Cavco Industries Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 4, 2023

There are 8 speakers on the call.

Operator

Good day, and welcome to the Cavco Industries First Quarter Fiscal Year 20 24 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mark Fessler, Corporate Controller and Investor Relations. Please go ahead.

Speaker 1

Good day, and thank you for joining us for Cavco Industries' Q1 fiscal year 2024 earnings conference call. During this call, you'll be hearing from Bill Bohr, President and Chief Executive Officer Alison Aden, Executive Vice President And Chief Financial Officer and Paul Digby, Chief Accounting Officer. Before we begin, we'd like to remind you that the comments made during this conference call by management May contain forward looking statements, including statements of expectations or assumptions about Cavco's financial and operational performance, revenues, Earnings per share, cash flow or use, cost savings, operational efficiencies, current or future volatility in the credit markets or future market conditions. All forward looking statements involve risks and uncertainties, which could affect Cavco's actual results and could cause its actual results to differ materially from those expressed in any forward looking statements made by or on behalf of Cavco. I encourage you to review Cavco's filings with the Securities and Exchange Commission, including without limitation, the company's most recent Forms 10 ks and 10 Q, which identifies specific factors that may cause actual results or events to differ materially from those described in the forward looking statements.

Speaker 1

This conference call also contains time sensitive information that is accurate only as of the date of this live broadcast, Friday, August 4, 2023. Cavco undertakes no obligation to revise or update any forward looking statements, whether written or oral, to reflect events or circumstances after the date of this conference call, except as required by law. Now, I'd like to turn the call over to Bill Borer, President and Chief Executive Officer. Bill?

Speaker 2

Welcome and thank you for joining us today to review our Q1 results. While the earnings release provides year over year comparisons, I'd like Focused primarily on the sequential movements, which I think are more relevant in understanding the current dynamics. From an operating and financial results perspective, this quarter was very consistent with Q4. Sequential volumes were essentially flat, up about 2%. Revenue was flat at $476,000,000 and pretax profit was up slightly from $59,000,000 to 61,000,000 Our capacity utilization as measured over all available days remain consistent as well at approximately 60%.

Speaker 2

So operationally, it's been a steady quarter at the reduced pace with most of our plants remaining on a 4 day schedule and costs are being well managed as indicated by the Strong gross margins. The most notable change this quarter was a meaningful pickup in wholesale orders. Backlogs Edge lower from 7 to 8 weeks to 5 to 6 weeks, showing that production is still outpacing wholesale orders. However, the change was more modest than in the past few quarters, meaning the pace of orders did improve. Order rates were up year over year and up considerably over Q4.

Speaker 2

The pickup in orders is partly attributable to the improvement in retail inventories, which are now largely under control, And it's partly due to increased homebuyer activity. We need to see these trends continue in order to achieve balance with our reduced production rates, and then we'd be able to start ramping capacity utilization up from there. In our retail business and across our independent dealers and communities, there's Continued confidence in the underlying demand and that's based on traffic quotes and overall buyer activity. Interest rates and general economic confidence remain the questions However, given the positive order trend, we believe we've seen the bottom of home's wholesale orders and we're looking to return to full production schedules as soon as the market support develops. I spoke about this last quarter, but I continue to think it's worth noting in these tougher operating times that our plants have done an outstanding job of managing margins despite reduced production rates.

Speaker 2

Factory built gross margins remained healthy at 24.8%. This was certainly helped by lumber and OSB pricing this quarter And by continued healthy selling prices. The business model is centered on the ability to keep controllable costs in our factories as variable as possible And our healthy profit and gross our cash generation despite a challenging order environment is the result. It's been a fast two quarters since we closed on the Solitary deal. The work to combine the companies continues to go well.

Speaker 2

One area of focus has been on developing new models and updating the existing lineup with a focus on high quality lower priced We've spoken in the past about the opportunities to round out product offerings across The combined retail operations and very good progress has been made there. As we continue to work off the purchased inventory, Solitare's impact on our results Overall, there have been no surprises, and we're very happy with the acquisition and the great people that have joined our Cavco family. With that, I'd like to turn it over to Allison to discuss the financial results in more detail.

Speaker 3

Thank you, Bill. Net revenue for the period was $475,900,000 down $112,400,000 or 19.1% compared to $588,300,000 during the prior year's 1st fiscal quarter. Within the Factory Built Housing segment, net revenue was $457,100,000 down $115,500,000 or 20.2 percent from $572,600,000 in the prior year quarter. This decrease was primarily due to a decline in base business homes sold and a decrease in average revenue per home sold, partially offset by the solitaire Homes acquisition, which contributed $36,800,000 in the quarter. The decrease in average revenue per home was primarily due to more single lives in the mix and to a lesser extent product pricing decreases.

Speaker 3

After utilization for Q1 of 2024 was approximately 60% when considering all available production days, It was nearly 70%, excluding scheduled downtime for market or weather, consistent with the Q4 of fiscal 2023. Financial Services segment net revenue increased 19.2 percent to $18,800,000 $15,700,000 primarily due to more insurance policies in force and higher premium rates. Consolidated gross profit in the 1st fiscal quarter as a percentage of net revenue was 24.8%, up 20 basis points from the 24.6% in the same period last year. In the Factory Build Healthings segment, The gross profit increased 40 basis points to 24.8% in Q1 of 2024 versus 24.4 percent in Q1 of 2023, driven primarily by lower material dollars per floor. As expected, solitaire purchase accounting adjustments on acquired inventory continue to have a 40 basis point Negative impact on our gross margins this quarter.

Speaker 3

Under accounting rules, the inventory acquired upon purchase is recorded at fair value, which is approximate for sales price. Therefore, when acquired of employees sold, no operating income is recognized. We anticipate seeing the same impact over the next two quarters. Gross margin as a percentage of revenue in financial services Decreased to 24% in Q1 of 2024 from 32.6% in Q1 of 2023, resulting from higher insurance claim expenses from increased weather events, which included a very long period of daily storm activity in Texas. Selling, general and administrative expenses were $61,700,000 compared to $66,100,000 During the same quarter last year.

Speaker 3

The decrease in these expenses is primarily due to lower third party support costs And lower incentive compensation costs, partially offset by the addition of Solitare Homes SG and A costs. Interest income for the Q1 was $4,600,000 up 2 51% from the prior year quarter. The increase is primarily due to higher interest rates on greater investment cash balances and increased lending under our commercial loan programs. Other income net this quarter was $100,000 compared to $400,000 of expense in the prior year quarter. This increase is primarily driven by unrealized gains on equity securities held in the current year compared to losses in the prior year.

Speaker 3

Pre tax profit was down $18,600,000 or 23.5 percent to $60,700,000 compared to $79,300,000 for the prior year period. The effective income tax rate was 23.5% for the 1st Fiscal quarter compared to 24.7% in the same period last year. In the prior year period, Energy Star credits had expired and had not yet been fully extended. Therefore, the current period Tax rate is more indicative of our future rate. Net income attributable to Cavco shareholders was down 13,200,000 or 22.1 percent to $46,400,000 compared to $59,600,000 in the Q1 of the prior fiscal year.

Speaker 3

Fully diluted earnings this quarter was $5.29 per share versus $6.63 Per share in last year's Q1. Before we discuss the balance sheet, I'd like to take a minute to talk about capital allocation. As announced with our press release, the company's Board of Directors approved a new $100,000,000 stock repurchase program that may be used to purchase our outstanding common stock. This increases the total availability to $135,700,000 This includes the remaining amount under the program previously announced last year. With that, we will continue to possibly deploy capital in keeping with our strategic priorities.

Speaker 3

Our capital priorities remain plan improvement, further acquisitions And ongoing evaluation of the opportunity in our lending operations. We will continue to utilize buybacks as a tool to We manage our balance sheet. Now I'll turn it over to Paul to discuss the balance sheet.

Speaker 4

Thank you, Allison. When we compare the July 1, 2023 balance sheet to April 1, 2023, the cash balance was $352,200,000 up $80,800,000 or 29.8 percent from $271,400,000 at the end of the prior fiscal year. The increase is primarily due to net income adjusted for non cash items such as depreciation and stock compensation expense And other working capital adjustments, including inventory, which decreased $9,200,000 from lower raw materials at our factories And finished goods at our retail locations. Cash also increased due to the sale of consumer loans greater than originated, partially offset by commercial loan originations exceeding payments received. Prepaid and other assets are down from lower prepaid taxes and Normal amortization of prepaid expenses.

Speaker 4

Property, plant and equipment net is down from the sale of equipment acquired with Solatera Homes. And lastly, stockholders' equity exceeded $1,000,000,000 up $47,000,000 from $976,300,000 at the end of the prior fiscal year. This completes the financial review. Now I'll turn it back to Bill.

Speaker 2

Thanks, Paul. Our results this quarter highlight the ability of our organization to manage costs and generate cash even when conditions are challenging. Everyone at Cavco is ready for what we view as an inevitable return of demand, so we can help more families get the homes they need. With that, Abigail, let's turn it over and open up the line for questions.

Operator

Thank you. At this time, we'll conduct the question and answer session. One moment for our first question. Our first question comes from Daniel Moore with CJS Securities. Your line is open.

Speaker 5

Sorry about that. I was muted. Thank you, Bill, Allison, Paul. Good morning. Thanks for taking the time and the questions.

Speaker 5

Maybe And Bill, very helpful colors in terms of the cadence of orders and demand. Maybe if you can delineate across end markets starting with retail, then the REIT channel and community developers, what's the cadence of order look like throughout the quarter and thus far into fiscal Q2.

Speaker 2

Just looking for kind of relative differences between those?

Speaker 5

Yes, exactly. And the rate of improvement and whether that's continued thus far in the current quarter?

Speaker 2

Yes, it has continued. I mean, I think we talked last time about order levels and the fact that they left The Q4, basically did not confuse the time periods. March was stronger than January, right, as you would Expect seasonally, but it was good to see it and that's what we kind of reported on last quarter. And that strength kind of continued to carry through. And as I said, we had a pretty nice Sequential increase in order rates this quarter.

Speaker 2

To take it deeper, because I think it's part of your question that A lot of that strength, I think, is really coming from the dealers, the REIT independent stores and Obviously, Cathco owned stores. We've talked about the inventory problem. And last quarter, we said that we really thought that was going It's not like it immediately is an on off switch, but that was going to largely be behind us sometime during this 1st quarter and I think that's the case from a total inventory perspective. And so right away, you kind of get the lift of Starting to get one to one orders, right? They sell a house and they need to order another home from the factory.

Speaker 2

So that's Kind of played out as we expected it to when we talked last quarter. So a lot of the uplift in order rates And has really come from the dealers. The communities are lagging a little bit. And it's interesting to think about. I think They're dealing with their own form of an inventory problem.

Speaker 2

And we've talked this in the past, and I think it's hard to generalize across The thousands of communities that are out there, but I think the community inventory problem takes 2 forms. Some communities Have set houses. They're ready to be occupied, and they've seen a slowdown in filling those homes. So they're not going to be ordering. And then we're ordering as fast.

Speaker 2

It's not an either word, but they're going to be kind of on the slower side of wholesale orders. And then other communities, when we've talked this, they have unset homes. They have inventory of homes they previously ordered and that were largely delivered They haven't been able to get set in place due to permitting and crew problems, set up crews. And so if they could set more quickly, They feel they do have the demand, but they're not able to get the homes ready to be occupied. So I don't mean to complicate this, but I think we've got a little of all that going on in the community The total effect is that while retail orders are on the upswing, community orders are lagging a bit.

Speaker 2

We've talked to folks, both our people talking to the communities and also at a higher level with some of our large REITs. And best estimates we've heard are that this issue will start to ease up by the end of the calendar year and we'll expect to see community orders And that's all every time I talk about that, guys, looking forward, I always feel like I've got to say, That's all assuming macroeconomic factors kind of allow that, right? We've seen what happens when There's kind of a shock or big upswing in interest rates and things slow down. But macro factors permitting, I think the communities will pick up yet this calendar year. So that was a mouthful.

Speaker 2

Dan, did I cover the basis?

Speaker 5

Without a doubt. No, I That was extremely helpful. And in fact, maybe just delineate a little bit further between communities and REITs, any difference or delta between The factors that you just described there and what they're saying about their likely plans as we look to the balance of the year and next year?

Speaker 2

Yes. I'm not sure what you're asking for delineation on. I was kind of talking through collectively the REITs and therefore the community operators.

Speaker 5

That's fine. We can kind of finish that offline. But maybe talk about your As you mentioned, in order to start to see an uptick in factory utilization, you'd The orders continue to build. I believe I heard that correctly. What are your expectations for shipments, as well as ASPs directionally for fiscal

Speaker 2

Yes. We kind of stay away from guiding because I think it's still subject to changes in the market. So it's I'd kind of shy away from making a prediction about it. And my comment was, as you picked up, it was that It's not only the level of backlog that matters, it's the direction of backlog. And we haven't turned that around yet.

Speaker 2

We saw another A bit of drop in backlog this time. It was much smaller drop to the pace of that drop is improving. And I guess I'm being very repetitive here, but that pace was improving because the orders were up. Our production level was pretty steady the last two quarters. So we just need that trend to continue.

Speaker 2

I think it's on the right trajectory where we'll see backlogs 1st, stabilize, which would be great, and then hopefully start to build with our 4 day schedule. And again, hopefully return to A level that supports us starting to take plants on a local basis back up to full schedule. So I'm not trying to make a prediction as much as just saying that's Those are the trends that we're going to keep an eye on and we're going to be looking forward to that time we get our utilization back up. Understood. You asked about pricing as well, Dan.

Speaker 5

You

Speaker 2

asked about pricing as well, and that's very related, right? If the supply and demand balance supports, I think the industry has shown good discipline in holding prices as well as it has. So all we need is for those backlogs to stabilize and start turning direction and then that would support prices. If something happens and disrupt demand, then I think it's a real risk as it always is in this industry.

Speaker 5

Understood. Helpful. I will jump back with a couple of follow ups, but turn it over. Thank you.

Speaker 2

Thanks, Dan.

Operator

One moment for our next Question comes from Greg Palm with Craig Hallum. Your line is open.

Speaker 6

Hey, thanks for taking the questions. Maybe starting off and Following up on a couple of Dan's. Can you maybe quantify exactly kind of what you're seeing in terms of order rates, whether that's a Sequential or year over year basis? And then just specifically, what are you seeing in July? Are you seeing sort of same magnitude of what you were seeing In the quarter, you've seen better, you've seen worse and then maybe just kind of remind us what kind of normal seasonality is in terms of Order rates on a normal year.

Speaker 2

Yes, I can take a stab and then ask the other folks to Correct. If I get to sophomore or anything, I'm looking at some data here. And I'll give you the numbers. We haven't historically done this, but on a same plant basis, which Basically, what's not included in these numbers is a solitaire acquisition. But on a same plant basis, we're up about 25% year over year on orders and quarter to quarter, we were up about 65%.

Speaker 2

So pretty big jumps. Last year, I think I'm right about this. Last year, we were in a period Now we are starting to see cancellations and the orders drop off. So I really think it's more instructive to focus on sequential, but there's the data on both. And Greg, could you remind me the second part of your question?

Speaker 6

Yes. What are you seeing in July specifically in terms of Order rates, I mean anything that's maybe different relative to the quarter? And then I guess if you can just remind us kind of What normal seasonality is on for a typical year in terms of orders?

Speaker 2

Yes. The I wouldn't note anything different in July, kind of a continuation coming off the last quarter information I just shared. So nothing of note there. And seasonality is interesting. We've looked at this and you kind of if you take the year, This is going to be way too simplistic, but I think if you looked at the year kind of late March timeframe through October, That tends to be considerably higher and then things drop off after October seasonally when you get into November, December and the early part of the calendar year As far as the seasonality, but I'll tell you the seasonal shifts in some years where you've got a lot of bigger things going on like we have, Like the interest rate adjustments and the macroeconomic drivers kind of shifting on folks as far as confidence, the seasonal Aspect can sometimes get dwarfed by that.

Speaker 2

But we should we're not hitting a period where we'd expect things to drop off seasonally. We should From that perspective, be in a good zone through October at least.

Speaker 6

Yes. Okay. In terms of the commentary on the community orders, and more or less on the Timing, how's your visibility? And I think what you said was expect to see Some orders, I don't know if it was by year end or towards the end of the year, but can you give us maybe a little bit finer Point on when you think, I know your crystal ball is not perfect, but just based on all the information we know today.

Speaker 4

Yes.

Speaker 2

Well, thanks for acknowledging it's not perfect because I was feeling that way as you're asking the question. Yes, I think my only statement is that Just about everyone we talk to internally and externally kind of feels like this is something that will be worked through in the next couple of quarters. So that's why I didn't really pinpoint it. I don't know These things don't happen. I always say that they don't happen like an on off switch.

Speaker 2

So hopefully, we'll be able to see this ease during the period. But even in talking to our Big Read customers, they're kind of feeling like, hey, by the end of the year, we should be quote Back to normal, meaning the this because I'm defining it, an inventory problem that they have is kind of worked through. So it's a little bit analogous to what we went through with the dealers and the communities just seem to be on a little different time schedule. So I can't pinpoint it by months.

Speaker 6

Yes. But just to be clear, is that does that mean they order in advance, So they're ready to start taking more units by the end of the year? Or is your expectation that they start sort of ordering the units and then it's Another handful of weeks or months until they actually take delivery and set them up.

Speaker 2

Yes. It's kind of fine tuning. We do expect that we'll see if we have an expectation, we do expect that we'll see orders in that timeframe. And keep in mind, our backlogs Pretty short. So all of our customers know that orders turn into shipments pretty quick when backlogs are this short.

Speaker 2

So they won't be ordering with an assumption that That means for delivery far in the future. But it should be really when we have this short of a backlog, which is a good thing in this regard, It should be pretty just in time. They make an order, we're putting it into production and getting it to them. So anyway, long winded way of saying, I think the answer to your question is, yes, we're hoping that we'll have communities strengthening to support the Order trends we're seeing from Street dealers right now.

Speaker 6

Understood. And last question around margins. Do you have I think you mentioned increased claims in the financial services. Do you have sort of any visibility on whether That might impact this quarter as well or do you feel like that was just sort of a 1 quarter kind of thing?

Speaker 2

Yes. It's weather. Everything that Our insurance company is doing to run their business. They feel real good about, their costs are right, they're getting appropriate Premium increases, which are that's a whole process to get states to approve premium increases, and it takes a little time for the premium increases to kick in. But that business is operating as we expect it to.

Speaker 2

They just had high claims. And so in my view, We had a number of storms, none of which were catastrophic, so they didn't get into the reinsurance levels. And On the kind of near term outlook, there's no reason to think that correlates necessarily to a continuation of storm events for the rest of the year. So it's kind of just from a planning perspective, that past quarter is kind of isolated and we're looking forward to Insurance company, over time, they've done real well for us economically as far as getting a good return and making profits. But A little bit of the nature of the game that periodically get hit with a rash of storms.

Speaker 2

Not sure if that was a clear answer, but going forward, I don't see that there's any reason to expect a continuation.

Speaker 6

Yes. Yes. Okay, sounds good. All right. Thanks for the questions.

Speaker 2

Thanks, Greg.

Operator

Our next question comes from James McCanless with Wedbush. Your line is open.

Speaker 7

Good morning, everyone. Thanks for taking my questions. So Bill, congrats. Cavco's unit decline was about half of the 28%, 29% decline we saw in industry shipments. I guess, could you talk about how flexible you've had to be on price to do better than the industry.

Speaker 7

And then also on the flip side of that, now that we've seen lumber prices Starting to work their way up. Have you guys been tightening up on pricing just in the eventuality that higher lumber prices are going

Speaker 2

to start to flow through? Yes. I really don't think we've Maintained or gained any market share through pricing, through being more aggressive on pricing. I really don't believe that's the case. Just as we talk to all of our plants, We're in constant touch with them and have focused calls every month.

Speaker 2

We go through them Kind of sensing what's right to do in their market. And for the most part, when they're kind of looking and talking to their own customers, the dealers, They feel like we're priced right with the other manufacturers. So I think we I'd like to think that we've got really good relationships with our dealers. I think that pays off over time and I'd attribute any strength there You know, us focusing on the independents and doing a good job for them, but I don't think it comes from pricing. The question about lumber Coming up, we always talk about our gross margins in kind of an obvious way that it's partly driven by Those costs and it's partly driven by price.

Speaker 2

But I've also said that for the last couple of years now, I think The price we charge as an industry, but us as well for our homes is a little bit disassociated with the cost. It's been driven by the supply and demand of our homes. So I don't I guess it's a way of saying, given where we are now, I'm not sure I believe that We're going to necessarily be kind of correlating price to any uptick in lumber and OSB prices, if that makes sense. We'll be kind of looking at it more from the standpoint of our competitive position and the supply and demand of homes in all those local markets.

Speaker 7

Sure. Makes sense. Could you talk about where chattel mortgage rates are now versus maybe Last quarter and last year?

Speaker 1

Yes, Jay, this is Mark. So I can take that one. So they've been pretty consistent So right now, they're still about 9.15% to about 9.4%.

Speaker 2

Sounds good.

Speaker 7

And then I guess the other question I had, just thinking again about Capital allocation, the new authorization, could you maybe talk about whether you do more stock repurchase First, or does it make sense to expand on the floor plan side? Maybe just some general thoughts about that.

Speaker 3

James, can you help with that? I think if you take a step back, we've been very diligent since our first authorization, which was a couple of years ago And using the repurchase authorization, and we do have $35,000,000 on our previous authorization, And the Board just gave us another $100,000,000 So we really use these stock buybacks as a balance We recognize that this creates Maybe too much attention to when we are in the market in a given quarter. And we've had markets in the Quarters in the past when we didn't repurchase, and there's a variety of considerations. I wouldn't read too much into The fact that we weren't in the market except to say that we're not generally speculating our stock price when we make these decisions. We're really managing the balance sheet and making sure we're conservative about possession of any non public information.

Speaker 3

And we still invest around our strategic priorities, which are expansion of plant operations and Ongoing evaluation of opportunities in lending operations that are right down the center of manufactured housing. So Taken as a whole, it's just our continued focus on using stock buybacks as a responsible way to manage the balance sheet.

Speaker 7

Got it. Okay. Thanks. That's all I had.

Operator

Thank you. That concludes the question and answer session. At this time, I would like to turn Back to Bill Bohr, President and CEO for closing remarks. Bill, please make sure your line is not muted.

Speaker 2

Thank you. It was. I apologize for that. Despite our reduced production schedules and our plants are still operating efficiently and our retail organization continues to proactively drive lead generation and sales, and we're providing valuable tools to our retailers and prospective homebuyers with our digital marketing advances. And all of this combined with our strong balance sheet puts us in a great position to take what the market offers at the moment and be ready to ramp up when the inevitable release The housing affordability problem continues to worsen and while near term economic drivers can slow orders, the underlying So with that, I want to thank you as always for your interest in Cavco, and we look forward to keeping you updated on our progress.

Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

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Cavco Industries Q1 2024
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