Cavco Industries Inc

NASDAQ:CVCO

Earnings Call Transcript 2019-Q2

[Operator]

Good day, ladies and gentlemen, and welcome to the Second Quarter and Fiscal Year 2019 Cavco Industries, Inc. Earnings Call Webcast. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Mark Fusler, Director of Financial Reporting. Sir, you may begin.

[Mark Fusler, executive]

Thank you, Lauren. Before we begin, please be advised the comments made during this conference call by management will contain forward-looking statements under the provisions of the Private Securities Litigation Reform Act of 1995, including statements of expectations or assumptions about Cavco's financial and operational performance, revenues, earnings per share, cash flow or use, cost savings and operational efficiencies. 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 include specific factors that may cause actual results or events to differ materially from those described in the forward-looking statements.

Some factors that may affect Cavco's results include, but are not limited to, the risk of litigation or regulatory action arising from the subpoena we received from the SEC, the risk of potential litigation or regulatory action arising from the SEC related internal investigation and its findings, potential reputational damage that Cavco may suffer as a result of matters under investigation, adverse industry conditions, our involvement in vertically integrated lines of business, including manufactured housing, consumer finance and insurance, market forces and housing demand fluctuations, our business and operations begin being concentrated in certain geographic regions, loss of any of our executive officers, governmental and regulatory disruption and extensive regulation affecting manufactured housing.

This conference call also contains time sensitive information that is accurate only as of the date of this live broadcast, Friday, November 9, 2018. Cavco undertakes no obligation to revise or update any forward-looking statement to reflect events or circumstances after the date of this conference call, except as required by law. Bill?

[William Boor, executive]

Thank you, Mark. Good morning, and thank you, everyone for joining our call today to discuss our strong second quarter financial results, and we'll also be discussing changes that we announced regarding our executive leadership team. My name is Bill Boor, and I'm the new Chairman of the Board of Directors. I've been an independent member of the board since 2008, and I have a long association with Cavco dating back to when it was part of Centex Corporation up till its spin-off in 2003.

I'd like to start today's call by having the pleasure -- the real pleasure to introduce Dan Urness as Cavco's new President and Acting Chief Executive Officer. I know that many of you know Dan well, because of his leadership for many years as our company's Chief Financial Officer. While CFO, he's played a key role in advancing Cavco's operational initiatives which have established the foundation for the company's successes. Dan has worked for and on behalf of the company for nearly 20 years in numerous leadership positions, and the board has had the opportunity to get to know him very well over the years. He's an excellent and thoughtful leader. For several years now, Dan has been front and center in board's discussion about succession planning. And recently, Dan left his role as Cavco's CFO and Treasurer to gain valuable experience in our manufacturing operations as part of that very succession plan. Now the time has come to make a transition and the board is confident that Dan is the right person to build on our company's success. His institutional knowledge of our company and significant industry experience will ensure a smooth leadership transition.

Our former CEO, Joe Stegmayer is transitioning into a new role as Director of Strategic Initiatives, and this will allow Cavco to retain his deep industry and operational experience. Joe stepped down from his former roles as Chairman, CEO and President after an internal investigation conducted by independent legal counsel identified certain violations of company policy that were related to securities trading. It's very important to understand that the leadership changes we announced are not the result of accounting or operational issues at our company. Cavco remains strong and continues to be an industry leader.

I'd like to spend a moment on the SEC subpoenas that we disclosed yesterday. As we mentioned in the press release and in the SEC Form 10-Q filing yesterday, the company received a subpoena from the SEC that requested certain documents relating to, among other things, trading in the stock of another public company. The SEC also sent a separate subpoena for documents in testimony to Joe Stegmayer, regarding similar topics. Upon learning of this, the board initiated an independent investigation which is ongoing at this point in time. The company intends to cooperate fully with the SEC inquiry.

I'm sure the participants on the call will understand that we're limited regarding what we know at this point, and what we can talk about at this stage in a process like this. Moreover, we have a strong business and the remaining time on today's call is best spent focusing on the quarter's results. Beyond what we disclosed in our 10-Q, there's not any additional information we can provide. For those reasons, we will not be taking questions on today's call. Instead, we'll be conducting one-on-one call with analysts and investors. So to arrange a call, please contact Mark Fusler at [phone], and of course we're going to provide -- we're going to -- as we go forward, we're going to provide updates as appropriate.

Before I conclude, I want to state that the board believe strongly in Cavco's current strategy and is very confident that the changes we've announced will continue to support the execution of that strategy.

So with that, I'd like to turn the call over to Dan Urness, the company's President and Acting Chief Executive Officer. Dan?

[Daniel Urness, executive]

Thanks, Bill. Good morning. I look forward to speaking today as part of a review of Cavco's financial results for the second quarter of fiscal year 2019. I'm honored to have the opportunity to serve as President and Acting CEO, positions that I have always respected. It has been a distinct privilege to work with Joe for all these years, and I look forward to opportunities to work with Joe in his new role serving our company.

Over the past 20 years, I've worked in and toured our facilities, collaborated with our partners and customers, and had the honor of working alongside and learning from our valued associates. Our company is strong and we continue to realize robust demand for our products in the markets we serve. Our people can continue to execute on the groundwork laid over the last several years in relation to providing excellent customer service during and after the sale, building high-quality homes and creating innovative housing designs.

Now I would like to turn the call over to Josh Barsetti, our Chief Accounting Officer, for our financial report. As You know, Josh has held high level accounting positions with other public companies before joining Cavco in 2014. Josh is adept with accounting and financial reporting experience make him a valued member of our executive team. Josh will now review our financial results, and after his remarks, I will give you an update on our business. Josh?

[Joshua Barsetti, executive]

Thanks, Dan. Net revenue for the fiscal 2019 second quarter was $242 million, up 20% compared to $201 million during the second quarter of fiscal year 2018. Within the factory built housing segment, net revenue grew nearly $40 million mainly from improved average home sales prices and home sales volume. In addition, factory-built housing revenue included $6.2 million related to changes made during this fiscal year from the implementation of required accounting standards related to revenue in certain subcontracted pass-through services on retail home sales.

Financial services segment net revenue increased 10% as the prior year included a $1.4 million reduction in net revenue related to required reinsurance premium buybacks as a result of Hurricane Harvey. Consolidated gross profit in the second fiscal quarter as a percentage of net revenue was 20.5%, up from 17.2% in the same period last year. The increase was primarily the result of higher insurance claim activity in last year's second quarter financial services segment financial results, which were adversely impacted by Hurricane Harvey. Hurricane Harvey also caused delays in homebuilding sales and new home inventory damage at certain retail locations. The financial services segment did experience a weather event during the current second fiscal quarter that resulted in a large deductible cost for reinsurance purposes. However, this event was much less severe than last year's hurricane.

Selling, general and administrative expenses in the fiscal year 2019 second quarter as a percentage of net revenue was 12.4% compared to 13% during the same quarter of last year. The improvement was from fixed cost efficiencies gained from higher net revenue levels. The effective income tax rate was 20.2% for the second fiscal quarter compared to 27.3% in the same quarter of the prior year. Overall, the lower tax rate is a result of the U.S. government enacting comprehensive tax legislation, commonly referred to as the Tax Act this past December, which reduced the federal corporate tax rate to 21%. In addition, the current quarter includes a benefit of $1.1 million related to excess tax benefits on exercises of stock options compared to a $300,000 benefit in the prior year period. Net income for the second quarter of fiscal 2019 was $15.6 million compared to net income of $6.2 million reported in the same quarter of the prior year. Net income per diluted share this quarter was $1.67 compared to $0.67 in last year's second quarter.

Comparing the September 29, 2018 balance sheet to March 31, 2018, the cash balance was approximately $195 million compared to $187 million, 6 months earlier. The increase was mainly the result of net income and net cash provided by operating activities offset by increased commercial lending. Accounts receivable increased from overall sales growth during the period. Total commercial loans receivable increased from higher loan activity under our wholesale loan programs. In addition, the prior year balance included early payoffs on certain accounts, thereby deflating the balance.

Prepaid expenses and other current assets increased from higher estimated tax payments on improved earnings. Accrued liabilities increased from higher accrued customer rebates related to higher home sales volume as well as increased customer deposit balances from higher order rates. Current securitized financings increased in line with the contractual terms related to these facilities. Non-current securitized financings decreased in accordance with these contractual terms. Lastly, stockholders' equity grew to approximately $495 million as of September 29, 2018, up approximately $38 million from the March 31, 2018 balance.

Dan, that completes the financial report.

[Daniel Urness, executive]

Thank you, Josh. We were pleased with our financial results this quarter. Reported improvements in economic measures including increased consumer confidence, low unemployment and growth in jobs and wages have continued to support homebuying ability of our customers.

Homeownership rates are up over the prior year. Also new and affordable homes continue to represent a growing portion of overall housing demand. This, and 61% of new homes sold under $200,000 during the first 9 months of calendar year 2018 were manufactured homes. At the end of the second fiscal quarter, Cavco's backlog was approximately $204 million compared to $199 million at September 30, 2017, and our capacity utilization approximated 80% compared to approximately 75% in the prior year quarter.

We are working to further increase manufactured home production volume through investments in homebuilding capabilities, processes, labor recruitment and employee retention efforts. Production staff training and quality assurance are also significant areas of focus given our diverse home product offerings and reputation for high standards of quality. Further, we believe that rising site-built housing prices, residential rents and mortgage interest rates make our high value, precision built homes an increasingly sought after affordable housing solution. In closing, with strong demand for our products and solid business fundamentals, Cavco is well positioned to benefit in the present marketplace. We operate our business in key geographies with affordable housing needs. Our products are well respected and we have wide demographic appeal. In addition, our people are talented and we look forward to continuing to serve our valued customers.

Thank you for joining our call. And that concludes our remarks today. Lauren?

[Operator]

Thank you. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. And you may all disconnect. Everyone, have a wonderful day.