Cavco Industries, Inc. F1Q09 (Qtr End 06/30/08) Earnings Call Transcript

Jul.25.08 | About: Cavco Industries, (CVCO)

Cavco Industries, Inc. (NASDAQ:CVCO)

F1Q09 Earnings Call

July 25, 2008 12:00 pm ET

Executives

Joseph Stegmayer - Chief Executive Officer

Dan Urness - Chief Financial Officer

Analysts

David Kaplan – Sidoti and Company

Michael Corelli – Barry Vogel & Associates

James McCanless – FTN Midwest

Howard Slinker – Slinker & Company

Operator

Welcome to Cavco Industries first quarter fiscal year 2009 earnings conference and webcast. (Operator Instructions) With us today from the company is the Chairman and Chief Executive Officer, Joseph Stegmayer.

Joseph Stegmayer

With me is Dan Urness, our Vice President, Chief Financial Officer, and Treasurer. Of course, before we begin, we are obligated to state what we state today is under the umbrella of the Safe Harbor rules. Certain comments we will make are forward-looking statements. Cavco disclaims any obligation to update any forward-looking statements, and investors should not place any reliance on any such forward-looking statements because they may not in fact materialize. There is a complete statement on this subject incorporated in our 8-K, which was released yesterday.

During our fourth quarter conference call, we said that the next several months will be very tough and indeed they have been. As the general economy and the housing industry continue to struggle, we feel fortunate to be solidly in the black and to be financial strong enabling Cavco to continue to develop new products and to pursue new markets. Before I make some additional comments, I’m going to ask Dan to review some financial highlights, and then we’ll take your questions.

Dan Urness

Net sales for the first quarter of fiscal year 2009 were down 5% to $32.5 million from the prior year’s net sales of $37.4 million. The lower sales figure is the result of reduced floor shipments which were down 3.7%, while the average selling price per floor this quarter of approximately $26,400 was 2.3% lower than the average selling price per floor during the same quarter last year of approximately $27,100.

NHI recently reported industry HUDCO production and shipment information through May of calendar year 2008. Accordingly national floor shipments for the first 5 months of the calendar year were reported to be down 9% for the industry. Aided by the ramp-up of our Texas factory, Cavco’s comparative change was a decrease of 1.8%. Isolating these same statistics for the company’s key states of Arizona and California, industry floor shipments were down 38.5% through May 2008, while Cavco shipments were down 29.9% comparatively.

The company’s gross profit margin for Q1 ’09 was $4.1 million, or 11.8% of net sales versus $5.4 million, or 14.6% of net sales for the first quarter last year. The gross margin was challenged this quarter by low margins in Texas resulting from that factory’s product line combined with our low utilization. The margin was also adversely affected by higher raw material costs in each of our operations. Normally whereas we will pass along raw material price increases in our wholesale sale prices, the current market environment has not afforded us many opportunities to do so in an efficient and timely manner.

We successfully reduced our selling, general, and administrative expenses for the quarter by $0.5 million to $2.3 million, compared to last year’s first quarter SG&A of $3.6 million. As a percentage of net sales, SG&A shrank to 8.7% in Q1 ’09 versus 9.6% in Q1 ’08. Interest income was lower by $377,000, primarily as a result of generally lower interest rates and the company’s more conservative cash investment strategy. The current effective income tax rate for Q1 ’09 is 38%, compared to 32% for Q1 ’08. The rate has been largely affected by no longer realizing tax-free interest income on short-term investments as well as a reduction in certain state tax credits in fiscal 2009 resulting primarily from decreases in personnel.

Fiscal 2009’s first quarter income from continuing operations was $853,000, or $0.13 per diluted share, compared to $1.735 million, or $0.26 per diluted share last year. In comparing the balance sheet at June 30th to March 31, our cash and cash equivalents balance was $73.4 million, essentially the same as the balance 3 months ago. The company’s trade receivables were moderately lower. Inventory is up $2.1 million, primarily due to the timing of shipments at quarter end.

Current assets were five times current liabilities at June 30th, and total current liabilities were down slightly from March 31. Our balance sheet contains no short- or long-term debt, and our stockholders’ equity improved $147.2 million at the end of the quarter.

Joseph Stegmayer

We are gratified that our Texas facility is growing and is profitable. Meanwhile, our Arizona operations have performed very well, given the market conditions Dan just referred to with the comments on home shipment levels. Our people are doing everything they can from an operations standpoint to mitigate the rise in costs of raw materials and transportation expense. On the product line front, we have introduced a new line of green homes as well as a section of solar homes. In fact, these new features were highlighted in a television news story about Cavco that aired on CNBC this past Monday. If you did not see it, you can still view the story on www.cnbc.com under TV stories by reported Jane Wells.

While there is virtually no visibility as far as the near-term outlook is concerned, one bright spot may be the Comprehensive Housing Reform Bill moving through Congress. While I think the bill is flawed for a number of reasons, within this broad legislation is a logical and important manufactured housing FHA Title 1 initiative that will significantly increase the limit for a home [inaudible] loan. The reason we feel this particular part of the bill makes sense is because the loan limit for FHA financing of a manufactured home has not been raised, not even adjusted for inflation, since 1992. As a result, the number of loans originated under FHA’s title loan program has declined to an insignificant number of less than 2000 per year. The loan limits should spur more activity in this viable lending program.

There are also tax credits for first-time home buyers and a tax credit for people who do not itemize on their tax returns, both helpful issues for affordable home buyers. In any event, there is no doubt that the economy and the housing market will continue to be difficult environments in the months ahead. We remain confident, however, that we have the wherewithal, financial and otherwise, to combat the challenges we expect to face.

Longer term, we appreciate the fact that we are involved in geographic and demographic markets that offer excellent potential for improved systems to fill housing demand. With that, please open it up for questions.

Question and Answer Session

Operator

(Operator Instructions) Our first question comes from David Kaplan – Sidoti and Company.

David Kaplan – Sidoti and Company

Could you please provide the capacity utilization and backlog for the quarter please?

Dan Urness

Our capacity utilization is in the low 50s this quarter, and our backlogs are at $3 million for the company.

David Kaplan – Sidoti and Company

In terms of the cost pressures, where are you seeing the greatest cost pressure?

Joseph Stegmayer

Well, David, we’re seeing those in virtually area of what we buy. One of the biggest items we buy is steel and aluminum for various parts of the home. Steel price has risen tremendously and is still rising. Another is insulation and paint. Paint of course is often petrochemical based. Insulation takes a lot of energy to product. The only area that we’ve not seen significant increase is in some of the, what we call, panel products. Firewood and OSB have not risen nearly as much. They’ve been fairly stable, but gypsum which is the wall board we use inside the home, same as other construction methods, has risen significantly, and appears to continue to be rising. Electrical parts, plumbing parts, floor coverings, carpets, carpet pads of linoleum all have petrochemical relation, so they are all rising on that basis, as well as of course transportation costs to deliver them.

David Kaplan – Sidoti and Company

Could you talk about any special projects you’re currently working on? You had mentioned on the last call that you had been working a project for the past two quarters. Are there any other ones in the pipeline?

Joseph Stegmayer

I’m not sure I’m following you, David. From what project…

David Kaplan – Sidoti and Company

The community project?

Joseph Stegmayer

The community project, yes. Well, we have several that are fairly active and a number we’re working on. The problem right now though is although we feel we’re gaining share, we’re gaining shelf space, if you will, and more involvement with more communities, the problem is of course the business in those communities is fairly slow right now, but we do feel it positions us well. As home sales pick up, we’re going to be more involved in more locations and more placed than we have been in the past. I can’t point to any one specific project that has had any meaningful impact in the short term, but I think we’re making inroads in a wide variety of projects both Arizona, California, and even New Mexico.

Operator

Our next question comes from Michael Corelli – Barry Vogel & Associates.

Michael Corelli – Barry Vogel & Associates

Question about unit shipments. Obviously considering the environment in the industry, it was pretty surprisingly that you were able to maintain relatively flat unit shipments. Is that mainly due to growth in Texas that is offsetting weakness in other areas or was there anything else that you were able to do that?

Joseph Stegmayer

Yes, certainly Texas is the biggest factor. Texas continues to ramp up. It is providing initial volume, so that helped both on unit shipments and the sales number. We also add stability in our specialty line of products which are small units. They seem to be very popular now at somewhat lower price points, and we have had interest in some of our new cabins line of products for residential cabins, so it’s kind of across the board, but I’ll say the biggest factor has in the unit shipment certainly was Texas.

Michael Corelli – Barry Vogel & Associates

Could you give us an idea of how many units that you increased in Texas versus a year ago?

Joseph Stegmayer

No. We don’t break out Michael by plant.

Michael Corelli – Barry Vogel & Associates

Is there a possibility you can maintain relatively flat shipments because of what’s going on in Texas, although I did see after a period of some rapid growth there, the shipment data for in Texas got a little softer in May?

Joseph Stegmayer

Yes. Texas is doing better than many states, but it is by no means without its challenges as well, so we’d except to continue to ramp up production in Texas over time. Production activity here in our Arizona markets is certainly up. It’s hard to predict at this point in time, but I think you’ll see a stabilization of our shipment levels.

Michael Corelli – Barry Vogel & Associates

Okay, mostly because of Texas ramping up and the other ones not deteriorating as much?

Joseph Stegmayer

I think that’s probably a good assessment for the short term for this next quarter.

Operator

Our next question comes from James McCanless – FTN Midwest.

James McCanless – FTN Midwest

My first question is a conceptual question. I agree with your assessment on the housing bill that may pass tomorrow in the Senate, if the Wall Street Journal is correct, but I’m wondering if you could give us sort of your outlook on how it’s going to affect the different segments of your market. In other words, are the leisure and active adult buyers going to respond as quickly as maybe the entry-level buyer or the affordable buyers of your single section products is Texas? How do you think that’s going to play out, if this bill ends up being ratified?

Joseph Stegmayer

That’s valid point. I think the empty nester buyer as a demographic is at the age who may be a willing buyer that is such a large demographic and an important one for industry and certainly important for Cavco. That is a little different market. I think they are more dependent upon sales of existing homes which, of course, still could help us sell their home for us faster and they have been able to do here before, and also it depends on their determination and if they overcome the denial that they have. Their home isn’t worth quite as much as it was several years ago, and I think that gradually happens. These people that want to make a housing lifestyle change in that demographic, they made up their mind to make the change. I submit that they can delay it for a while, but ultimately the clock is ticking and they want to make the change, and so I think the Housing Bill could have that impact on better resale of homes. Other than that, it does not have it does not have a lot impact for those buyers. It has an important impact to the affordable home buyer, and those are still big markets for us, not only in Texas. We sell a lot of typical first-time homebuyer and first move-up buyer homes in Arizona and California markets, and in fact, in California, we saw a lot of communities that are family-oriented communities, and our business is very slow right now, but California has an enormous number of parks, and they have estimated about 60% of the homes in those parks are pre-1976 in age, so there is a long line of replacement business which could and will happen, and this bill could spur some of that.

James McCanless – FTN Midwest

Could you give the percentage mix of multisection product versus single section product for what you did in the first quarter versus what you did in the first quarter of ’08?

Dan Urness

Sure. I presume you’re speaking HUDCO product, for which multi are around 90% and singles are around 10%.

James McCanless – FTN Midwest

I was actually going to see if you take the split between multisection for your different classes and then single section to include park models, cabins, etc.

Dan Urness

In that breakdown, it would be about 50:50.

James McCanless – FTN Midwest

And does that compare about even with last year?

Dan Urness

It’s pretty close with last year’s as well.

James McCanless – FTN Midwest

My final question is did you call buy back any stock this quarter, and what’s the outlook for that since I know you have the authorization now.

Joseph Stegmayer

We have not purchased any yet, but we’re getting ready to do so.

Operator

We go now for a followup question from Michael Corelli – Barry Vogel & Associates

Michael Corelli – Barry Vogel & Associates

With the rising costs that you were talking about and the fact that you’ve been shifting I guess to more lower priced products, should we expect the margin squeeze to worsen going forward?

Joseph Stegmayer

Michael, that’s quite a forecast. I think we expect to see continued margin pressure. I’m not sure that we necessarily expect to get weaker, but certainly material cost challenges don’t appear to be dissipating to any extent. It’s surprising in some case why they continue to rise. For example, gypsum shipments are way down for the industry, but somehow they still about price increases, and other products you can see that maybe demand is still there worldwide. So I think at least for the time being we’ll continue to see the raw material price pressures and the somewhat reluctance on the part of the market for us to be able to pass all those price increases through certainly in a timely manner, so I think we’ll continue to see some margin pressure. I don’t necessarily think it’s going to get a lot tougher than it’s been, but it could.

Operator

Our next question comes from Howard Slinker– Slinker & Company.

Howard Slinker– Slinker & Company

Your comment about replacement housing is kind of interesting. Would that stem from the $7500 credit essentially? Is that your line of thought?

Joseph Stegmayer

On the replacement housing?

Howard Slinker– Slinker & Company

Yeah and the Housing Bill.

Joseph Stegmayer

Right. That is what it extends from I think. Of course, that credit is for first-time home buyers.

Howard Slinker– Slinker & Company

Oh, it’s only first-time? I forgot.

Joseph Stegmayer

I believe that’s what I read anyway, and so that will help our affordable home buyers, a few of the people coming out of rentals. On the older age demographic, the 50 to 55 and older, I think again the whole bill might spur the sale of their home. Other than that it does have a significant impact probably on their approach, other than perhaps a lower income retiree who might not be itemizing or something like that. The bill could help them with the tax credit for them, but I think this is primarily going to help the first-timer, the affordable homebuyer.

Howard Slinker– Slinker & Company

You mean it would generally loosen up the market.

Joseph Stegmayer

Providing I think more financing capability.

Howard Slinker– Slinker & Company

Secondly, this is kind of a subjective question. If you can think back in your memory, when you were at Centex or Champion and the several upturns in those markets that occurred, and if you can think of the early signs, do you see any of those now?

Joseph Stegmayer

Well, some of them.

Howard Slinker– Slinker & Company

At some point soon, you’re going to have to see them, because it’s been what 7 years?

Joseph Stegmayer

There are some. Certainly, we’re pleased that inventory levels are very much in control. That is they are not way out of line, and in fact, we’re seeing inventory levels among our distribution base declining which is a good sign. As sales decline, obviously, retailer and distributor generally want to reduce their inventory, and it takes them a little bit longer to do so because obviously sales are slower, but once they get through that, then eventually they get to the point where even if sales are slow, they have to order a home to sell a home.

Howard Slinker– Slinker & Company

At some point, they reduce inventories too much because they too get scared, like people in the investment business.

Joseph Stegmayer

And their inventory gets so low they can’t tell us inventory anymore, so they have to order a home when the customer comes in. Eventually, they might be trying to sell the customer on a stock model home, just like a spec home. They might encouraging them to take that because they want to reduce it, but after they get their levels down, the customer comes in and they order a home for them. They don’t try to convince the customer otherwise because they are ready to order a home. So, we’re seeing that. Every month that goes by, we are in the better position from that standpoint, because our dealers obviously are not ordering many homes. They’re certainly not ordering homes for stock, so as they reduce their stock inventories, they are closer and closer to ordering a home every time they sell one. We’re not quite in that position yet, but I think we’re closer all the time. So, yes, I see some of those signs.

Howard Slinker– Slinker & Company

What about traffic? At some point, doesn’t traffic start to increase even before buys? Are you seeing any of that?

Joseph Stegmayer

Well, it does, but the reports we’re getting on traffic are all over the map. Some say traffic has increased, some say it’s declined, some say it’s very sporadic. One week, they’ll have 20 customers. The next week, they’ll see two customers, so we’re getting all kinds of reports.

Howard Slinker– Slinker & Company

We’re certainly not any worse either.

Joseph Stegmayer

I think the customers certainly are hesitating. They want to see what’s going to go on the economy. They want more confidence. Some people obviously just don’t have the credit quality. They’re looking, but they don’t have the credit yet to buy a home, but I think the traffic is out there. I think we’ll see more of it. I think the apartments are quite expensive, so the alternatives are not that attractive, and price of the homes is very attractive.

Howard Slinker– Slinker & Company

Okay. That gives me an education. Thanks Joe.

Operator

At this time, Mr. Stegmayer, we have no other questions standing by. I’d like to return the program back to you for any additional or closing comments.

Joseph Stegmayer

We’re very pleased that you call could join us today. We’re cautiously optimistic that we can improvements as the year progresses. It’s certainly going to be a difficult environment, but we think we’re well positioned to capitalize any opportunities. We look forward again to talking to you here in a few months. Thank you very much.

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