Earnings Call Transcript - CVCO Q2 2025

Operator, Operator

Good day, and thank you for standing by. Welcome to the Second Quarter Fiscal Year 2025 Cavco Industries, Inc. Earnings Call Webcast. At this time all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mark Fusler, Corporate Controller and Investor Relations. Please go ahead.

Mark Fusler, Corporate Controller and Investor Relations

Good day, and thank you for joining us for Cavco Industries second quarter fiscal year 2025 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, November 1, 2024. Cavco undertakes no obligation to revise or update any forward-looking statement, 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

Thanks, Mark. Welcome, and thank you for joining us today to review our second quarter results. I want to start by addressing the recent hurricanes affecting Florida and other states in the Southeast. As everyone on the call knows, Hurricane Helene hit right before the end of Q2 and Hurricane Milton struck in early October, which is our existing Q3. Recognizing that many others were not as fortunate, we were relieved that our employees throughout the region and their families survived the storms, although many experienced significant property damage. Clearly, they and many others are dealing with a long process to regain some normalcy after the cleanup and rebuilding process unfolds. Like every catastrophic weather event, it's inspiring to see the resiliency shown as our employees made their way back to work to continue producing and selling vitally needed homes. Relative to what was feared, our operations experienced minor damage and raw material losses. It could have been much worse, but our team did a commendable job preparing for the storms. And through the efforts of our committed coworkers, production and retail downtime has been minimized. Since I know it's top of mind, I'd like to address the business impact of these storms upfront, and then we'll cover the quarter more generally. First, our insurance operations were not impacted as we do not actively write insurance policies in the affected areas. As indicated, physical damage to our operations and raw material losses were minimal. Regarding the quarter results, Hurricane Helene resulted in delayed net revenue of approximately $4 million from the second to third quarter because conditions prevented us from completing shipments of finished homes. We also wanted to provide some perspective on the impact beyond Q2, specifically how much production time was lost. On a combined basis, we estimate that through a combination of pure downtime and slowed operations, we lost the equivalent of 15 to 20 production days across our Florida and Georgia plants. The real question is how quickly and how fully the Southeast market recovers to its pre-storm health. We're optimistic about this based on the last few weeks of activity. Now switching to the overall discussion. We felt very good about our results this quarter and the continuing progress we're showing as we ramp production in line with the improving market. Units shipped in the quarter were up 15.7% over last year's quarter. Capacity utilization was up sequentially from 65% to 70%, and that includes additional days taken around the 4th of July. So our running pace was closer to 75% capacity utilization. In addition to shipping more homes, strong orders resulted in our backlogs growing approximately 20%. The quarter ending backlog represents about 8 to 10 weeks of production. There continues to be a wide range of backlogs across our operations with some plants ramping production as quickly as possible to keep backlogs in check and a few still needing more orders. Generally, we've been encouraged by the continued market growth we're seeing. For what seems like a very long time, we've been talking about slow community and developer order rates due to their inventory challenges. It was about this time last year that we discussed our expectation that it would improve over calendar 2024. That's what we've seen. And while every community in development has a unique inventory situation, we feel the recovery is mostly behind us. This quarter, we had growth in all three channels, dealer, community, and builder-developer. The business model continues to generate cash with our ending total balance of $7 million after $44 million of share buybacks in the quarter. As indicated in our press release, our Board has authorized an additional $100 million for share repurchases, which is incremental to the remaining amount in the prior authorization. So we continue to have this important tool to responsibly manage the balance sheet. 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 second fiscal quarter of 2025 was $507.5 million, an increase of $55.4 million or 12.3% compared to $452 million the previous year. Sequentially, net revenues rose by $29.9 million, attributed to higher sales of base business units, increased average selling prices, and growth in financial services revenue. In the factory-built housing segment, net revenue was $486.3 million, up $52.3 million or 12% from $434.1 million during the same quarter last year. This rise was driven mainly by a 15.7% increase in homes sold, somewhat offset by a 3.1% decrease in average revenue per home sold from the previous year's quarter. The drop in average revenue per home was largely due to a smaller proportion of homes sold through our company-owned stores and, to a lesser extent, price reductions, though this was partly countered by an increase in multi-wide units sold. Factory utilization for the second quarter of 2025 was around 70% considering all available production days, but nearly 75% when excluding scheduled downtime for the 4th of July holiday, during which many plants were closed. Utilization was approximately 60% in the same period last year. The Financial Services segment net revenue was $21.1 million, up $3.2 million or 17.6% from $18 million, primarily due to higher insurance premium rates. Consolidated gross margin for the second fiscal quarter as a percentage of net revenue was 22.9%, a decrease of 80 basis points from 23.7% in the same period last year, mainly due to losses in financial services and lower average selling prices in the factory-built housing segment. In the factory-built housing segment, gross profit fell by 30 basis points to 22.9% in Q2 of 2025 compared to 23.2% in Q2 of 2024, influenced by lower average selling prices, partially offset by reduced input costs. The gross margin for the Financial Services segment dropped to 21.8% in Q2 of 2025 from 35.9% in Q2 of 2024, significantly impacted by Hurricane Beryl, with losses from the event reaching our reinsurance limit of $4 million. Selling, general and administration expenses in the second quarter of 2025 amounted to $67 million or 13.2% of net revenue, compared to $61.5 million or 13.6% of net revenue during the same quarter last year. The rise in these expenses was mainly due to higher variable compensation linked to improved earnings, increased share-based compensation owing to better performance metrics, and extra expenses from acquired retail locations. Pretax profit was $55 million, an increase of $3.2 million or 6.4% from $51.7 million in the prior year. Net income to capital stockholders was $43.8 million, rising by $2.3 million or 5.5% from $41.5 million in the previous year. Diluted earnings per share this quarter were $5.28 compared to $4.76 in last year's second quarter. During this quarter, we repurchased nearly $44 million under our Board-authorized share repurchase program, bringing cumulative repurchases to $347.6 million since the program began in the fourth quarter of fiscal 2021. Our Board has authorized an additional $100 million for share repurchases, which adds to the remaining amount from the previous authorization, leaving $153.4 million available for future repurchases. Now I'll hand it over to Paul to discuss the balance sheet.

Paul Bigbee, Chief Accounting Officer

Thanks, Allison. In the quarter, we generated an increase in cash and restricted cash of $7.3 million, bringing our balance to $386.2 million. Cash provided by operating activities was $54.7 million, as Allison discussed. Cash used in investing activities was $5.7 million, reflecting capital expenditures to enhance manufacturing capabilities. And finally, cash used in financing activities was primarily due to share repurchases, highlighting our commitment to enhancing shareholder value. Comparing the September 28, 2024 balance sheet to March 30, 2024, the increase in accounts receivables related to organic growth in the factory-built housing segment. The overall value of investments has remained relatively stable with more investments transitioning to current as time passes and as shorter duration bonds in our portfolio are approaching maturity. The increase in short-term consumer loans receivable is primarily a timing difference between higher originations of loans held for sale in excess of actual sales. Current liabilities are up from increased compensation and bonus accruals on higher earnings, increased loss reserves for previous storms, and higher customer deposits. Stockholders' equity edged up $8.6 million to just over $1 billion. The last thing I wanted to call out is in yesterday's earnings release, we presented on the September 28, 2024 balance sheet, the number of shares for outstanding common stock and treasury stock, which do not impact the amounts reflected in the balance sheet or earnings per share data. These will be updated in the 10-Q to be released later today to increase treasury shares by 108,801 and decrease outstanding common shares by the same amount. Now, I'll turn it back to Bill.

Bill Boor, President and Chief Executive Officer

Thank you, Paul. This was another encouraging quarter showing improvement from the time of the interest rate pullback. We have seen the industry drop to 88,000 HUD shipments following the 2022, 2023 run-up in interest rates, and now the latest monthly shipments data indicates a 103,000 unit pace. There's certainly risk and uncertainty in the macro environment, but based on what we're seeing in the market and the undeniable need for our products, we're optimistic about demand and we're pressing forward to provide more homes. Gigi, would you please open the line for questions?

Operator, Operator

Our first question comes from Daniel Moore from CJS Securities.

Daniel Moore, Analyst

Thank you. Good morning, Bill, Allison and Paul. Thanks for the questions. Let me start with maybe just a little bit more color on what you're seeing from an overriding demand perspective, more from a geographic perspective, maybe where you're ramping production as quickly as possible and where orders are still lagging? And then you mentioned all three markets are now kind of back to growth, just what you're seeing in terms of sequential improvement in the community and REIT businesses?

Bill Boor, President and Chief Executive Officer

Hi, Dan, thanks for the question. We've been discussing the consistent increase in sales orders, which has continued. While it's not dramatic, there has been a steady rise. Regionally, the Southeast shows the highest order rates and has the largest backlog. Texas and that area have also performed well consistently. Florida, while part of the Southeast, is lagging and has some of our smallest backlogs. Additionally, there's a trend in product demand; our plants producing lower-priced items, whether single or multi-section, are experiencing the most market activity and backlog increases. I hope this addresses your inquiries about regional differences and product trends. We typically combine builder developers when discussing communities, but I understand the interest in both separately, so I’ll be more mindful of that. All three channels—retailers, communities, and builder-developer—saw increases this quarter. It's noteworthy that we've spent several quarters discussing inventory builds and the time it takes to manage them, and it seems we are nearing a point where that won't be a significant impact anymore. The communities have had high inventories, but many have started to manage them effectively, getting closer to a 1:1 ratio of homes set and residents moved in before new orders are placed. This is a positive development. Regarding wholesale shipments, they have drained order rates as they clear out inventory, but this is starting to turn into a tailwind. Dan, let me know if I covered everything you were interested in.

Daniel Moore, Analyst

I appreciate the insights regarding the disruptions. It's great to hear that there was minimal physical damage and, more importantly, no harm to the employees. The backlog is up 20%, but some downtime in Florida and Georgia may require extra effort to recover. How are you approaching production and shipment growth in Q3 compared to the recent performance in Q2, considering all these factors?

Bill Boor, President and Chief Executive Officer

Yes, focusing specifically on the Southeast, I appreciate your points. It's difficult to classify any aspect of that situation as minimal, but in terms of the overall company, the impact on our operations was slight. However, we do have ongoing challenges in that area. As I mentioned earlier, we're looking at around 15 to 20 days of downtime in that region, with some of it occurring in Florida facilities that had little backlog. While I dislike losing production time, it felt similar to market downtime. In Georgia, we experienced downtime as well, but there we have robust backlogs, and we will work on catching up as much as possible in the third quarter, including some overtime, to meet demand. The larger concern isn't about our production capabilities but rather how retail activity rebounds. We don't have a definitive prediction for that, but initially, there was very little activity in some impacted areas as people addressed storm-related damage. Over the last few weeks, we've been assessing the recovery, and while some places faced significant devastation, overall, we're seeing positive signs as we communicate with retailers and our own stores in the region. Early indicators regarding the bounce back make us cautiously optimistic, but the situation still needs to unfold. Therefore, I can't provide a clear answer regarding the third quarter at this time.

Daniel Moore, Analyst

Understood. I guess maybe one more and I'll jump back. But just bigger picture, in the past, you've spoken about kind of changes in HUD code. Is there anything that you're seeing recently are being proposed that could create more of a tailwind looking beyond the next few quarters? And I'll broaden out beyond HUD code to just general changes in zoning, et cetera, what you're seeing there? Thanks again.

Bill Boor, President and Chief Executive Officer

Yes, Dan, what I'll mention is a continuation of our previous discussions. This is a long-term narrative. I believe the recent changes to the HUD code are largely positive, as they even allow for multifamily housing to be included under the HUD code. These developments will encourage innovation in our industry, enabling us to create products suitable for urban areas. This leads us to the topic of zoning. I don't have any new updates regarding that, but I've consistently stated that in areas with the greatest affordability challenges, municipalities are reevaluating their strategies to provide better housing options, particularly in urban settings where factory-built housing can be implemented. I am optimistic about the general direction of these trends, though the pace and timing remain uncertain.

Daniel Moore, Analyst

Thank you. I’ll jump back when we have follow-ups again.

Bill Boor, President and Chief Executive Officer

Thanks, Dan.

Operator, Operator

Our next question comes from Greg Palm from Craig-Hallum Capital Group.

Greg Palm, Analyst

Hi, thanks. Appreciate taking the questions. Wondering if we can dig into the volume numbers a little bit more and not just the quarter, but kind of the implied order rate, the backlog growing. It implies that you are gaining some share versus the industry. So I'm curious to kind of get your thought whether that is geographically based, in terms of which areas are maybe performing the best, whether it's more of a product? You kind of alluded to some kind of changes in product mix or some trends you're seeing out there, maybe you're able to adapt to that a little bit quicker. Just any kind of broad thoughts on the outperformance would be great as a starting point.

Bill Boor, President and Chief Executive Officer

Thank you for the question, Greg. I'm here considering a few thoughts, and it's worth noting that I should probably appreciate the positive feedback you're giving us. It wasn't long ago that similar metrics indicated we were losing market share. This highlights that quarter-to-quarter share figures can change significantly. However, I believe we've been proactive in ramping up production, and we've earned the volume growth we've seen. To go back a bit, during a time when the industry was slowing down, we managed to maintain relatively high shipment levels compared to others. Consequently, a year later, that performance made it seem like we were trailing behind the industry. This illustrates how much those figures can fluctuate. Regionally and by product, we've focused on re-hiring and taking early steps to enhance our position. We’ve adopted an optimistic outlook for the market, knowing that we’ve proven our ability to adjust if necessary. We’ve also established a national sales team for the first time to complement the localized sales efforts, which has improved our overall sales performance and provided better attention to REITs and community operators. While I'm excited about our market share gains, I also recognize the variability in those numbers.

Greg Palm, Analyst

Sure. That makes sense. If I could shift over to the factory-built segment, the margin is interesting. When I consider the volumes for the quarter, whether on a year-over-year basis or sequentially, it seems like volume has increased significantly. This indicates better capacity utilization and lower input costs, yet gross margin has only improved slightly sequentially and decreased on a year-over-year basis. I'm focusing specifically on the factory-built housing segment. Is there anything you would like to highlight? I expected the performance to be a bit better given the discussions we've had, so I'm curious if there's anything else going on behind the scenes.

Allison Aden, Executive Vice President and Chief Financial Officer

The key point to remember is that the average selling price significantly impacts our margins. The decline in average selling price compared to last year mainly resulted from a lower percentage of homes being sold through our company-owned stores, as we mentioned. When a smaller proportion of sales go through retail, it leads to reduced retail pricing in our average selling price and more reliance on wholesale pricing, which ultimately drives the average selling price down a bit. This is an important factor to consider.

Greg Palm, Analyst

Yeah. Okay. That makes sense. And then I guess, lastly, capital allocation, obviously, buyback front and center, but curious if you've got any kind of update on M&A pipeline, your appetite, kind of anything you're seeing out there in the market related to that?

Allison Aden, Executive Vice President and Chief Financial Officer

Yeah. Thanks for the question. I think somewhat recent examples of our capital commitment was our purchase of Kentucky Dream Homes, which was a manufactured housing retailer. And before that, Solitaire Homes, the manufacturer and retailer. And our capital priorities remain planned improvement to improve capacity and also efficiencies in our plant. Future acquisitions are certainly on the horizon, and we have a process internally. It's ongoing evaluations of these opportunities. And we also continue to look at opportunities to expand in the lending operation. And again, this quarter, we announced our Board once again showing support by authorizing another $100 million allocation for purchase buyback of our shares, which we use in a responsible manner as we've demonstrated that after the last seven quarters to really manage our balance sheet and our cash in a responsible manner to our shareholders.

Bill Boor, President and Chief Executive Officer

To add to that, if we had a dollar to invest, we would likely focus on expanding our current plant capacities. We have undertaken several projects over the past few years and have many more planned, which we are very enthusiastic about. While not all of these projects are large, we consistently look to invest several million dollars in our plants, and we do this regularly to enhance the capacity of our existing systems. Regarding your question about mergers and acquisitions, we have a consistent perspective. There are always incremental M&A opportunities in this industry, so we remain vigilant and hope to be a preferred buyer. We regularly engage in discussions about potential acquisitions, and you can expect us to remain active in this area over time.

Greg Palm, Analyst

Okay. I’ll leave it there. Thanks a lot. Thanks for all the color.

Bill Boor, President and Chief Executive Officer

Thank you.

Allison Aden, Executive Vice President and Chief Financial Officer

Thank you.

Operator, Operator

Thank you. One moment for our next question. Our next question comes from the line of Jay McCanless from Wedbush.

Jay McCanless, Analyst

Hey, good afternoon, everyone. I wondered if we could kind of stick on that average price topic for a minute. You look back at fiscal '23, probably the peak of the market at 106,000, almost 107,000, and now you're running close to like 98,000, 99,000. Is there any way to know if we're close to an inflection point on pricing, whether it's through an expansion in retail sales or just product mix as you see coming over the next few months? I don't know if you'll have any larger longer-term view about that and where you think pricing might go over the next couple of three quarters?

Bill Boor, President and Chief Executive Officer

I would say that in every quarter we've reported, we've tried to provide an understanding of how much of the average selling price is influenced by various factors. I believe what you are primarily interested in is the price difference for the same product sold a year ago compared to today. The gradual decrease in average selling price we've experienced over the last couple of years hasn't mainly been due to the same products. While some same products have seen a decline, other factors have significantly impacted the average selling price, such as the ratio of homes sold through our distribution and the shift from single-section to multi-section homes. In hindsight, it's surprising that the industry could drop to 88,000 shipments for a period without seeing a more significant reduction in same product prices. Ultimately, the key factor that will lead to a turnaround in same product prices is demand. We've improved to about a 103,000 unit pace and have observed backlogs increasing in many of the industry's plants, though not all. If we see plants reaching 80% utilization or more and backlogs rising across the industry, that’s when we would likely see the expected price increase. The progress from 88,000 industry shipments to 103,000 indicates we're moving in that direction, but I can't provide a more precise prediction than that.

Jay McCanless, Analyst

No, that's great and good color, thank you. Could you also talk about where Chattel rates are right now? And if we've seen any improvement or decrease in those versus where we were last quarter and last year.

Mark Fusler, Corporate Controller and Investor Relations

Yeah, Jay, this is Mark. They've been pretty steady in the last few months, but they are slowly declining from where they were last quarter. So at this point, we have a high 7% range. So there's some that are quoted in the high 7s and then it looks like they're topping down in the high 8s about 8.8%, 7.5%.

Jay McCanless, Analyst

That’s great. Okay, that’s all I had. Thank you. Appreciate it.

Bill Boor, President and Chief Executive Officer

Thanks, Jay.

Allison Aden, Executive Vice President and Chief Financial Officer

Thanks, Jay.

Daniel Moore, Analyst

Sorry, I had to get off mute. Thank you again. One more forward-looking question. I'll take a shot at least just given the challenges with weather in the Southeast and ASPs ticking a little lower. Just how are you thinking about factory-built gross margin Q3, the remainder of the year relative to what we experienced this quarter, any movements in lumber or other input costs, good guys, bad guys as we kind of think about the next couple of quarters? Thanks.

Allison Aden, Executive Vice President and Chief Financial Officer

We consider gross margins primarily influenced by pricing, which is the most significant factor. Additionally, the cost of materials, primarily lumber and OSB, plays a crucial role in gross profit. As we've mentioned previously, there is typically about a 60-day lag between the commodity rates we observe in the market and their incorporation into our margins. We've noted that OSB prices have remained relatively flat, with a slight decrease. Over time, like other commodities, these costs will impact our margins. Historically, as we continue to increase our sales in factory-built housing, we anticipate leveraging our factory overhead costs, similar to what we've seen before. We are deeply focused on managing our cost of goods sold and selling, general, and administrative expenses, striving to keep them as variable as possible.

Daniel Moore, Analyst

Very helpful, Allison. And lastly, there are clearly short-term disruptions in Florida and Georgia. In the medium term, how do you view the potential increase in demand from rebuilding, reconstruction, and possibly replenishing FEMA inventories? Or is that too uncertain at this time? Any insights would be appreciated.

Bill Boor, President and Chief Executive Officer

I have been reflecting on the situation, and it's clear that there is heightened demand while supply has decreased. We recognize this reduction in available stock, which supports our observation of growing demand. Having been in the industry for some time, I find it intriguing to observe how catastrophic weather events affect this dynamic. Typically, we don't see an immediate surge in demand after such events; instead, it tends to gradually return to normal. I've adjusted my expectations regarding how quickly we will see significant rises in demand following these incidents. For instance, even after Hurricane Ian in Florida a couple of years ago, there are still areas that have not fully recovered. Regarding FEMA, they recently communicated with manufacturers, indicating a potential for ordering homes, but nothing concrete has materialized yet. Nonetheless, it appears there may be opportunities for orders from FEMA or some state relief housing in the near future, but I don't have any specific updates to share at this time.

Daniel Moore, Analyst

Yeah. It’s helpful. Thank you again.

Bill Boor, President and Chief Executive Officer

Absolutely.

Operator, Operator

Thank you. At this time, I would like to turn the conference back over to Bill Boor, President and CEO, for closing remarks.

Bill Boor, President and Chief Executive Officer

Thank you. Just kind of stand on that theme, I want to once again share our ongoing concern for the folks affected by the storm, and our appreciation for impressive efforts our teammates continue to make to provide homes for deserving families. Thank you for joining us today and for your interest in Cavco. We look forward to keeping you updated.

Operator, Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.