipated significant drop in revenues. And lastly, gain factory built housing market share by finding financeable channels of distribution and by reaching more retail buyers to pull through existing distribution.

In the past 12 months the company has decreased inventories and receivables by $45 million while simultaneously paying down debt by $32.3 million, reduced marginal costs significantly to improve gross margins despite a 30% plus drop in revenue and reduced SG&A expense $26 million on an annualized basis and, lastly, generated over $60 million in revenue from distribution sources that did not exist just two years ago.

Going forward, we will continue to reduce our working capital needs to maintain adequate liquidity for our operations and schedule debt reductions, continue to improve our operating costs and lower SG&A expense and continue developing alternative and creative sources of new revenue.

We have seen a few green shoots, our overall bright spots recently. More customers are deciding to buy and some lenders have returned to the factory built market. It is too early to tell if there will be any momentum to these improvements. Hopefully there will be and this momentum will be hastened by the new FHA Title I money, Jenny Mae certification of Title I lenders and Fannie Mae authorization of new channel lending programs as required by Congress.

However, our plans remain the same and are geared for the current market realities and not for the much hoped for and anticipated recovery. We will now open the call for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from James McCanless - FTN Equity Capital Markets.