Cavco Industries, Inc. (NASDAQ:CVCO) Q4 2017 Earnings Conference Call June 13, 2017 1:00 PM ET
Joe Stegmayer - Chairman and CEO
Dan Urness - EVP and CFO
Daniel Moore - CJS Securities, Inc.
Howard Flinker - Flinker & Company
Good day, ladies and gentlemen and welcome to the Fourth Quarter Fiscal Year 2017 Cavco Industries' Earnings Call Webcast. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference may be recorded.
I would now like to introduce your host for today’s conference, Mr. Joe Stegmayer, Chairman and CEO. Sir, you may begin.
Thank you, Bruce and welcome everyone to the phone conference and on the web glad to have you today. With me as usual is Dan Urness, our Executive Vice President and Chief Financial Officer; and he’ll begin with the declaimer and financial our report and then I’ll come back and make a few comments, and we'll happy to take your questions. Dan?
Thanks, Joe, and good day, everyone. Before we begin, we respectfully remind you that certain statements made on this call either in our remarks or in our responses to questions may not be historical in nature, and therefore, are considered forward-looking. All statements and comments today are made within the context of Safe Harbor rules. All forward-looking statements are subject to risks and uncertainties, many of which are beyond our control.
Our actual results or performance may differ materially from anticipated results or performance. Cavco disclaims any obligation to update any forward-looking statements made on this call and investors should not place any reliance on them. More complete information on this subject is included as part of our earnings release filed yesterday and is available on our website and from other sources.
For our fourth quarter financial report, net revenue for the fourth fiscal quarter was $198 million, that’s up 12% from higher home sales volume, compared to $177 million during the fourth quarter of fiscal year 2016.
Consolidated gross profit in the fourth fiscal quarter as a percentage of net revenue was 21.3%, up from 20.7% in the same period last year. Operating leverage mainly from the increased home sales volume improved gross profit as a percentage of net revenue.
Selling, general, and administrative expenses in the fiscal 2017 fourth quarter as a percentage of net revenue was 12.7% compared to 14.2% during the same quarter last year. Improvement was from better SG&A utilization at higher sales levels.
Net income for the fourth quarter of fiscal 2017 was $10.9 million, compared to net income of $7 million reported in the same quarter of the prior year. Net income per diluted share for Q4 2017, was $1.19 versus $0.77 in last year’s fourth fiscal quarter.
Comparing the April 1, 2017 balance sheet to April 2, 2016, cash was approximately $133 million compared to $98 million last year. The increase was from net income and cash provided by operating activities.
For certain items on the balance sheet, total consumer loans receivable increased from further development of home only loan programs and additional mortgage sales volume. Prepaid expenses increased from the timing of quarterly income tax payment activity. Accounts payable grew from more home sales as did most accrued liability categories including warranty and customer deposits, as well as on earned income premiums from higher policy counts at our insurance subsidiary.
Other asset and liability accounts remained relatively consistent. Stockholders equity grew to approximately $394 million as of April 1, 2017, up $41 million from the April 2, 2016 balance.
Joe, that completes the financial report.
Thank you, Dan. While we are pleased with the results and more importantly we are pleased with the outlook for our industry and for Cavco in particular it’s interesting to note that in recent surveys including one just recently by USA Today, those who link homes with the American Dream are greater than nearly 60% every age category at the 18 to 34 age cohort is over 65% of those people who still want to own their own home. That’s a very important statistic for us. Because many of our buyers come from that Millennial [ph] group, as well as the empty nester and retiree group, two major markets for us. Both these market home ownership is still very important.
However the median price the average price of site built home is greater than $350,000 today. So that presents a challenge, because of the households aged 25 to 54, study show that only approximately 40% can qualify for a typical mortgage of the average site build home that I just mentioned. Yet 80% can qualify for a $200,000 price point home.
Now 80% of what [indiscernible] sales is less than $150,000. So we think we are in the right spot, right place. Manufactured housing accounts for about 9% of housing starts, we look to increase that as the industry over time. And we also expect the housing industry in general to increase or in fact most analyst expect it to increase. So as we look out over a few years we should see industry growth in line with housing in general and we’ll also of course will work towards gaining greater share of housing starts in total.
We will do that by trying to reach out to more people, we will do it with new product introductions. We're looking at new classes of manufacturing homes, most of you who follow the industry know that we build our homes generally to the federal preemptive code called -- generally called the HUD code. Homes can be placed anywhere in the country. But they do have certain restrictions because we transport them over highways.
So we're looking at different ways to change the elevation of the home. We'll try to work with HUD to get some regulatory help to allow us to do more to the homes on site, which allow us to do things such as higher pitch roofs and add garages to make them more compatible or competitive with home construction on site. We'll still have the major advantage of the efficiencies of building in a factory whether that be with material supplies coming to one location, labor and more efficient use of labor and stringent quality control.
So we have all the benefits of assistance built construction process within an enclosed environment of the factory, but we'll also have the advantages of more creative product. So the industry and we in particular specifically are working towards that end. In the meantime we're not going to abandon the truly affordable price point home we have the HUD code home, which is doing very well and should do I think better in the future.
So overall, we're quite pleased with the way things are working out so far and we are relatively or cautiously optimistic you might say for the future. The economy continues to grow and jobs are created, we should benefit.
With that, I think we'd like to, Bruce, take any questions these folks may have. If Bruce is there.
[Operator Instructions] And our first question comes from Daniel Moore from CJS Securities. Your line is now open.
Good morning, Joe. Good morning Dan. Thanks for taking the questions.
So, there was a little bit of talk at the start of the year about industry growth certainly has accelerated or reaccelerated and in part due to government assistance or FEMA Homes. Wondering any sense of the impact in the quarter that you saw from shipments to FEMA? And then as a follow-up average selling prices down a little bit, wondering if that was due to mix or any color you might have on that?
Well, I'll let Dan address the price point the average selling price. I'm actually in travelling, I'm in West Virginia today speaking to people within our industry our distribution base in Virginia and West Virginia, but -- and Dan is in Phoenix.
However, I would comment on the FEMA product, for those who you're not familiar that the industry is typically built emergency housing for the Federal Emergency Management Agency, FEMA over the years for various catastrophes. And did so this past year and in particular this first quarter calendar '17, we don't know the specific number of homes, hasn't been -- we seen anyway hasn't been publically disseminated Dan.
We did build some fairly modest amount from our factories for FEMA. We'd expect to do so again in the future if the need arises. You actually bid for those products and we've been involved in the bidding process. And we expect we've had good performance for them and we expect to be able to participate again.
It's hard to say how much an impact that’s had on industry shipments, but it definitely had an upward impact in the first quarter of this calendar year in terms of industry shipments. And I’d really be guessing Dan to guess the number, but it would probably take that 24% or so in shipment levels down probably into the high teens perhaps maybe 20%. And again, that's just a guess.
Dan, if you want to address the average selling price.
Sure. And the average selling price I just note here, as you mentioned it's a little bit lower than it has been in recent quarters, but it's not lower than the range that's been running in over the past several quarters. The average selling price this quarter was $49,894 and that's kind of on the lower end of the range, but within the range it’s been running 49,000 to say 55,000.
And it's a result really of the fluctuation in the mix of products that we build each quarter. There were quarters where we get bulk orders similar to you could call this FEMA business we did this quarter of bulk order. And would have a slightly lower average sales price than what would be typical because it's wholesale. It's not retail as you know, our home sales include retail sales prices to consumers and that has the effect of raising a portion of the model mix every quarter.
So, there is a fluctuation, this isn’t unusual and I wouldn't characterize it otherwise.
Very helpful. And then April shipments for the industry are up 7%, 8% maybe give us a sense of what you are seeing now that we're kind of half way through June in your fiscal Q1 in terms of growth rates?
Well, the -- I'm sorry Dan, you are saying, in fiscal Q1?
In the -- just kind of what you are seeing this quarter, so far we have just one month of data from the industry I think, April was up 7.5% roughly?
And wondering if that sort of in line with what you are seeing trending for the full quarter at this stage given what visibility you do have.
I think so. I mean we’ve of course not made predictions generally, but I think for MH Industry shipments, we would look for a 10% increase or so this year, it could be better than that. But we think we're certainly on track to do that number. There is some forecast that show that the industry the shipments will grow about 28% through calendar 2019 to about 100,000 units. We don't find any fault with that kind of prediction.
And so 28% move from the 78,000 the industry did in 2016 to 100,000 in ‘19, would be attractive and certainly would benefit I think all the players the industry uncertainty with our 20 factories now in the country I think we participate in that and hopefully be working to gain some share above that level.
Very helpful. Go ahead.
Dan, that's of course just HUD numbers; we're also as you know producing modular homes. A much smaller sector of the industry, but we’re a fairly significant factor in the modular home business. And we'd expect that to show continued improvement. The modular homes are built to local and state codes and can have several different characteristics to them generally to turn it a little bit larger and have things like garages and other amenities that make them actually more competitive with site built. So we have that as well.
Very helpful, I will ask one more, couple of parts on one more question and jump back in queue. But Lexington a recent acquisition, any sense for the number of units they've produced annually over the last year or two? And maybe just any color on average sales price, margin profile, et cetera would be helpful.
Well, I don't want to be smart, but we do have those exact numbers, but we're not prepared to disclose them sorry. Because of course we don't generate -- we don't disclose our individual plant performance. But, suffice it to say I think that we feel very good about acquiring an established operation in a market we have not really been able to participate to any extent mainly because of our geographic location of our other plants.
So we've been looking at the Deep South market, Mississippi, Alabama, Louisiana and even some of the Border States to those states for some time. We just never found the right opportunity and we believe we've found it in Lexington. They are one plant operation fairly modest in scope I guess you might say, but they build a good product. We think we can bring some things to the table there in terms of product design; we can expand its product line somewhat and will certainly look at expanding their distribution base.
And that's couple of the several areas where we feel we can befit them near-term. So, I think there will be good opportunity for us to pursue that market it's not terribly significant in terms of our overall consolidated numbers however at this point in time.
Got it, appreciate the color. I'll jump back in queue again. Thank you.
[Operator instructions] And we have a follow-up question from the line of Daniel Moore. Your line is now open.
Alright, I got another shot. Maybe just Joe, I’d love to hear your thoughts on the industry from a lending and liquidity perspective, are you seeing any signs of loosening in either travel market or other areas or new capital coming into the market, number one. And secondly you mentioned you have taken a few more loans on the balance sheet, do you expect to continue to use cash flow, your strong cash generation as it continues to grow, maybe to take more loans on the balance sheet if the secondary market doesn’t open up.
Right, well, I am glad you asked that question, it’s a good question obviously vital to our industry financing as is to our home building. And yes I think the general appearance would be that things are getting somewhat better. The GSEs, Fannie and Freddie have expressed interest in trying to do more to fulfill their duty to serve obligation, which are statutory. And so they have an interest in trying to explore how they can participate more in the manufacturing housing lending market.
They have not in the past provided statutory market for chattel or personal property loans, and personal property loans are used to a great extent to finance manufacturing homes. Because often times they go on private lands that’s already owned by the private buyer and that buyer does not choose to encumber the land.
So to they get a personal property loan on the home itself or commonly called the chattel loan and that’s been somewhat in -- somewhat short supply for the industry, there are couple lenders that are in the business, our country place mortgage our subsidiary started to do some chattel activity, we’re doing some testing in a couple of different market areas, we found some sources secondary sources to sell these loans too and we will continue to look for others.
The securitization market does not look like it’s going to open up short-term to manufactured housing loans it’s kind of reflecting to us because the loans have performed very well historically. And I think we are just not on the radar of a lot of institutional lenders for fixed income product and I think that will change eventually. But that’s a little bit longer term process.
I think in near term, I think you will see some -- made some trial programs that will be offered by the GSEs that may help. And as I say we will continue to pursue sources of backup to loans we may do in this area. And we will not be hesitant to put some of these on our balance sheet in anticipation to be able to package them and sell them at a point down the road and in fact we are beginning to do just that.
Very good, appreciate the color. Look forward to seeing you in New York at a conference next month.
We will look forward meeting there. Thank you, Dan.
And our next question comes from Howard Flinker from Flinker & Company. Your line is now open.
Hi, Joe, hi Dan.
Hi, how are you?
You look up on, you mentioned the average price $49,800 what was it $49,400 something?
This quarter our average sales price was $49,894.
Okay, that’s it. Thanks, nice quarter.
See you guys.
And at this time showing no further questions.
Okay, Bruce thank you, and thank you everyone for joining us today and we appreciate it and as always we are available for follow-up calls and questions. And please visit our website to see some of our product examples, I think can be very informative for you all. Thanks again. We’ll look forward talking to you next quarter.
Ladies and gentlemen thank you for your participation in today’s conference and this does conclude the program. You may all disconnect. Everyone, have a great day.