Earnings Call Transcript - CVCO Q1 2024

Mark Fusler, Corporate Controller and Investor Relations

Good day, and thank you for joining us for Cavco Industries First Quarter Fiscal Year 2024 Earnings Conference Call. During this call, you'll be hearing from Bill Boor, President and Chief Executive Officer; Allison Aden, Executive Vice President and Chief Financial Officer; and Paul Bigbee, 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-K and 10-Q, which identify specific factors that may cause actual results or events to differ materially from those described in the forward-looking statements. 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 Boor, President and Chief Executive Officer. Bill?

Bill Boor, President and Chief Executive Officer

Welcome, and thank you for joining us today to review our first quarter results. While the earnings release provides year-over-year comparisons, I'd like to focus 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 million and pretax profit was up slightly from $59 million to $61 million. Our capacity utilization, as measured over all available days, remained consistent as well at approximately 60%. So operationally, it's been a steady quarter at the reduced pace with most of our plants remaining on a four-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 edged lower from seven to eight weeks to five to six 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. 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 for the near term. However, given the positive order trends, we believe we've seen the bottom of homes 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 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. 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 cash generation despite a challenging order environment is the result. It's been a fast two quarters since we closed on the Solitaire deal. The work to combine the companies continues to go well. One area of focus has been on developing new models and updating the existing lineup with a focus on high-quality lower-priced products in line with current market needs. 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, Solitaire's impact on our results will develop as expected. 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.

Allison Aden, Executive Vice President and Chief Financial Officer

Thank you, Bill. Net revenue for the period was $475.9 million, down $12.4 million or 19.1% compared to $588.3 million during the prior year's first fiscal quarter. Within the factory-built housing segment, net revenue was $457.1 million, down $115.5 million or 20.2% from $572.6 million 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 $36.8 million in the quarter. The decrease in average revenue per home was primarily due to more single-wides in the mix and to a lesser extent, product pricing decreases. After utilization of Q1 of 2024 was approximately 60% when considering all available production days, but was nearly 70%, excluding scheduled downtime for market-related weather, consistent with the fourth quarter of fiscal 2023. Financial services segment net revenue increased 19.2% to $18.8 million from $15.7 million, primarily due to more insurance policies in force and higher premium rates. Consolidated gross profit in the first 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-built housing segment, the gross profit increased 40 basis points to 24.8% in Q1 of 2024 versus 24.4% 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. Under accounting rules, the inventory acquired upon purchase is recorded at fair value, which approximates the sales price. Therefore, when acquired inventory is sold, no operating income is recognized. We anticipate seeing the same impact for the next two quarters. Gross margin as a percentage of revenue and 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 $61.7 million compared to $66.1 million during the same quarter last year. 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 Solitaire Homes SG&A costs. Interest income for the first quarter was $4.6 million, up 251% from the prior year quarter. The increase is primarily due to higher interest rates on greater investment cash balances increased lending under our commercial loan programs. Other income net this quarter was $0.1 million compared to $0.4 million 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. Pretax profit was down $18.6 million or 23.5% to $60.7 million compared to $79.3 million for the prior year period. The effective income tax rate was 23.5% for the first 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 $13.2 million or 22.1% from $46.4 million compared to $59.6 million in the first quarter of the prior fiscal year. Fully diluted earnings this quarter was $5.29 per share versus $6.63 per share in last year's first quarter. 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 million stock repurchase program that may be used to purchase our outstanding common stock. This increases the total availability to $135.7 million. This includes the remaining amount under the program previously announced last year. With that, we will continue to responsibly deploy capital in keeping with our strategic priorities. Our capital priorities remain plant improvement, further acquisitions and ongoing evaluation of the opportunity in our lending operations. We will continue to utilize buybacks as a tool to responsibly manage our balance sheet. Now I'll turn it over to Paul to discuss the balance sheet.

Paul Bigbee, Chief Accounting Officer

Thank you, Allison. When we compare the July 1, 2023, balance sheet to April 1, 2023, the cash balance was $352.2 million, up $80.8 million or 29.8% from $271.4 million 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 $9.2 million 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. Property, plant and equipment net is down from the sale of equipment acquired with Solitaire Homes. And lastly, stockholders' equity exceeded $1 billion, up $47 million from $976.3 million at the end of the prior fiscal year. This concludes the financial review. Now I'll turn it back to Bill.

Bill Boor, President and Chief Executive Officer

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, Operator

Thank you. We will now start the question-and-answer session. Our first question comes from Daniel Moore with CJS Securities. Your line is open.

Daniel Moore, Analyst

Sorry about that, I was muted. Thank you, Bill, Allison, Paul. Good morning. I appreciate you taking the time and the questions. Bill, your insights on the timing of orders and demand were very helpful. Could you break down the order cadence across different markets, starting with retail, then the REIT channel, and community developers? What has the order cadence looked like throughout the quarter and into fiscal Q2 so far?

Bill Boor, President and Chief Executive Officer

Just looking for kind of relative differences between those?

Daniel Moore, Analyst

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

Bill Boor, President and Chief Executive Officer

Yes, it has continued. Last time, we discussed order levels and how they left the fourth quarter, without confusing the time period. March was stronger than January, as expected seasonally, which was good to see, and we reported on that last quarter. This strength has continued, and we experienced a nice sequential increase in order rates this quarter. Delving deeper, much of this strength is coming from dealers, independent stores, and Cavco-owned stores. We mentioned the inventory issue last quarter and believed it would mostly be resolved during this first quarter, and it seems that is the case from an overall inventory perspective. This has led to a boost in order rates, as they can now sell a house and order another one from the factory. This has played out as we expected last quarter, with the increase in order rates primarily coming from dealers. Communities, however, are lagging a bit, which is interesting. They seem to be facing their own inventory challenges. It's hard to generalize across the numerous communities, but I see two forms of community inventory issues. Some communities have completed homes ready for occupancy but are experiencing a slowdown in filling them, leading to a slower pace of orders. Others have homes that were previously ordered and delivered but have not been set in place due to permitting and crew issues. If they could set up more quickly, they believe there would be demand, but they are unable to prepare the homes for occupancy. While retail orders are increasing, community orders are lagging. We've communicated with both our teams and larger REITs, and the best estimates suggest this issue will start to improve by the end of the calendar year, leading to an increase in community orders, which would be an upside compared to the current ordering pace. It's important to note that this is contingent on macroeconomic factors. We've seen how shocks or a significant rise in interest rates can slow things down, but if macro conditions allow, I believe community orders will pick up this year. Did I cover everything, Dan?

Daniel Moore, Analyst

Without a doubt. No, I found that, 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?

Bill Boor, President and Chief Executive Officer

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

Daniel Moore, Analyst

That's fine. We can finish that offline. But maybe talk about your…

Bill Boor, President and Chief Executive Officer

Okay.

Daniel Moore, Analyst

As you mentioned, in order to start to see an uptick in factory utilization, you need to see orders continue to build. I believe I heard that correctly. What are your expectations for shipments as well as ASPs directionally for fiscal Q2 which we expect shipments to be basically flattish from here, a little maybe a little bit of pull back? What are your thoughts?

Bill Boor, President and Chief Executive Officer

We usually avoid giving guidance because it can change based on market conditions. I'm hesitant to make any predictions. What I mentioned is that the direction of backlog, not just the level, is important, and we haven't seen a turnaround yet. There was another slight drop in backlog this time, but it was much smaller, indicating an improving pace. I realize I sound repetitive, but that improvement is due to an increase in orders. Our production levels have been steady over the last two quarters, so we need this trend to continue. I believe it is on the right track, and we will first see backlogs stabilize, which would be a positive development, and then hopefully begin to increase again with our four-day schedule. Ideally, we can return to a level that allows us to operate plants at full schedules locally. I'm not aiming to make a prediction, but these are the trends we will monitor as we look forward to increasing our utilization.

Daniel Moore, Analyst

Understood. Maybe…

Bill Boor, President and Chief Executive Officer

You asked about pricing as well, Dan?

Daniel Moore, Analyst

Yep.

Bill Boor, President and Chief Executive Officer

You 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 price as well as it has. So all we need is for those backlogs to stabilize and start turning the direction and then that would support prices. If something happens to disrupt demand, then I think it's a real risk as it always is in this industry.

Daniel Moore, Analyst

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

Bill Boor, President and Chief Executive Officer

Thanks, Dan.

Operator, Operator

Our next question comes from Greg Palm with Craig-Hallum. Your line is open.

Greg Palm, Analyst

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? Are you seeing better? Are you seeing worse? And then maybe just kind of remind us what kind of normal seasonality is in terms of order rates on a normal year?

Bill Boor, President and Chief Executive Officer

I can provide some insights based on the data I'm examining. On a same plant basis, excluding the Solitaire acquisition, we are seeing a year-over-year increase of about 25% in orders. Quarter-to-quarter, the increase is approximately 65%. This is quite a significant rise. Last year, we were at a point where we began to notice a decrease in order cancellations. Therefore, I believe it's more useful to concentrate on the sequential data. Greg, can you remind me about the second part of your question?

Greg Palm, Analyst

What are you observing in July regarding order rates? Is there anything that stands out compared to the previous quarter? Also, could you remind us what normal seasonality looks like for a typical year in terms of orders?

Bill Boor, President and Chief Executive Officer

I wouldn't highlight anything different in July; it's mainly a continuation from the previous quarter's information I shared. So nothing significant to report there. Seasonality is interesting. If you consider the year from late March through October, that period tends to be much busier, and then there’s typically a decline after October as we move into November, December, and the early part of the new year. However, in years with major events like interest rate changes and shifts in macroeconomic factors affecting confidence, the seasonal trends can sometimes be overshadowed. That said, we are not entering a period where we expect a seasonal decline. We should be in a favorable position through October, at least.

Greg Palm, Analyst

In terms of community orders and timing, how clear is your visibility? You mentioned expecting to see some orders, possibly by year-end or towards the end of the year. Can you provide a bit more detail on when you anticipate this, understanding that your predictions may not be perfect but based on the current information available?

Bill Boor, President and Chief Executive Officer

Yeah. 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 talked 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 a on-off switch. So hopefully, we'll be able to see this ease during the period. But even in talking to our big REIT customers, they're kind of feeling like, hey, by the end of the year, we should be back to normal, meaning the, 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.

Greg Palm, Analyst

Yeah. But just to be clear, 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?

Bill Boor, President and Chief Executive Officer

We expect to see orders within that timeframe. Our backlogs are quite short, which means our customers are aware that orders quickly turn into shipments when backlogs are minimal. They won't be ordering with the expectation of a distant delivery. With a short backlog, it should operate just in time; they place an order, we put it into production, and complete it. In short, we hope to see communities strengthening to support the order trends we are currently observing from street dealers.

Greg Palm, Analyst

Understood. And regarding margins, do you have any insight on whether the increased claims in financial services might affect this quarter as well, or do you think it was just a one-quarter issue?

Bill Boor, President and Chief Executive Officer

The weather has been a factor for our insurance company, but they are managing their operations well. Their costs are in line, and they are receiving appropriate increases in premiums, which is part of the process to gain state approvals for those increases. It takes some time for these premium adjustments to take effect. Despite experiencing high claims due to a number of storms, none were severe enough to trigger reinsurance levels. Looking ahead, there's no indication that these storm events will continue for the rest of the year. It seems that last quarter was somewhat isolated in this regard. Over time, the insurance company has provided us with solid returns and profits, but it is not unusual to occasionally face a surge of storms. I hope that clarifies things, and I don't anticipate a continuation of this situation.

Greg Palm, Analyst

Yeah. Okay. Sounds good. All right, thanks for the questions.

Bill Boor, President and Chief Executive Officer

Thanks, Greg.

Operator, Operator

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

Jay McCanless, Analyst

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 the industry shipments. I guess could you talk about how flexible you've had to be on price to do better than the industry? 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 to start to flow through?

Bill Boor, President and Chief Executive Officer

I really don't think we've maintained or gained any market share through pricing or by being more aggressive on pricing. From our discussions with all of our plants, which we stay in constant touch with and have monthly focus calls, it seems that they feel we're priced competitively with other manufacturers. I believe we have strong relationships with our dealers, which benefits us over time. I attribute any strength in that area to our focus on independents and our performance for them, but not to pricing. Regarding lumber, we always discuss our gross margins, which are influenced by costs and pricing. However, I've mentioned that for the past couple of years, the prices we charge as an industry and for our homes seem disconnected from costs, as they are primarily driven by supply and demand. Given our current situation, I'm not convinced that we will see a direct correlation between rising lumber and OSB prices and our pricing strategy. We will instead consider our competitive positioning and the supply and demand dynamics in local markets.

Jay McCanless, Analyst

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

Mark Fusler, Corporate Controller and Investor Relations

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

Jay McCanless, Analyst

Sounds good. 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.

Allison Aden, Executive Vice President and Chief Financial Officer

Certainly, James. To give you some context, we've been careful with the stock repurchase authorizations since our first one a couple of years back. We currently have $35 million left from the previous authorization, and the Board recently approved an additional $100 million. We utilize these stock buybacks as a tool for managing our balance sheet, which we plan to continue doing. We understand this can draw attention to our market activities during specific quarters. There have been times in the past when we haven't repurchased any shares, due to various considerations. It's important not to overanalyze our absence from the market, as our decisions aren't based on speculating about stock prices. Instead, we're focused on managing our balance sheet conservatively and considering any non-public information. We also remain committed to our strategic priorities, which include expanding plant operations and evaluating lending opportunities in the manufactured housing sector. Overall, our goal is to responsibly manage our balance sheet through stock buybacks.

Jay McCanless, Analyst

Got it. Okay, thanks. That’s all I had.

Operator, Operator

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

Bill Boor, President and Chief Executive Officer

Thank you, it was. I apologize for that. Despite our reduced production schedules, our plants are still operating efficiently. 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. 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 of demand occurs. The housing affordability problem continues to worsen. And while near-term economic drivers can slow orders, the underlying need in demand is only increasing. 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, Operator

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