Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Larry Keener – Chairman, President, Chief Executive Officer

Kelly Tacke – Executive Vice President, Chief Financial Officer, Secretary

Greg Aplin – President – CountryPlace Mortgage

Lyle Zeller – Executive Vice President – CountryPlace Mortgage

Analysts

John Diffendal – BB&T Capital Markets

Kathryn Thompson – Avondale Partners

Michael Corelli – Barry Vogel and Associates

James Mccanless – Ftn Midwest Securities Corp.

Chris Hansen – Wibodi and Company

Michael Chriodooloo – Wood Capital Partners

Bill Baldwin – Baldwin Anthony Securities

Matt Sherwood – ZS Fund

Mike Durap – Verboti and Company

Palm Harbor Homes, Inc. (PHHM) F1Q09 Earnings Call July 16, 2008 10:00 AM ET

Operator

Welcome to the Palm Harbor Homes, Inc., first quarter fiscal 2009 conference call. (Operator Instructions) At this time, for opening remarks and introductions, I would like to turn the call over to the Chairman and Chief Executive Officer, Larry Keener.

Larry Keener

I have here with me Kelly Tacke, our chief financial officer and executive vice president, Greg Aplin, President of CountryPlace Mortgage, and Lyle Zeller, Executive Vice President of CountryPlace Mortgage.

Before we begin our discussion, however, our lawyers have reminded me that I have to remind you that all our comments today are made within the context of the safe harbour rules, that past performance is not guarantee of future results, and that any comments about a buying future may not in fact materialize.

Our first quarter results were consistent with our expectations as expressed to you in our fiscal 2008 year end call in May. As you recall, we closed 18 underperforming retail locations and 3 factories in the fourth quarter of last year. We also made significant overhead reductions throughout the organization.

We expected these streamlining actions to reduce SG&A expense by $20 million annually and to reduce our annual revenue break-even level by $100 million. The results of the first quarter indicate that these two goals have been achieved.

We also stated during our May call that we expected to be at an operating income break-even level at $130 million in quarterly revenues. This target was also reached for the quarter.

Now on to more specifics of the quarter that just finished. Revenue for the quarter was $130 million, a decrease of 9.3% from $143.3 million prior year. The revenue decline was driven by a 7.6% decline in units sold and a 1.9% decrease in the average sales price of units sold.

Gross margins for the quarter were up 57 basis points to 24.6% from prior year. Margin improvement resulted from the combined impact of the closure of the underperforming operations, an increased internalization rate, and improvements in financial services, all of which were significantly offset by increased manufacturing costs driven by rapidly rising material costs.

SG&A expense declined $5.8 million from $37 million prior year to $31.2 million this year. All of the reductions in SG&A expense resulted from the restructuring actions taken last quarter.

Operational earnings for the quarter were $800,000 versus a $2.6 million loss prior year.

Net income was enhanced to $1.6 million or $0.07 a share by a $4.4 million gain resulting from the repurchase of $10.8 million of convertible senior notes. Kelly will explain this transaction in more detail in her comments.

Overall, we were pleased with the progress made in the first quarter, but understand we have much more work to do. Later in the call I will detail our plans, but for now I will turn the call over to Kelly to review some important specifics about the quarter. Kelly?

Kelly Tacke

As indicated in the press release, in addition to our strategic initiatives we have been keenly focused on strengthening our balance sheet. With that goal in mind we accomplished three significant transactions this quarter.

First, in April, we sold $51.3 million of CountryPlace’s warehouse portfolio of chattel and mortgage loans. We sold these loans at book value and these loans had not been previously written down.

Second, in May, we renegotiated on terms comparable to the previous facility our floor plan agreement with our current vendor and extended the facility expiration date from March 2009 to March 2011.

And finally, in June, we took advantage of the very distressed bond market and retired $10.8 million of our convertible senior notes using $6.3 million of our cash, which resulted in a gain of $4.4 million.

These transactions, coupled with our significantly improved operating results, mean that we ended the quarter in excellent financial condition. Cash totalled $32.8 million at the end of the quarter, an increase of $4.5 million since the beginning of the fiscal year.

Accounts receivable and new home inventory for company owned retail and builder location was up $91,000 or 6.7%. This increase is the result of increased receivables due to improving sales.

Retail inventory had declined $7.5 million or 7% in the last three months while retail homes sold has increased 6% compared to the fourth quarter of last year.

Consumer loans receivable totalled $207.7 million, a decline of $59.9 million since the beginning of the fiscal year. Fifty-one-point-three million of the decrease is the result of the April loans sales, while the remainder is due to customer payments.

CountryPlace is currently servicing 3,245 loans with an average FICO score of 711, average down payment of over 16%, and an average balance of $65,000.

Accounts payable in the crude liabilities declined $3.4 million this quarter due principally to a decline in deferred revenue and reduced compensation related accrual.

Our floor plan payable was up approximately $900,000 or 1.5% since the beginning of the fiscal year. The facility totalled $70 million, has an advance rate of 90%, and, as I mentioned, was renegotiated this quarter and extended through March 2011.

The convertible senior notes bear interest at 3.25% and are due May 2024. However, the holders may require the company to repurchase these notes on certain dates, the earliest of which is May 15, 2011. As a result, we retired $10.8 million of these notes this quarter which resulted in a gain of $4.4 million.

In summary, we finished the quarter with a strengthened balance sheet; cash and receivables are up; inventories, payables, accrued liabilities, and debt are down. Larry?

Larry Keener

Thank you, Kelly. The company ended the quarter with 87 open retail locations, a reduction of 20 versus prior year. Unit sales through company stores were down overall 3.3%, however, same-store sales were up 4.3% in units and 5.3% in dollars. The internalization rate was 69% for the quarter.

Unit sales to independent retailers declined 16%. This decline would have been almost 40% without the impact of 111 commercial modular units sold during the quarter. The reduction in independent sales is largely the result of slowdowns in three key states: Florida, Arizona, and California. Especially manufactured home sales to retirement age buyers in these states.

Modular sales for the quarter declined 8%. Modular sales were bolstered by $9.2 million in commercial and military modular business. Commercial and military modulars is a new business channel for Palm Harbor. In addition to last quarter’s business we have $9 million in additional orders that will be shipped in the next few months and over $20 million in follow-on business under these contracts. However, the follow-on business is dependent upon regulatory approvals and end financing before it can be released for production. There is no guarantee we will produce this business until these conditions are met.

Modulars accounted for 30% of units shipped during the quarter and 35% of revenues.

Backlog at quarter end stood at $47 million versus $84 million prior year. The backlog reduction has been substantially impacted by planned sell down of retail inventories. Total inventories are down $24 million versus prior year and down almost $10 million versus the fourth quarter. The backlog composition is 35% manufactured housing and 65% modular.

Capacity utilization for the quarter was 54% versus 59% prior year and 57% at March quarter end. Capacity utilization is weakest in the big HUD retirement states and in the east and southeast residential modular business.

We shipped 87 homes to the Gulf Coast during the quarter compared to 138 prior year, a decline of 37%. Gulf Coast business is steady, but down from last year’s results.

Standard Casualty had an excellent quarter underwriting 3,202 policies, an increase of 3.3% over prior year. Standard now has 11,214 policies in force and is continuing to expand their point-of-sale business in Texas, Arizona, New Mexico, and Georgia. In addition, Standard Direct, an internet based after marketing underwriting channel for us, is now operating and contributing 9% of standard’s new policies at quarter end.

CountryPlace Mortgage originated 117 new loans during the quarter, down from 187 prior year. The composition of these loans is as follows: 44 non-conforming mortgage or chattel loans, 73 conforming mortgage or FHA loans.

Of the $207.7 million of loans on our balance sheet at quarter end, CountryPlace owns $23.9 million of these loans composed of $4.1 million of conforming mortgage loans committed for sale upon completion and $19.8 million of non-conforming or chattel loans. The non-conforming and chattel loans can either be held for investment or sold in a transaction similar to the $51.3 million loans sale executed in April. These chattel and non-conforming loans represent the funding out of our pipeline. CountryPlace is no longer originating chattel and non-conforming loans, but continues to originate Fannie Mae loans under their seller-servicer agreement and FHA loans as a certified FHA lender.

Going forward our focus is simple. First we must continue to reduce our SG&A expense. While we met our targets for the quarter we have not yet realized the full benefits of restructuring and consolidation.

Second, we must continue the development of additional profitable revenue sources. These efforts are in three primary areas. First, product. We have greatly expanded our product line at both ends of the price spectrum in the last 18 months. This has been accomplished with two objectives in mind: to increase the reach and value of our product line and to develop flexible designs that can be sold at multiple grade levels and multiple price points. This expanded and flexible product line is one of the keys to the increased productivity of our company-owned retail stores.

Second, marketing and advertising. The principle focus of our expanded marketing and advertising efforts has been an increase in internet visitors, leads, and sales. Surveys show that approximately 70% plus of our customers visit us via our website before they visit a sales centre. We have taken advantage of this fact by upgrading our website to be more informative and useful, targeting our TV and advertising to customers who own their land and drawing more of them to our improved website, forming an internet sales team to work personally with each lead generated, and finally, training our entire sales team on how to best serve these highly qualified customers. Since beginning this process in January of 2007 internet leads have increased by 400% and internet generated sales have increased seven fold. Another key reason for increased company-owned store productivity.

Third, new distribution. The primary focus of our new distribution efforts has been in expanding our multi-family modular business and in entering the commercial and military modular business. We assigned a small team of experienced managers to this task earlier this year. In February our team signed our first military contract and to date have produced over $18 million worth of revenue, and have slightly more than that under contract subject to financing and regulatory approval.

These four initiatives would be yielding enormous dividends in better times. However, the fact is these are not better times. The industry is still in the throes of a 10-year slump and is now faced with eroding consumer confidence and a rapidly rising cost of living.

These factors, combined with declining home values, declining appraisals, stubbornly high inventories, have both buyers and sellers on the sidelines. But these conditions, too, will pass and a different housing market with different characteristics seems likely to emerge.

Only credit worthy buyers will be financeable. Housing decisions will largely be shelter decisions and not investment decisions. The average home will have to be more energy efficient and probably smaller. To the extent gas prices remain high, redevelopment of closer in, older, urban neighbourhoods will increase. And down payments as a condition of financing will be a requirement. Buyers who own their own land will have a ready down payment and an advantage.

We believe all these factors are favourable for factory built housing in general and for Palm Harbor in particular. In the meantime, we’ll busy ourselves with the key initiatives outlined earlier.

We’ll now open the call for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from John Diffendal – BB&T Capital Markets.

John Diffendal – BB&T Capital Markets

In the commercial/military am I to assume that most of the business that was booked, it sounded like it was primarily military and less commercial. Can you talk about how that sort of lays out in front of you?

Larry Keener

It was about 60% military and about 40% commercial.

John Diffendal – BB&T Capital Markets

Is that true of your pipeline going forward as well?

Larry Keener

Yes, it’s about the same, John.

John Diffendal – BB&T Capital Markets

You talk about the tone of the industry a bit, but I’m just curious if you’ve noted any real change as you came to the end of the quarter and as we’ve moved into July. I mean, the May shipping number was down 15% in terms of HUD code. Anything that you can kind of add to just the tone of what you’re hearing either from dealers or sort of seeing at the margin right now.

Larry Keener

Overall what we’re seeing is business is tougher. There are fewer consumers in everybody’s sales centres. People are worried about their jobs and the cost of living. I think it’s keeping some people off the sales centres. As it relates to independents versus company stores, our company stores seem to be doing significantly better than our independents. Their close ratios on the, traffic’s down about 15% with close rate yields are up about 20%. I think the primary reason for that are the two things I mentioned earlier: the expanded product lines and the fact that we’re getting so many more qualified internet leads to our stores that we’ve had internet conversations with for a month to six months before they get there.

So we have seen some deterioration. I don’t want to sound pessimistic because I like some of the things we’re doing, but it does seem to be impacting the independents more than it’s impacting our company stores.

John Diffendal – BB&T Capital Markets

You mentioned the troubled states of California, Arizona, and Florida. Anything to note? I mean, it seemed like we were seeing a little better action out of Florida relative to the other two. Anything you can note about that given your position down there?

Larry Keener

Sure, kind of in a microcosm, we saw business improving just as you said, albeit from very low levels, some in the spring. But in the last couple of months it has weakened again. The difference there between what our independents are doing and what our company stores are doing is pretty dramatic. Our company stores continue to make money down there and I know that’s probably not something a lot of our independents can say right now.

John Diffendal – BB&T Capital Markets

You mentioned the Gulf building being down. I guess there’s been a new sort of initiative about 12,000 houses or 12,000 dwellings to help in Mississippi in particular. Anything you can tell us about that program and what you may be hearing out of Mississippi?

Larry Keener

Well, we don’t know a whole lot more than what has been made public. I think the amount is around $350 million that’s going to be let through RFPs here in the near future. And we’ll certainly be looking at that. But it’s consistent with some of the things that FEMA has been doing. We’re doing a pilot project with FEMA and a developer just outside of Mobile for 105 to 110 houses to see if there’s some way to put permanent houses in place as fast as temporary houses. So if there are future disasters you don’t have to go through the temporary phase. I suspect an awful lot of that $350 million will be on multiple experiments to try to figure out the best way, the best process for replacing housing without having to go through that temporary step.

Operator

Your next question comes from Kathryn Thompson – Avondale Partners.

Kathryn Thompson – Avondale Partners

First question is on commodity pricing pressures and what you’re seeing in the market. You’ve seen some easing in lumber, but to talk about some of your other sources. And could you also remind us what’s the rough breakout of the most important to relatively least important in terms of commodities in terms of cost of goods sold. Thanks.

Larry Keener

Kathryn, you’re right about lumber and panels. After pretty much being on an escalator for two or three months they peaked sometime in mid-May and have started wandering down, thank goodness. I got with our materials people in anticipation of this question and we were notified during the quarter, not all of them took effect, but we were notified during the quarter of approximately $1,000 in raw material cost increases that we would be taking here in the very near future. Some of it occurred in the quarter, some of it would be occurring in July and August.

The biggest increases have been in all-steel products and in anything that has to do with oil, which would be carpet, carpet pads, shingles, even insulation and aluminum because there’s so much energy required in their production and a lot of that is oil driven. Also we’ve seen an awful lot of the vendors now go to transportation surcharges because of the increase in fuel.

So it’s coming quick and it’s coming fast and it’s coming from all directions. Lumber is still the primary commodity in our products with gypsum, which is now beginning to rise and makes no sense whatsoever, but it is, and steel being right behind that. But it’s amazing how many things are dependent upon our petroleum. Any of the plastics, any of the fibres are all dependent upon petroleum.

Kathryn Thompson – Avondale Partners

Just to clarify what you said; gypsum, steel, and what was the first?

Larry Keener

Lumber is still the primary component. Lumber and panels are still the primary components in terms of cost in our houses.

Kathryn Thompson – Avondale Partners

When you say you saw a $1,000 raw material price increase, is that per?

Larry Keener

Per home, on the average home. And again, let me stress that that didn’t all take place during the quarter. We were notified of those increases. Some of them have taken place, the rest will be taking place this quarter.

Kathryn Thompson – Avondale Partners

Have you been able to pass on those price increases, not only from a dollars but from a margin standpoint, so far?

Larry Keener

We have not. I think ultimately we will be able to, but there’s no way to keep up with them. We are certainly lagging behind in getting them to the marketplace. An integrated company also trades dollars because to the extent that we have contracts to deliver houses in August and September with customers, if we raise the wholesale price it means we’re just reducing the retail margin.

Kathryn Thompson – Avondale Partners

So in light of that commodity, your commodity comments, do you still maintain that $130 million per quarter on operating income basis is still break even?

Larry Keener

Still think so, yes, Kathryn. And I don’t see anything different there yet.

Kathryn Thompson – Avondale Partners

And as far as, and kind of tagging on from trends in the industry, there’s been a lot of talk about independents being weak for some time, but it does seem that we’re at a break point right now, particularly as we enter into the fall. Do you see independent dealer failures and more so kind of in coming months and what would that impact be on Palm Harbor?

Larry Keener

I think there could be some this winter. I think most of the retailers can hold on until the winter. I think we’ve seen the major fallout already, but there will be some. As you know, we do not have the huge independent distribution base that some of our competitors have. We don’t really see any major impact. We have not had to repurchase any inventory, I believe, Kelly, in the last year, have we? And we haven’t been notified of anybody in trouble by any foreplay institution. But I’m sure there will be some pop up, but the exposure is minimal for us.

And there again, having our own retail operation it’s a lot easier for us to repurchase and resell those than it is if you have to go back into the independent market to resell them.

Kathryn Thompson – Avondale Partners

As far as kind of the key states that you talked about earlier, Florida, California, Arizona, it’s just our impression that May was a key month for you to sell. Obviously aside from just [inaudible] which is across the US with a market change and just overall sentiment. Is it a fair assumption that this negative stance is carried into this current quarter and in June and July?

Larry Keener

I think probably so. The bad news is traffic is down. The good news is the people that are shopping and buying are typically good credits with down payments, have a need to buy, or are in such a comfortable position that they’re moving forward anyway. That’s a customer base we’ve always focused on, so we feel good about our ability to capitalize on that with our company stores.

The retirement business, however, just remains in the doldrums. Principally because the retirees have to sell to buy and I don’t think the denial stage is over yet on the decline in home values for a lot of the future retirees. They’re still waiting for some uptick so they can get a little more equity out of their house when they sell.

So we’ve said, I think for three or four calls now, we don’t think that those three big states are going to recover any time until sometime in 2009 and probably late then, just on what we’re seeing right now.

Operator

Your next question comes from Michael Corelli – Barry Vogel and Associates.

Michael Corelli – Barry Vogel and Associates

First of all, I just want to make sure I understood something properly that was said in the release and what you’ve said about your cost savings before. You talked about bringing your operational breakeven point down by $100 million in revenues, and I believe you had talked about $20 million in annual cost savings related to the restructuring. Then there was a mention of $23 million in selling general and administration savings in the press release. I just want to understand, are those separate or is that tied together?

Larry Keener

That is absolutely tied together. If you take our current SG&A expense and annualize it and divide that by our current margin I think you’ll see that we’ve reduced our annual breakeven levels somewhere around $104 million, $105 million.

Michael Corelli – Barry Vogel and Associates

So that $23 million of total cost savings, is that just a little bit higher than you thought before when you were talking about $20 million or were you being conservative?

Larry Keener

We were being conservative.

Michael Corelli – Barry Vogel and Associates

So the number now you think is $23 million.

Larry Keener

We’re comfortable with $23 million, yes.

Michael Corelli – Barry Vogel and Associates

So if we look at the second fiscal quarter versus the first will more of those savings be coming in? Because I think you said they weren’t fully in place yet in this quarter.

Larry Keener

I think, Michael, we’re not going to be happy until we’re consistently profitable, not just on the operational level, but on the net level as well. Obviously there’s four factors in that. There’s revenue, margin, and our fixed expense, and now we have an NOL. So if we can make money we’re going to be able to put it all on the bottom line free of taxes. So we’re working in all three of those. I think you can assume, as we’ve said in our release and on the call, that we’re not happy with our revenues, we’re not happy with our margin, and we’re not happy with our SG&A expense. We’re working on all three.

Michael Corelli – Barry Vogel and Associates

How’s the status of trying to sell those couple of plants? Anything going on there?

Larry Keener

Several bottom-feeding offers.

Michael Corelli – Barry Vogel and Associates

All right, so nothing near a deal it sounds like.

Larry Keener

That’s correct.

Michael Corelli – Barry Vogel and Associates

You had talked in a release back in March about the cumulative loss on the two securitizations, you know, the 2.1% on the 2005 and the 0.14% on the 2007. Any major changes or any changes in those cumulative loss ratios on those securitizations?

Greg Aplin

There’s no major changes. In fact, last year our losses were 103 basis points, 1% on our 2005 deal, and 46 basis points on our 2007 deal.

Michael Corelli – Barry Vogel and Associates

Okay. That’s great. And the change in terms on the floor of the plan. Could you talk a little bit about that?

Kelly Tacke

There weren’t any significant change in terms. We had an advance rate of 90%. The advance rate is still 90%. The pricing is now based upon LIBOR versus PRI (sic) and that’s increased our interest rate right now by about 70 basis points. That’s it.

Michael Corelli – Barry Vogel and Associates

What was cash flow from operations in the first quarter?

Kelly Tacke

Well, cash flow from operations was $59 million.

Michael Corelli – Barry Vogel and Associates

But that includes the sale of the portfolio.

Kelly Tacke

It was actually $59.8 million. Yes. So if you take out the $51.3 million, let’s see, it would have been $8.5 million excluding that loan sell.

Michael Corelli – Barry Vogel and Associates

You had talked previously that your goal was to produce a profit in the second quarter, that you thought you would reduce the operating loss in this quarter and obviously, you had an operating profit. Are you still shooting for a profitable second quarter?

Larry Keener

I think what we said in January and in May again, Michael, was that we felt we would be operating at a breakeven level by July 1 and at the operating breakeven level, and we think we are there, but we are not happy with that. We think there are other things we can do to become consistently profitable, as I said, both at the operating level and at the net level. I can’t give you any guidance as to when that’s going to occur, but we are where we said we were going to be in the January call and in the May call.

Operator

Your next question comes from James Mccanless – Ftn Midwest Securities Corp.

James Mccanless – Ftn Midwest Securities Corp.

The first question is talking again on the interest expense. With the new floor plan in place or the new floor plan agreement what should we expect for interest expense this year?

Kelly Tacke

Well, I think each quarter, Jay, all things being equal and interest rates unchanging, okay, having said that, we should probably expect a decline of about $200,000 to $400,000 each quarter. And that’s really due to the reduced securitized financing.

James Mccanless – Ftn Midwest Securities Corp.

So a sequential decline $200,000 to $400,000 each quarter?

Kelly Tacke

Yes.

James Mccanless – Ftn Midwest Securities Corp.

How much do you have in chattel loans that you can still sell?

Larry Keener

I think it was $19.8 million. Our preference, however, is to hold those. We made them for investment and we like them and they return a whole lot more to us both percentagewise and in whole dollars over time. But they are saleable and could be sold we believe under terms similar to the sale that we executed in April.

James Mccanless – Ftn Midwest Securities Corp.

Sticking with chattel, has there been any progress in obtaining or talks for the new warehouse lender?

Lyle Zeller

We have seen no change in either the term financing market or the warehouse financing with respect to chattel and non-conforming product.

James Mccanless – Ftn Midwest Securities Corp.

And then jumping over to the commercial business, how should we think about the operating margins on this? Is it better than Hudco, better than modular, same as modular? Can you give us a sense there?

Larry Keener

It’s about the same as modular, Jay. We’ve always said and it’s still true that when we build a house and we sell a house we make about 15% at the manufacturing level gross margin and about 15% at the retail level. The commercial and military business is about the same. Obviously we don’t have the retail component, but it’s about the same as our regular modular business.

James Mccanless – Ftn Midwest Securities Corp.

On the tax situation, was that local taxes paid this quarter and then you all had an NOL against the federal? How is that going to work going forward?

Kelly Tacke

Yes, the tax expense, are you talking about the $58,000?

James Mccanless – Ftn Midwest Securities Corp.

Correct.

Kelly Tacke

That’s state taxes. And NOL against the federal taxes and we can re-establish that NOL when we re-establish our deferred tax assets, I should say, once we return to profitability on a consistent basis.

James Mccanless – Ftn Midwest Securities Corp.

But until you re-establish the deferred tax assets can you not use the NOL against federal taxes?

Kelly Tacke

Yes, we can use your federal NOL. This is just accounting purposes.

James Mccanless – Ftn Midwest Securities Corp.

How much is the NOL?

Kelly Tacke

We have to assume we would have a tax expense we could certainly use our NOL.

James Mccanless – Ftn Midwest Securities Corp.

How big is the NOL now?

Kelly Tacke

For tax purposes it’s $26.4 million, so that can be used to offset $9.3 million in taxable income. The book NOL is $44.9 million and that can be used to offset $15.7 million. So we’ve got some pretty hefty NOLs to use for a while.

James Mccanless – Ftn Midwest Securities Corp.

Just picking off of something you said, Larry, you were talking about buyers who have land or own land have an advantage in this market. Are you doing more land-in-lieu deals? Is this something you all are going to focus on going forward? Can you talk about that a little bit?

Larry Keener

Well, yes, I’d like to talk about that. I’d like to talk about it more than I can. It was the growth part of our business at CountryPlace. It was a sweet spot, especially for factory built housing, because we have so many customers that live rural and own their own land. The non-conforming mortgages that we were doing at CountryPlace were almost totally had a land component for the down payment. It is a business we’d love to get back in. It’s a missing piece that is poorly served by FHA, Fannie or Freddie. But right now we’re not doing it. Fortunately there’s still a couple of chattel lenders that do do some land-in-lieu and we’re continuing to do that, but from a lender’s standpoint our experience has been that when people put their own land in the deal the deal performs significantly better over time than just a pure chattel loan.

James Mccanless – Ftn Midwest Securities Corp.

And not having worked with those transactions before, do they perform better when the land is equal to 20% or maybe the lot’s value is equal to 20% of the house or 15%? How does that need to work to make it a saleable mortgage?

Greg Aplin

Obviously the more equity they have in the transaction the better it performs. There’s an inherent deal in all these transactions where the people own the land and they’re very proud of that land. Whether it’s 10% or 20%. That being said, Larry talked about the chattel business, we can still use that land in appraisals for conforming mortgages or FHA mortgages.

Operator

Your next question comes from [Chris Hansen – Wibodi and Company].

[Chris Hansen – Wibodi and Company]

Hi. Good morning. Most of my questions have already been answered. The wholesale pricing, I saw it decline from $60,000 to $50,000 for manufactured housing. Was that primarily due to the single multi-mix or is there something else in there?

Larry Keener

Single multi-mix is one of the primary causes. The other primary cause is competitive pressures.

[Chris Hansen – Wibodi and Company]

Yes. Can you talk a little bit more about competitive pressures and, you know, where in particular?

Larry Keener

Everywhere, there are places where it’s more competitive than others. Obviously those three key states, Florida, California, and Arizona, are hypercompetitive right now. But the industry, depending on which expert you talk to, has somewhere between 70% and 100% excess capacity at the current shipment level. So that puts a lot of competitive pressure on everybody. We see it everywhere.

[Chris Hansen – Wibodi and Company]

And how would you characterize the extent to which repos are impacting wholesale prices? Is it less now than it has been in the past?

Larry Keener

It’s almost non-existent for repossessed manufactured houses to impact pricing. I suspect we’re getting some headwinds from foreclosed real estate properties, but we’re not getting any from repo-ed manufactured homes.

Operator

Your next question comes from [Michael Chrisodooloo] – Wood Capital Partners.

[Michael Chriodooloo] – Wood Capital Partners

A few questions about the convert and the CountryPlace loans. So on the convert that was a $75 million issue, if I’m looking at some of the financials right, and it’s not mandatorily putable for, what, another three years?

Kelly Tacke

Mandatorily putable the earliest date is May 2011.

[Michael Chriodooloo] – Wood Capital Partners

Were you approached or, you know, I’m just curious. Some of that’s at 144A and some that I guess is more registered. I’m just curious if there might be more of that out there that you thought you could get your hands on.

Kelly Tacke

Well, first of all, we have not made a formal tender offer. So we have been approached by people and we just been opportunistic buyers as we’ve been approached. We have not initiated the transaction.

[Michael Chriodooloo] – Wood Capital Partners

Okay. And of the $23.9 million that’s currently held by CountryPlace, the balance is in the two securitizations, is that correct? The 183?

Kelly Tacke

That’s right.

[Michael Chriodooloo] – Wood Capital Partners

What kind of party bought that $51.3 million? Could you characterize?

Larry Keener

It was a financial institution. That’s all we can say. There’s a confidentiality agreement.

[Michael Chriodooloo] – Wood Capital Partners

But your guess might be that that institution or someone of that ilk may have similar appetite?

Kelly Tacke

Right.

Larry Keener

That’s our feeling, Michael, yes.

[Michael Chriodooloo] – Wood Capital Partners

I commend your discipline. It seems like if you can build a unit and make a 15% gross margin and sell it through your own retail and make another 15% gross margin and then turn around and sell some of those dollar bills for a dollar to turn around and buy other dollar bills for $0.58 it seems like –

Kelly Tacke

It makes a lot of sense, doesn’t it?

[Michael Chriodooloo] – Wood Capital Partners

It seems to make a lot of sense.

Larry Keener

It wasn’t the business we signed up for, but it does make sense.

Operator

Your next question comes from Bill Baldwin – Baldwin Anthony Securities.

Bill Baldwin – Baldwin Anthony Securities

. Could you give us a little bit of colour on the commercial modular business, Larry, and kind of what you think the potential for that is looking out over the next several years? What are kind of the channels of distribution on that?

Larry Keener

First of all, we’re in it because there’s money there. The federal government is funding the replacement of all these barracks over a decade all around the country, all the different military installations. So that money has been appropriated and is going to be available. An awful lot of those units are going to be modular built. Some are going to be site built, but an awful lot of them are going to be modular built.

On the commercial side, commercial construction has not slowed like residential construction has. There are an awful lot of sites, especially smaller, low-density sites where people want to put 100 apartments or 50 condominiums or 30 smaller single-family homes that are almost zero lot line where site building, for whatever reason, cost, availability of labour, location, just really doesn’t make sense. Increasingly, developers are turning to modular.

And we’ve been in that business nationwide for two or three years on the commercial side. And now we’re in it on the Palm Harbour side with our Discovery modular division. We see that as an opportunity to grow our revenues. We think it will be a permanent part of our business and be a new business channel for us. I’m not sure yet how large it will be, but with the slowdown in residential housing and the funding that’s available on the military and commercial side we think it’s a growth opportunity and could perhaps be significant for us.

Bill Baldwin – Baldwin Anthony Securities

Larry, are you seeing the opportunities for this commercial development throughout a broad swath of your geographical reach or is it concentrated right now in certain locals, certain regions?

Larry Keener

It’s more in the eastern part of the country and tends to concentrate along the coast. Not quite sure why that is, but it does tend to concentrate along the coast and the eastern part of the country.

Operator

Your next question comes from Matt Sherwood – ZS Fund.

Matt Sherwood – ZS Fund

Are there any significant covenants on the new floor plan loan?

Kelly Tacke

No. The covenants are basically unchanged from the existing covenants. We have a minimum liquidity, tangible net worth. They’re balance sheet driven covenants.

Matt Sherwood – ZS Fund

I remember you used to have a turn-over covenant that you renegotiated.

Kelly Tacke

An inventory term rate. That’s right.

Matt Sherwood – ZS Fund

And is that still there or not?

Kelly Tacke

Yes.

Matt Sherwood – ZS Fund

And you had been in violation of that, but the line doesn’t seem to mind that. Is it more relaxed now?

Kelly Tacke

The covenants have been renegotiated and they’re based on the company’s forecast. So we are currently in compliance with all the covenants.

Matt Sherwood – ZS Fund

Do you know where the converts are currently indicated? I know you gave in the interim what your plans were.

Kelly Tacke

Anywhere, the latest I heard was 57 to 62.

Operator

Your next question comes from [Mike Durap – Verboti and Company].

[Mike Durap – Verboti and Company]

In your shareholder letter you mentioned investing in a new property and casualty business in Florida. I was just wondering, could you provide more details on that? Like how much you invested, maybe who the venture is with, and why you decided to make that investment?

Larry Keener

We have invested to date $750,000 and we will be investing a total of $1 million, assuming certain conditions are met here within the next few months. The insurance companies is one of our large developer customers and then a group of experienced and seasoned Florida insurers that have built smaller property and casualty companies in Florida with a legacy of making money. The reason we did was because the larger insurers in Florida have such a legacy cost and such a high re-insurance cost that new issuers have a distinct advantage in that state on rate, especially if they will observer concentration limits and coverage limits.

That’s the way this has been set up. Because Florida is such a key state for us we felt like it was important to have a contingency plan down there to be able to ensure even if we can sell houses and finance houses, if we can’t get them insured at reasonable rates that’s going to impede our revenues and obviously impeded our sales. So that’s why we got into that business. The only thing we have at risk is the investment. We have no liability on the company and that company has no liability on standard in terms of their re-insurance rates. So hopefully that answers your question.

[Mike Durap – Verboti and Company]

While we’re on the topic of insurance, on the last call you mentioned the bulk of your operating income and financial services comes from insurance. Could you give the percentage of that for fiscal year 2008 for financial services? What actually, I guess the income from operations was $21.638 million for financial services in your fiscal year. What percentage of that was actually from insurance?

Kelly Tacke

We’ve never broken that out and aren’t going to, don’t plan to do that as we go forward.

[Mike Durap – Verboti and Company]

I guess in February you came to an agreement to purchase the remaining 20% of CountryPlace. What was the total consideration paid for the 20% and how did you determine the price given the environment? Was there an independent evaluation of that transaction?

Larry Keener

There was not an independent evaluation because it was not required unless the parties couldn’t agree and we readily agreed on the value of their residual interest. I think, Kelly, help me here, I think it’s disclosed, is it not?

Kelly Tacke

Yes, it’s disclosed in the [inaudible]. Let’s see. To tell you the truth, I don’t remember. So let me look it up right quickly. Is it $1.8 million?

[Mike Durap – Verboti and Company]

I guess that’s note 17. I’ll look at that further. Okay. All right. That answers my questions. Thanks very much for taking my call.

Operator

Your last question is a follow-up from John Diffendal – BB&T Capital Markets.

John Diffendal – BB&T Capital Markets

Feedback I’ve gotten from dealers has been increasing difficulty in getting appraisals to work. I assume on the modular and land home side. Is that something that you’re seeing and could you comment on that?

Larry Keener

John, I saw that in your survey and, frankly, I was surprised it took this long for it to show up. We’ve been seeing that, especially over the last year, in these declining home value states and that had not been an issue up until that point. But for the last year we have been seeing that. The other thing that’s happened is on FHA deals FHA has been pretty stringent on lenders to have them hold appraisers accountable on manufactured housing sales. We have not really run into a lot of appraisal problems on modulars. It’s been more on manufactured homes.

John Diffendal – BB&T Capital Markets

On MH?

Larry Keener

Yes.

Operator

Your next question is a follow-up from Michael Corelli – Barry Vogel and Associates.

Michael Corelli – Barry Vogel and Associates

The securitized financing has dropped by a reasonable amount again this quarter and I know we had talked last quarter that you thought maybe the refinancings and things like that would slow down. Could you talk about why that came down so much again?

Lyle Zeller

The refinancing or prepayments have not slowed down.That’s the primary cause. We’re as surprised as you are, Michael.

Michael Corelli – Barry Vogel and Associates

What was depreciation/amortization in the quarter?

Kelly Tacke

Depreciation/amortization was $2.3 million.

Michael Corelli – Barry Vogel and Associates

Is that a good run rate?

Kelly Tacke

It’s a good run rate.

Michael Corelli – Barry Vogel and Associates

And CapEx?

Kelly Tacke

It was $1.9 million and that’s a little higher than it’s been, as you know. For the last several years we’ve spent little to nothing on capital expenditures. This quarter we’ve spent some money upgrading our carrier systems at the plant, as well as in a new payroll system here at corporate. I don’t expect that run rate each quarter.

Michael Corelli – Barry Vogel and Associates

Any thoughts on what that might look like for the year?

Kelly Tacke

I’d use $4 million to $5 million.

Operator

There are no additional questions..

Larry Keener

This concludes our first quarter fiscal 2009 earnings call. I’d like to thank you for your interest and the investment of your time today. Good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Palm Harbor Homes, Inc. F1Q09 (Qtr End 06/27/08) Earnings Call Transcript
This Transcript
All Transcripts