Nobility Homes FQ407 (Qtr End 11/03/07) Earnings Call Transcript

Nobility Homes Inc. (NOBH)

FQ407 (Qtr End 11/03/07) Earnings Call

December 20, 2007 4:30 pm ET

Executives

Terry Trexler - Chairman and President

Thomas Trexler - EVP and CFO

Analysts

Bill Richard - Scobell Company

Walter Hensley - Walter Partners

Russ Silvestri - Skiritai Capital

Ralph Marish - First Manhattan Company

Presentation

Operator

Good day everyone and welcome to the Nobility Homes Incorporated fourth quarter fiscal year 2007 sales and Earnings Call. (Operator Instructions).

At this time, I'd like to refer to the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. During this conference call, management may discuss financial projections, information or expectations about the Company's products and markets or otherwise make statements about future, which statements are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made. The risks and uncertainties are detailed in the Company's filings with the Securities and Exchange Commission.

With us today are Mr. Terry Trexler, Chairman and President of Nobility Homes Incorporated, and Mr. Thomas Trexler, Executive Vice President and Chief Financial Officer of Nobility Homes Incorporated and President of Prestige Home Centers. Gentlemen, please go ahead.

Terry Trexler

Thank you. Good afternoon, ladies and gentlemen. As we normally do, I'd like to take a few moments and go over the balance sheet, the income statements and a few operating highlights and then I'll turn it over to Tom for our retail, finance and insurance breakdowns.

First I'd like to draw your attention to our consolidated balance sheet, just to point out a couple of things that have either changed or worth noting. First, our cash, cash equivalent, short-term investments and long-term investments are up to about $24.9 million, which is at the highest level that we've ever been at. But, certainly something we are proud of in this very, very tough operating environment.

The second note that I'd like to make is that, if you have looked at our accounts receivable trade, you noticed that there was about $460,000 increase in the accounts receivable. However, this year 2007, Mountain Financials started to provide construction loans to people who buy our homes from outside lenders. And so we are showing about $700,000 of construction loans in that accounts receivable trade. So it does make our accounts receivable look a little high, but in fact our true accounts receivable were only about $120,000, so not large at all.

Inventories have, pretty much, stayed normal with a year ago; we were $12.7 million, $12.4 million, I think we are up about 4 houses in inventory from a year ago, so certainly not alarming there. Other than that, total assets $47.5 million versus $47.1 million a year ago. And I might mention that you might see our long-term investments actually decrease about a $1 million that was just the run-off from our latter municipal bond portfolio that we have. So, and within the next year too, unless Tom chooses to continue investing in that way, that there will be more roll off there, probably a couple of million dollars this year.

Under the current liability section, really the only thing that I would like to point out is that our customer deposits are down about $1.3 million from the same period a year ago and certainly that’s a reflection of the declining market conditions in the state of Florida. But we still have about a $1.5 million in customer deposits and still have a good pipeline and a good backlog of homes. The other thing I would like to mention on the balance sheet is that, total stockholders equity increased about 5.4% to $43.9 million up from $41.68 million.

Now, if I can draw your attention to the income statement, again just a few items I would like to mention. For the year, sales were down about 32% from almost $60 million down to $40,600,000. Our market area was down about 47% for the like time period. So, while we certainly had a significant decline in sales, it wasn’t the same as what the industry had faced pretty much in our market area.

One thing we are quite proud of though in this down market is that our gross profit percentage still stayed above 29%, 29.1% for 2007 fiscal year and 29.35% for the fourth quarter. So the management teams at both retail and the manufacturing have done a very good job of maintaining the gross profit and keeping expenses under control and hopefully, we can continue that in 2008.

Our SG&A expense percentage wise, was up both in the fourth quarter and year-to-date, but primarily a reflection of the reduction in sales. Operating income for the year $4,323,000 or 10.64%, that was down from $8.5 million in 2006 or 14.26%. For the quarter, the operating income was $1,267,000 down from a $1,904,000 in the fourth quarter in 2006. However our operating margin percentage was 11.78% down form 12.99%.So, again still holding pretty good operating numbers on a company wide base.

Other income level, you’ll see that's pretty much the same, we are up about 11%, primarily a result of the interest income that we had. For the year it was up about 14%, $1,822,000 versus $1,600,000 and again primarily a result of the interest income and the earnings from our finance revenue sharing agreement. So, for the year company ended up with net income of little over $4,081,660 or 10.05%, net income over 10% again something that we're quite proud of and that was compared to a year ago $6.4 million, 10.8%. For the quarter it was $1,126,000 million versus $1,386,000 million for 2006. And we were at 10.47% net income percentage versus 9.45% in 2006.

So, in spite of a very difficult times in this industry and the extremely difficult times in the Florida market, primarily a result of very, very good numbers in 2004 and 2005, which were hurricane impacted, we still maintained good profit margins, good gross margins. So, for the year the company ended up with a $1 per diluted share versus a $1.59 a year ago, and for the fourth quarter $0.28 versus $0.34, so, again quite good numbers.

To give you a more of an idea on our gross profit percentage, we ended up, as I mentioned 29.01% for '07, we were 29.49% in '06, 29.04% in '05, 26% in '04 and 25% in '03. So, you can see that we've continued to increase that. Our last year in '06 was a record year, almost 29.5%, but still staying about 29% for the year.

One of the factors that have played into this has been that our vertical integration strategy has paid good dividends, 89% of the homes that we sold were rebuilt and were sold by our Prestige division, so it allows us to capture all four of the profit centers that's available to us, by being vertically integrated. And that 89% of new factory homes built that were sold through Prestige compares to 77% last year, 75% in '05, and 57% in '04, and 59% in '03. So, as we sell more homes through our retail division, certainly we become more profitable.

Another thing that's important to note is that, in 2007 our average new home retail selling price was almost $76,000 and Tom will go into that a little bit more in detail, but just as recent as 2003 we were about $52,000, so certainly people are buying little bit nicer product at least in our market area.

With that, I'll turn it over to Tom, let him discuss little bit about the retail and mortgage and insurance.

Tom Trexler

The average retail selling price for Prestige, our retail division for the fourth quarter of '07 was $77,151 up from $71,000 in the fourth quarter of '06. And again, that’s just the fourth quarter where the number Terry just mentioned was for the full year. Prestige retail sales were down 23% in the fourth quarter when compared to the fourth quarter '06. Our new home inventory averaged 13 homes per model center, which is consistent with the last few quarters. 65% of our new home sales were mortgaged financed in fourth quarter of '07.

Our finance division income was down 3% due to a large amount of payoffs in our first joint venture, which reduced the income in that portfolio during the quarter. Our credit quality continues to remain good with our past dues on the portfolio at 2.13%. Our insurance and mortgage lending division income was up 31% in the fourth quarter in the fourth quarter, primarily as a result of our increased volume in our mortgage lending operation.

At this time, we'd like to open it up for any questions that anyone may have.

Question-and-Answer Session

Operator

(Operator instructions). And our first question will come from Bill Richard with [Scobell Company].

Bill Richard - Scobell Company

Hi guys, how are you?

Terry Trexler

Great! How are you today?

Bill Richard - Scobell Company

Good. I just had a few questions: is there anything new with regard to financing? What about modular homes? What should we say expect in the next 12 months?

Terry Trexler

Well, I’ll mention a couple of things and then Tom may have some other things to mention. In our market area, modular housing has not been readily demanded I guess. We sell some to manufactures some modular homes, but we probably sell only about 10% at this point. Now, I am sure that it will continue to increase, but in our market area, which is primarily all of Florida and some of South Georgia there are still an abundance of available land and lots zone for manufactured homes. So, until that becomes more critical, I think that we’ll continue to sell more manufactured homes than modular homes, but we are selling them and we do expect that it will continue to increase. Tom, you want to add?

Tom Trexler

I am really not seeing any change in the financing for modular, but it's probably because we don't do, we don't sell that many modular homes. So there really hasn't been much change in the financing. Our own financing joint venture, we don't have any problems financing them and we don't have any problems getting outsides financing right now so, I've just not no there is any change.

Bill Richard - Scobell Company

Is your own joint venture, are you financing the bulk of this or?

Tom Trexler

Probably, about half of them, so: no, probably, not the bulk, but, probably, about half of them and the other half would be from outside, the traditional mortgage lending sources.

Bill Richard - Scobell Company

Okay. What is your sense in terms of, what are we looking at in terms of, what are your expectations for the next 12 months as far as module?

Terry Trexler

As far as: modular?

Bill Richard - Scobell Company

Yeah.

Terry Trexler

Again, in our market area, I think it will continue to increase but, I would be surprised if a year from now, we were building more than 12%, 13%, 14%, I just don't think its going increase that much.

Bill Richard - Scobell Company

Okay. Another question I had is, you were just talking quickly, I didn't hear it exactly. What did you say, you had for average asking price? And: what did you have for unit sold?

Terry Trexler

Our average retail selling price?

Bill Richard - Scobell Company

Yeah.

Terry Trexler

For the fourth quarter.

Tom Trexler

For the fourth quarter it was $77,151. That was our average retail selling price.

Terry Trexler

And for the year it was $75,971.

Bill Richard - Scobell Company

Alright. And: what about units sold?

Terry Trexler

As far as the number of units sold?

Bill Richard - Scobell Company

Yeah.

Terry Trexler

485.

Bill Richard - Scobell Company

For the --?

Terry Trexler

For the year.

Bill Richard - Scobell Company

Okay. And: that was down from last year, you had what?

Terry Trexler

That was down last year from about 900.

Bill Richard - Scobell Company

Okay. What do you have in terms of -- I know this is lot of cash on the balance sheet: what are your plans for that? Do you have any plans for making any acquisitions or share buyback or what? Is there anything on the agenda that you could tell us about?

Terry Trexler

Well, yes. After year-end we invested in two new Florida retirement manufactured housing communities. And also we have contracted by one of our retail model centers that we are currently leasing. And Tom, plans to continue to make some purchases there on some of the leased properties that we are on, we're going to continue to look at other retirement communities, we just think that with the housing market the way it is and the way we think it's going to be for a while, but you know the retiree is going to be a strong market with the numbers of baby boomers retiring.

We just think that building a new affordable manufactured housing community in key areas in the state of Florida is going to be good for the next 10 years. So, our hope is to kind of put together a little portfolio, where we provide all the homes in those communities, and not only help top-line sales, but also develop another revenue stream for the company.

The two communities that we just recently invested in give us sales rights to about 635 new homes. And we would like to just continue to grow in that particular area of the business. So, that certainly will be a use of the cash, and then we will as it becomes available, we still feel it's important to look at buying back the company stock. And we think that will happen when those are blocks coming available. And then certainly very important is the fact that, the Board of Directors declared a $0.50 divided, which was equal to the dividend that we paid in 2006. And so, that’s a couple of million dollars of earnings also.

Bill Richard - Scobell Company

One or two other quick ones, I don’t mean to hold anyone up. I was curios to know: what about any cost cutting? I know some of the other companies that put through some fairly successful cost cutting measures: do you have any that you want to talk about?

Terry Trexler

Well, we are constantly looking at controlling costs. And I think you can see from our gross margin percentages that we did a pretty good job in 2007. Our plans are to continue to seek new ways to keep cost under control and we have asked all the management teams both at the retail and manufacturing to constantly be aware of increasing expenses and see what we can do about cutting them, but any major program, it's just an ongoing thing with us everyday.

Bill Richard - Scobell Company

One last thing: do you have any revenue guidance in terms of going forward next quarter?

Terry Trexler

No, we do not.

Bill Richard - Scobell Company

Okay great, listen. Thanks so much guys.

Terry Trexler

Thank you very much.

Bill Richard - Scobell Company

I appreciate it.

Operator

Our next question will come from (inaudible).

Unidentified Analyst

Hi Terry. Congratulations on a great quarter.

Terry Trexler

Thank you.

Unidentified Analyst

You had a tremendous reduction in your SG&A: can you talk about how you did that? It’s actually the year-over-year reduction that we saw in the fourth quarter.

Terry Trexler

Well in a vertically integrated company a lot of that SG&A is sales compensation through the Prestige retail division and with sales being down that much, that in itself brought it down significantly, but we did try to control that in a big way also, but probably that’s the single biggest thing.

Unidentified Analyst

How much of that actual figure would say is with respect to that you would expect to occur each quarter?

Tom Trexler

I don’t have that number handy, but I can certainly get that for you and we do have it, I just don’t have it here right now.

Unidentified Analyst

Okay. And a last question from me. What was your capacity utilization for the fourth quarter and, may be, what was it in the fourth quarter of the prior year?

Tom Trexler

Well it was certainly much worse this fourth quarter then it was a year ago, but, and again, with the type of products that we're building now some of the bigger products, where they are triple sections or four sections, the plant capacity changes a little bit, but, pretty much, I would think that we're probably operating right now at probably about 48% of the plant capacity.

Unidentified Analyst

Okay.

Tom Trexler

And certainly we have a lot of room to increase.

Unidentified Analyst

Okay great thanks a lot.

Tom Trexler

Thank you.

Operator

Our next question will come from [Walter Hensley] with [Walter Partners].

Walter Hensley - Walter Partners

Hi Terry, Hi Tom,

Terry Trexler

Hi Walter.

Walter Hensley - Walter Partners

Congratulations. I've a few questions about the low end partnerships with the retirement communities: can you discuss how much of your investment is involved? And: what the accounting or the financial impact is likely to be over the relatively near-term?

Terry Trexler

The investment, we will actually do this in conjunction with a couple of other partners. So we won't have a 100% of the limited partnership, but I would expect it to be somewhere in the neighborhood of $3 million or $4 million total for the two communities and we will recognize our share of the earnings or looses from those limited partnerships each year through our ownership and through the submission of the K-1 from the partnership.

And I would expect that in the early years before there is much rental income that there could be losses in those partnerships and those would be non-cash losses financed by the capital that's in there, but there could be reported losses that could flow through to the company in these early years until the rental income gets up to a level that's high enough to cover the operating expenses.

Walter Hensley - Walter Partners

So: what do you think the breakeven period is like? Two years? Three years? That sort of thing?

Tom Trexler

Well, typically, the joint venture partner that we did this was they are great marketing people. They have about 25 other communities, about 10,000 spaces just in the Florida market alone. And, in the past, when we've sold to them for a number of years probably since early 80's and typically they fill a community up depending upon the size they put between 60 and 100 houses a year in a community. And so, depending upon the sizes of community, depends upon how quickly, they reach breakeven. For instance, one of the communities is 236 spaces and so, if they can generate a hundred sales a year, the breakeven there would probably be around a year. But again, it depends upon each community and the size of the community. One of the communities is around 400 spaces, so it kind of varies with each community, Walter.

Walter Hensley - Walter Partners

Okay. No, I think now it sounds great, the 635 unit sales rights: do you have to give them a discount because you are a partner or do you get the full margin on that?

Terry Trexler

We get the full margins, however we, its not like we are selling them through our retail division. So, all we're going to get is the manufacturing margins on those. However, our plan and Tom's plan is to finance some of those houses and also sell some insurance on some of those houses and maybe do a few other things, where we can increase our profitability on each one. But normally, in a situation like that the only profit that you would get would be your manufacturing profit, but we want to do a little bit better than that.

Walter Hensley - Walter Partners

Sure, so: the first two of you actually closed those partnerships? Or: are you still recruiting more limited partners?

Terry Trexler

No, we have invested our capital in it and we are in the process of, in essence selling part of our interest. Our interest right now is 49% in both the communities and we have people that are interested in maybe half of our 49% or something like that. So: yes, we are in the process of doing that right now.

Walter Hensley - Walter Partners

Okay. That sounds good and then another question on the one of those called finance revenue sharing agreement: can you just review how that works again? And: what the outlook is for that kind of earnings level to continue?

Tom Trexler

Well, the finance revenue sharing agreement is kind of operates just like our original joint venture, where we originate loans with our joint venture partner, which is 21st Mortgage and they originate and do the servicing and the underwriting on them, and then we split the income from that portfolio. So, it’s basically our lending joint venture that operates in the same way as it always has, just a little different name.

So, I would expect that borrowing any big payoffs that that would continue to increase in earnings as we continue to build and grow that portfolio by selling houses and originating new loans. If our sales and new loans slows down and for some reason the payoffs spike up for one reason or another than maybe our earnings there could stall, but my expectation is that we would continue to grow that portfolio on a quarterly basis, even if we stay flat one quarter or something like that, but overtime, just continue to grow that portfolio. It's about $98 million now that we have in there. And so, we've got the amortization that comes on that, but we add two each month with our new loans that we originate.

Walter Hensley - Walter Partners

Okay. And then just more generally: do you think the manufactured housing market can recover more aggressively better than the condo market in some of the other regular real-estate markets in Florida?

Terry Trexler

Yes. We do feel that way. We think that with the credit problems that are out there and the tightening of the credit on the site build in the condo market, that we are already seeing some people moved down in to manufactured homes. And, I think, you are going to see in the next 12 months, people looking for more affordable housings. Lot of people are retiring and moving down to Florida, will go ahead and, even though they haven't sold their existing home up north yet, because of the slow market, they will buy a second home and that's why we like the retirement business.

We think a lower priced, affordable, manufactured housing community is very attractive to these people, because they will buy it as a second home and not have to worry about selling their home up north right away. One other things that we've heard in some of our conversations with the retirement sector is that, they have a limited number of years left and, if they have always dreamed for retiring in Florida, they don't want to wait until the housing market turns around completely. And I think that we will see that part of the market come back quicker than you will, the condos and the site built in Florida.

Walter Hensley - Walter Partners

By the way I would say Nobility has done a tremendous job under difficult circumstances and the plan you've laid out looks great.

Terry Trexler

Thank you, Walter. Appreciate the [vote] of confidence.

Operator

Our next question will comes from Russ Silvestri with Skiritai Capital.

Russ Silvestri - Skiritai Capital

Hello, can you hear me?

Terry Trexler

Yes, we can.

Russ Silvestri - Skiritai Capital

All right, how are you?

Terry Trexler

Great!

Russ Silvestri - Skiritai Capital

I was trying to get a better understanding on the inventories. I was looking, it looks like your inventories year-over-year are relatively flat and sales are down. I was curious about the build: are you planning to sell some of those houses that you may have in inventory at this point in time to communities that you're investing in?

Terry Trexler

Well, I will comment on that and then I'm sure Tom will have something too, but on our retail model centers, on our 18 retail model centers that we have around the state, we typically like to keep 12, 13, 14 houses in inventory, because that’s what you need to kind, to truly show our whole product line. We've two manufacturing plants and we have price ranges that start at retail at $29,000 and go all the way up to $120,000. So, we have to have a pretty good array of product at each model center.

So, it’s pretty hard to sell a big ticket item from empty shells and we found that out during the hurricane rebuilding process, when our retail inventory got quite low and we had to go to the outsiders and buy from some outside manufacturers. And our plan is to keep that inventory pretty much at this level and the inventory that we put into the new joint venture manufactured housing communities will be paid for otherwise we will not be caring that, long-term we may give them some time initially. But those houses will be, it will be paid for, but we won't be increasing inventories that much.

Russ Silvestri - Skiritai Capital

But my question was: is the revenue build inventory at this point of time, to sell to that community?

Terry Trexler

No, not at all.

Russ Silvestri - Skiritai Capital

Okay. And then the other question, in terms of the mortgages that you've been doing, you've been adjusting reserves at all: has there been any adjustment of the reserves for delinquencies or?

Terry Trexler

Yes, we continue to add to our reserve for loan losses on a monthly basis. We take a provision for loan losses every month to cover anticipated loan losses and to keep our reserve balances at a healthy level for the relative to the amount of outstanding that we have.

Russ Silvestri - Skiritai Capital

Right. So: are you increasing the provision per dollar? Or: just, obviously, be every time you put a new mortgage I would assume you increase your provision?

Terry Trexler

Right: We just are continuing to reserve at the same amount, the same percentage amount that we have been in the past, its just that as our portfolio grows, our total reserve grows, but we are still reserving at the same percentage.

Russ Silvestri - Skiritai Capital

And then the experience that you are having at this in point is then no changes to the experiences in terms of delinquency, you said: you are up a little bit to?

Terry Trexler

No I said we were consistent that 2.13 that’s consistent. So, yes I am not seeing an increase in delinquency at this point.

Russ Silvestri - Skiritai Capital

Okay. And, in terms of houses you are selling: do you have any estimate of how many the people are purchasing the homes are related to the hurricane? Obviously, hurricanes happened a while ago, but: are you still buying manufacturer housing as a result of the hurricane being dislocated, having being moved?

Terry Trexler

No I don’t believe anybody is, if they are its not apparent to us at this point. It’s not, our sales are not in -- concentrated in those areas that were impacted and the sales that we have in the general area that was impacted by the hurricanes is what I would consider our core traditional home buyers and not necessarily a replacement situation.

Russ Silvestri - Skiritai Capital

And lastly: are you experiencing a similar seasonality this year that you had in the past?

Tom Trexler

Yes, we are. The winter months and our first quarter are, traditionally, the slowest period of time for the company and I would say that is --- we're experiencing a consistent seasonality this year.

Russ Silvestri - Skiritai Capital

Okay. Thank you very much

Tom Trexler

Thank you.

Operator

Our next question will come from [Ralph Marish] with First Manhattan Company.

Ralph Marish - First Manhattan Company

Hi Terry and Tom.

Terry Trexler

Hi Ralph, how are you?

Ralph Marish - First Manhattan Company

Okay. How are you?

Terry Trexler

Great!

Ralph Marish - First Manhattan Company

Good. Just quickly the statistics you gave on the mortgage financing that both the sides of the portfolio and past due rates that’s for the combined portfolio of Majestic 21 and the joint venture?

Terry Trexler

That’s correct. It’s combined for both.

Ralph Marish - First Manhattan Company

Okay. Thanks, that was it.

Terry Trexler

Thank you Ralph

Operator

And we have no further questions.

Terry Trexler

Just a couple of things to clean up here: I don’t think I mentioned that we have about $25 million in working capital, our ratio of current assets to current liabilities is 7.9:1. Our stockholders equity increased to almost $44 million book value of common stock increased to $10.75. The return on average stockholders equity was 10% and the return on average assets was 9%, both great numbers for our industry. I did mention that the Board of Directors declared an annual cash dividend of $0.50 for common share for 2007, which was equal to what we had declared in 2006. Cash dividend is payable January 11th to stockholders in record as of January 2nd, 2008.

Thank you very much for joining us today for Nobility's fiscal 2007 earnings conference call. If anyone has any questions, please feel free to call either Tom or myself. And we both would like to wish everyone a very happy and safe holiday season and a very profitable 2008. Thank you.

Operator

Thank you. That does conclude today's conference call. We thank you for your participation. And have a great day.

Terry Trexler

Thank you.

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