CVCO
#Thank you, and welcome, everyone, to our third quarter conference call.
We'll begin with our Executive Vice President, Dan <UNK>, providing the financial report, and then we'll be happy to take any of your questions.
Dan.
Hello, 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 reliance on any of them.
More complete information on this subject is included ---+ is part of our earnings release filed yesterday and is available on our website and from other sources.
Now for our financial results.
Net revenue for the third fiscal quarter was $221 million, up 9% compared to $202 million during the third quarter of fiscal year 2017.
Breaking this increase down by business segment, factory-built housing net revenue increased $18.6 million from improved home sales volume, including incremental sales from our new Lexington Homes factory in Mississippi and a larger proportion of higher-priced homes.
Factor ---+ financial services segment net revenue increased 3% from higher home loan sales volume and more insurance policies in force compared to the prior year.
Consolidated gross profit in the third fiscal quarter as a percentage of net revenue was 22.5%, up from 21.5% in the same period last year.
The improvement was the result of a $3.4 million favorable dispute settlement resolution this quarter.
The constrained labor market and rising material prices continued to be key challenges to gross margin growth.
We have implemented higher product prices to offset rising input costs, although large order backlogs deferred full realization of the benefits.
Selling, general and administrative expenses in the fiscal 2018 third quarter as a percentage of net revenue was 11.8% compared to 12.9% during the same quarter last year.
The improvement was related to fixed cost efficiencies gained from higher net revenue levels and effective cost controls.
Income tax expense benefited from the U.S. government's December enactment of comprehensive tax legislation.
The company recorded a net income tax benefit of $5.6 million this quarter, the result of a lower federal income tax liability and revaluation of net deferred income taxes.
This resulted in a transitional effective income tax rate this quarter of only 9.5% in order to adjust to full fiscal year lower income tax obligations.
The final fiscal quarter that ends this coming March is expected to have an estimated tax rate of approximately 30%, which reflects the blended rates before and after the new tax law, which span our fiscal year.
Lastly, fiscal year 2019 should benefit fully from lower income tax rates and reflect an estimated effective tax rate in the low 20s.
Net income for the third quarter of fiscal 2018 was $21.4 million compared to net income of $12.3 million reported in the same quarter of the prior year.
Net income per diluted share this quarter was $2.33 versus $1.35 in last year's third quarter.
Comparing the December 30, 2017, balance sheet to April 1, 2017, Lexington Homes balances are only included in the current consolidated balance sheet as the acquisition occurred at the beginning of this fiscal year.
Our cash balance was approximately $139 million compared to $133 million 9 months earlier.
The increase was mainly from net income and cash net ---+ net cash provided by operating activities.
Accounts receivable increased primarily from higher sales during the period.
Inventories increased for more homes in the final stages of sales at the end of the quarter.
Inventory is also higher from stocking additional raw materials to feed increased home production rates.
Accrued liabilities increased from customer deposits and higher volume rebate accruals incident to home sales growth, partially offset by decreases in salary and wage accruals at the end of the quarter.
Lastly, stockholders' equity grew to approximately $436 million as of December 30, 2017, up approximately $42 million from the April 1, 2017, balance.
Joe, that completes the financial report.
Thank you, Dan.
I'd like to make a few general comments.
The U.S. homeownership rate rose in 2017 for the first time in 13 years.
Reports indicate that young buyers drove this.
The increase last year is particularly notable because it comes after the federal government restrained previous policies and encouraged banks to ease lending standards to boost homeownership.
On prior conference calls and other public comments, Cavco has taken exception with a certain school of thought that younger people would continue to rent rather than buy their homes.
Now what appears to be driving the market is a move to own rather than rent, coming from the largest home-buying generation since the baby boomers, millennials.
The homeownership rate among households headed by someone under the age of 35 rose to 36% in the fourth quarter of calendar '17 from a 34.7% rate a year earlier, the largest increase of any age group during that quarter.
The homeownership rate bottomed out at 62.9% in early 2016, which was a 50-year low.
According to the U.S. Census Bureau, in the fourth quarter of calendar 2017, homeownership rose to 64.2%.
In addition, these figures have been climbing since the first quarter of last year, indicating a reliable upward trend.
The homeownership rate is still below the long-term average of approximately 65%.
Some reports suggest that homeownership rates will take years to fully recover as home prices are growing faster than wages and inflation.
The S&P CoreLogic Case-Shiller National Home Price Index report that single-family home prices rose 6.2% in the 12 months ended November 2017, about 3x the rate of inflation.
This trend and other factors such as potentially rising mortgage rates and tax code changes that offer pure incentives for homeownership might suggest headwinds for new home sales.
We believe, however, that in such an economic environment, the value and affordability of Cavco's factory-constructed homes actually becomes more apparent to buyers.
Certainly, we are not immune to adverse factors.
Our company must face the challenges of inflation in materials and wages and even the availability of qualified people to build our homes, the same as on-site construction builders must face.
The difference is that our system's process of building homes is a very efficient method of construction.
Far less waste of materials and much more effective use of labor results in our ability to offer new homes at very competitive prices.
Furthermore, we can reach affordable price points that are generally not of interest to on-site builders.
We're not suggesting that factory-built homes fit all market needs, but national home prices reached a record in September 2016, and with the prospect of continued price escalation in 2018, we think there should be steady demand for affordable housing.
We have robust employment; 2 large and growing demographic segments, the millennials and baby boomers, from which many of our buyers typically come; tax changes that could help our buyers save for downpayment and qualify for a loan; and indications of an improving economy.
With the positive economic environment and for the reasons, among others, that I've just suggested, we feel we can meet the challenges that lie ahead and generate attractive long-term growth.
There's lots of work to do but we have the capital and people talent to accomplish our objectives.
And now we'd be glad to take any of your questions.
Well, I don't think the environment's changed all that much just quarter-to-quarter, but it still remains an issue.
Labor availability, availability of qualified labor, that is people who will pass our requirements for employment.
And this is not an issue that we see just in our business or even in our industry, although we hear it from our peers and competitors.
We hear it from our vendors.
We hear it from, certainly, the on-site builders all point out to this problem.
And we hear it from other industries, people we come across.
So it's ---+ I think it's a systemic issue and challenge for the entire country, and we are facing it as everyone else is.
Now we're trying to do all sorts of things to address that.
We have full-time recruiter that we've brought on board, and her work is all and exclusively runs around recruiting talent in all areas of our company.
We're using all the social media.
We have different newly devised training programs, onboarding programs for people.
We've looked at wages and continue to wage surveys in various areas, incentive programs.
Even the work environment, we look at our facilities, and we'll ---+ we have been and will continue to invest in our facilities to provide an attractive working environment.
And so we try to do all these things with that goal in mind of attracting and then, more importantly, retaining good people.
But I couldn't tell you how much that will help us or restrain us from growing production to the extent we like.
It's just an issue we have to face, and we are addressing.
And we think we can make good progress.
But the full utilization of our facilities certainly depends on our ability to hire a substantial enough workforce to accomplish full utilization, and we're not quite there yet.
Yes.
I'm glad you asked.
The GSEs, Fannie Mae and Freddie Mac, both have been involved in our industry trade association, making presentations to the industry in general.
They both have programs to increase their participation with manufactured home lending.
Specifically, Freddie Mac plans to increase its purchase of manufactured homes' title as real property, that is traditional mortgages, if you will.
In '18 and '19 and '20, they've set specific objectives for increasing the number of loans they will finance.
It's a not huge numbers in and of themselves, but it indicates a trend that they're moving in the right direction.
Fannie Mae also makes an additional statement that they will add an additional 4,000 to 5,000 manufactured home loans secured by real estate over 3 years, which equals an estimated contribution of $500 million to about $660 million in loans.
And then on the chattel side, the personal property lending, where the home is the only collateral for the loan, again, both GSEs indicate that they intend to start preliminary chattel loan programs but not until next year, and we actually await that.
We think it'll be a good move for the industry.
There's certainly a lack of availability of chattel financing, and their involvement will help.
But they're ---+ they're still going through data.
And they move a little bit slower than we like, but it looks like they're at least making some progress.
Yes.
Again, good question.
For those of you on the call who are not familiar with that news, HUD did make a public announcement on January 25 that they were going to do a wholesale review of manufactured housing rules.
We've mentioned it in the past to many of you that we welcome HUD's regulation of the industry.
It kind of levels the playing field.
All our homes in our industry, manufactured homes, are built to a federal preemptive code.
So all prime materials are used.
The homes are thoroughly inspected.
In fact, arguably, much more inspected than an on-site construction is.
So HUD's regulation is not a negative thing.
The problem has been that HUD has not made any adjustments, improvements to their regulation and their reinforcement of interpretation of the rules in many years.
And I think what Secretary Carson is now doing is very welcome in that they will thoroughly review rules, look for what's outdated, what's hampering the growth of manufactured housing in the country, look what needs to be added.
And I think they've recognized, and they, in fact, they've stated publicly that manufactured housing plays a vital role in meeting the country's affordable housing needs.
Right now, it provides about 10% of total single-family housing stock, but there's no reason that percent couldn't be higher with some flexibility and cooperation between HUD and the manufacturers.
So we welcome this.
I think it's a great indication of HUD listening to the needs of the industry and also, of course, continuing the protection of the consumer and building quality homes.
So we feel very positive about this.
It's the most positive move and news that we have heard from HUD, our regulator, in many, many years.
And we look forward to a more cooperative relationship with that agency.
Sure.
Yes.
Happy to address that.
This is Dan.
The average sales price you're seeing there or calculating, of course, as a reminder, is based on our mix of wholesale homes, which is predominantly what we sell and then retail homes that sell through our company-owned retail stores, which carry a ---+ naturally a higher sales price.
So that can add variability, and that's the primary component of variability that we always refer to and have to remind you of.
But nonetheless, the larger and higher-priced homes can provide often a better gross margin for us.
And so we can lean, in times like this, towards more profitable gross profit homes, and so we'll do that.
We have done that.
We'll continue to do that, obviously paying attention to all the demands and needs in the marketplace to serve our customers as well.
But those take a little bit longer to produce, and we have to monitor the balance, if you will.
So we'll remain focused on bottom line improvement as opposed to top line unit shipment growth.
And I'd also add one important reminder that when we ship a double-section home, that counts as one unit.
And when we ship a single-section home, that counts as one unit.
So as we have certain quarters that may have higher counts of double-section homes, then the unit growth will be lower than others that have single-section counts, if you will, or higher mixes that way.
Well, as to the first part of your question, I'm not sure that we'll get into a lot of detail there.
Some of that's proprietary.
We always pride ourselves on maintaining efficient cost controls and keeping our SG&A among the lowest in the industry, in fact, when there was more industry to compare to publicly.
With respect to ---+ going forward, I'll let Dan address that.
Sure.
And yes, <UNK>, as we just naturally see the leverage in the SG&A component as revenues go higher, we'd expect to see continued improvement in the percentage of sales.
I think there's still little bit more room there to grow or to reduce the percentage even though the dollars for SG&A would continue to increase.
But yes, there's more room there.
And we probably wouldn't get as low as our all-time lows, which are in the single digits, but we think that we can get lower.
We now ---+ the reason we wouldn't get down to the low single digits again, we don't think, is because we have higher SG&A businesses included in our consolidated statements now, namely our finance company, our insurance company and also our retail division.
So that being said, together, we think there's still more leverage in the statement that way.
Well, we didn't provide color specifically, really just because it's a onetime event.
It's a settlement.
It's an issue we've been dealing with for a while and got resolution, favorable resolution.
And so we just wanted to make sure we called it out for what it was, but we don't have any specific color to add on that, no.
The only thing I would add to Dan's comment is that it's something ---+ it reflects expense we've incurred in previous quarters that we didn't feel were our responsibility.
And obviously, it ---+ the result was that we received favorable response.
To our belief, it wasn't our responsibility, and so we got that settlement.
So that's something, as Dan said, we've been working on for some time, but it's an unusual and onetime event.
Well, we do think that we have room, and we've worked towards increasing our prices based on demand levels to get the benefit in our gross margin.
And we don't have a percentage we could give you over cost that we are shooting towards to do that.
But we want to also be sensitive, obviously, to the long-term nature of the business being able to serve all the demands in the marketplace and the price points that we do produce.
So the short answer is yes, we'll continue to look at market factors in addition to just cost when we set price points for our products to be able to benefit as much as we possibly can there without losing business or turning away business that is good business for us in long term, in good times and in tougher times.
Our backlogs now are a little over $200 million, and that is roughly equivalent with our most recent reported numbers a quarter ago.
And the capacity utilization is running around 80% of our brick-and-mortar utilization, if you will.
Just a note on that, what that means is we have capacity to build more homes in all of our factories, speaking generally.
Our limitation is what Joe talked about in labor and the ability to ramp up as quickly as we'd like to meet the current market demand.
Hence, the reason we have a higher backlog than we typically would if we were producing more homes.
So the 2 are kind of related to each other directly.
But the 80% number is a brick-and-mortar number.
I just want to make sure you know that.
But we're really kind of constrained with labor right now, and we'll need to build more homes by more people we hire.
Yes, I don't think it will.
No.
We know both companies.
They're good competitors, and wouldn't really expect any significant changes there.
Well, capital allocation-wise, lending, we'll continue to invest in our mortgage operation but that will be fairly modest in the whole scheme of things.
We'll also be investing in our facilities.
As I mentioned in my comments, we'll be adding 2 facilities, in some cases, some expansions.
We'll also be looking at ways to automate, if you will, and that might be too strong a word because there's not ---+ I don't want to imply there's not a robotics kind of activities in our industry.
But certainly, we can look at ways to reduce the lifting and effort of building homes and try to make it more ergonomically friendly.
So we're looking at conveyance methods, the way we move materials around.
That will require some investment.
So I think our capital spending will be up somewhat.
It'll still be modest, I think, in relation to our cash flow, but it'll be up somewhat from prior years as we continue to look at ways to improve our facilities and maximize throughput.
Well, thank you, and appreciate being on the call and the questions, and we'll be happy to provide any follow-up information.
And we look forward to a good quarter and speaking to you again in 3 months.
Thank you.
