Q3 2020 Earnings Call

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I'd now like to hand, the conference your speaker today, Mark Fosland director of financial reporting and Investor Relations. Please go ahead Sir.

Good afternoon, and thank you for joining us for cap cost in industries third quarter fiscal year 2020 earnings conference call. During the call him you'll be hearing from Billboard President and Chief Executive Officer, Dan Urness Executive Vice President and Chief Financial Officer, and Josh First study 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 under the provisions of the private Securities Litigation Reform Act of 1995, including statements of expectations or assumptions about Kepcos 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 the cap cause actual results.

Could cause actual results to materially differ from those expressed in any forward looking statements made by more on behalf of capital.

I encourage you to review of cap those filings with the Securities and Exchange Commission, including without limitation. The company's most recent forms 10-K, and Q, which identifies specific factors that may cause actual results or events to differ materially from those described in the forward looking statements.

Some factors that may cause the company as a result.

And may affect the company's Raul results include but are not limited to.

Risk of litigation or regulatory action arising from the subpoenas, we received from the FCC.

<unk> reputation will damage the Capco may suffer as a result, the matters under inquiry.

Adverse industry conditions, our involvement and vertically integrated lines of business, including manufactured housing consumer finance commercial finance and insurance.

Market forces in housing demand fluctuations.

Our business in operations in concentrated and specific geographic regions.

Lots of any of our executive officers federal government shutdowns and extensive regulation affecting manufactured housing.

This conference call also contains time sensitive information is accurate only as of the data. This live broadcast Friday January 31st 2020.

Capco undertakes no obligation to revise or update any forward looking statements reflect events or circumstances. After the data This conference call, except as required by law.

Now I'd like to turn the call over to Bill bore President and Chief Executive Officer, though.

Thank you and welcome everyone.

The message this quarter is one of continuing consumer demand and strong results from our operations, who are doing a great job focusing on quality service and profitability.

Very good demand stemming from the strong economy, and well documented demographic drivers continue to leave us optimistic about the industry as a whole and our prospects going forward.

The big picture for the industry will continue to be driven by over eight years of under building.

Particularly undersupply of affordable units.

As well as by 10, a household formation demand.

The long term need for affordable housing is real and growing in our efforts are aimed at being part of the solution.

Decembers industry and the shipment that is not yet in looking at the second half for the calendar 2019.

Basically July through November industry shipments are up nearly 4%.

So while the full year shipments will be deceiving because of the first half in retail inventory reduction year over year comparisons are starting to clear up and show growth in demand.

We've seen that in our wholesale sales and we've seen that in our retail operations, where traffic is up year over year.

And last quarter's call. We commented that we were expecting backlogs and demand to carry us through the winter into the spring selling season.

The months later or backlog has held up well it six weeks and it's enabled us to grow shipments.

Turning to financial services, our teams had another outstanding quarter.

And insurance there weren't any major weather events impacting our policy areas over this shouldn't overshadow how well our team at standard casualty is balancing growth and risk diversification.

To consider the results is solely driven by weather doesn't do justice to the great job they've been doing through time.

Similarly, the lending operation is contributing strong results not solely due to interest rates and home buying demand, but in large part due to the steady and smart approach to growth in risk management.

Paying attention details as everything in these financial services operations and our teams are simply doing an outstanding job.

Regarding the broader lending environment I don't have much to add to what I expected participants on the call are already following.

The gses remain constructive through their junior duty to serve commitments.

Having said that it shouldn't be surprising that it takes time for programs like choice home and MH advantage to gain momentum.

These are very good programs that are making a difference and we certainly appreciate.

The level of commitment by the Gses.

Similarly, investor appetite in the prospect for a more robust secondary market from each lines is building.

All of these developments continue to move into right direction.

And finally, I would simply like data comment the recognizes the improving regulatory environment I.

I'd continues to make positive strides on behalf of the industry through reduced regulatory barriers as well as a streamline process for code updates from these are important changes.

These changes reduced cost and they result in a much more efficient process to get deserving families into quality homes.

So with that I'll turn it over to Dan or next to review the financial results.

Having to do so thanks, Bill good day everyone.

Net revenue for the third fiscal quarter of Twentytwenty was $273.7 million up 17.1% compared to $233.7 million during the prior years third fiscal quarter.

The majority of the increase was within the factory built housing segment.

Where net revenue grew approximately 17% to $257 million from 220 million in the prior year quarter.

The improvement was from organic sales growth and the inclusion of a full quarter of destiny homes operations as the acquisition occurred in August of 2018.

Housing units sales volume increased approximately 12% overall, while approximately 5% of the improvement was for the home price increases, which included a modest product mix shift towards multi section home sales.

Financial services segment net revenue increased 24% to.

To $16.6 million from greater unrealized gains on investments in the insurance subsidiaries portfolio.

Higher home sales loan volume.

And more insurance policies in force compared to the prior year.

These increases were partially offset by declines in interest income from the continued loan portfolio runoff.

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Adjusted gross profit as a percentage of net revenue was 21.9% up 90 basis points from the same period last year.

The higher gross margin percent was mainly from improved earnings in our financial services segment.

As the prior year period included a large hailstorm a bit and Phoenix.

While smaller storms did occur this quarter in Dallas and Phoenix, There were no significant weather related events.

The factory built housing gross margin percentage was 19.0% up slightly from 18.9% during the same quarter last year.

Selling general and administrative expenses in the fiscal 2023rd quarter as a percentage of net revenue was 13.5% compared to 13.2% during the same quarter last year.

The increase was primarily from $2.1 million and amortization of premiums related to Dino insurance.

As the policies were purchased in December 2018, requiring only one month of amortization in the prior year quarter.

We also recorded more sales commissions and incentive compensation from higher sales volumes and profits.

Expenses related to the FCC inquiry.

Were $900000 this quarter compared to $1.3 million during last year's third fiscal quarter.

Other income net this quarter was $2.2 million compared to 318000 in last year's comparable quarter.

The company realised $300000 and unrealized gains on corporate investments versus an unrealized unrealized loss of $2.1 million in the prior year quarter.

Amounting to $2.4 million positive change by comparison.

The current period also includes greater interest income from larger cash and commercial loan balances offset partially by lower market interest rates.

The effective income tax rate was 15.5% for the third fiscal quarter.

Compared to 21.0% in the same period last year.

Current quarter included a 1.7 million dollar benefit for the recognition of certain tax credits from the 2020 appropriations Bill.

Most notably energy Star credits.

The effective income tax rate declined from the prior year is partially offset by lower benefits from the exercise of stock options.

Net income was $20.9 million up 56% compared to net income of $13.4 million in the same quarter of the prior year.

Net income per diluted share this quarter was $2.25 versus one dollar and 44 cents in last year's third quarter.

Next Josh will discuss the balance sheet Josh.

Thanks, Dan.

During the December 28, 2019 balance sheet to March Thirtyth 2019.

Cash balance with nearly $217 million up from 187.4 million nine months earlier.

The increases from net income and changes in working capital repurchase of securitized debt and cash paid for the desking homes acquisition.

Prepaid and other assets increased mainly from the land exchange that occurred last quarter.

Property plant and equipment goodwill and other intangible balances increase from the destiny homes purchase.

Certain balance sheet lighter line items were affected by the new lease accounting standard which was implemented at the beginning of this fiscal year. As a reminder, this accounting standard requires that all leases be recorded on the balance sheet.

The current portion of securitize financings and others declined from the repurchase of securitized debt that occurred in August of 2019.

Lastly, stockholders' equity was approximately $596 million as of December 28, 2019, approximately 66 million from the March Thirtyth 2019 balance.

That completes the financial report.

Thank you Josh.

Well I think we'll just go ahead and the Turner rate over for questions.

Thank you as a reminder to ask a question you'll need to press star one on your telephone.

Withdraw your question pressed upon Keith please stand by will be commodity kinda give us there.

First question comes from Dan Moore with CJS Securities.

One is now open.

Hi, This is Stephan us Chris calling for Dan.

So first could just maybe talk about the underlying demand trends traffic at the dealer level and your expectations for backlog going into Q4.

Yes, I can talk generally about where we see I mean I've talked in the past that.

Yes.

The big question everyone's trying to always keep up finger on the pulse of is the end consumer end homebuyer demand and we don't talk about specific numbers, but.

We do look pretty closely it or Palm Harbor villages operation for an indication.

They're not national the big cover a pretty big an important region and as I mentioned in my opening comments, we watch those.

Year over year trends traffic is up and deposits are strong and conversions are strong. So you kind of just supports the whole thesis that well on.

Wholesale shipments.

Our.

Something we all track as well when you are really trying to keep a finger on the pulse of consumer demand all the indications we have are pretty positive.

Thanks, guys.

And Thats it from me ill jump back in Q.

Okay. Thanks.

Thank you.

I wonder to ask a question you'll need to press star one on your telephone.

Next question comes from Greg Palm with tax Alex Capital. Your line is now open.

Great. Thanks for taking the questions and congrats on the good results here.

Thanks, Greg.

I guess.

Maybe just start with a housekeeping item how could you break out what your organic growth rate was in the quarter and maybe your overall unit contribution from Destiny, If you have that Andy.

We don't break it out separately, Greg, but I can we had pretty good growth this quarter as we mentioned in our opening statements and I would break it down roughly that a third was related to destiny.

And then another third related to organic shipment growth and then the final third related to the higher prices.

Okay. So you're talking about a third of the revenue increase in the quarter Thats, what you're talking about a third a third.

Yes, that's right we had a 17%.

Increase I'm, just breaking it down roughly a third of 30 Threerd that's right for perfect. That's helpful.

In terms of the uptick in financial services revenue growth this year and it really accelerated this past quarter, Dan do you talked a little bit about it but anything to note. There in terms of a change of strategy. It's really been interesting to see how that's accelerated through the year.

You bet I'll just mentioned one thing there.

It's actually in our press release, but we have a part of the increase is a pretty big spread in just how we have to record unrealized gains and losses on equity investments.

So we had a 300000 dollar unrealized gain in the in the equity investments in the portfolio in that insurance company well this quarter last year. It was 900000 dollar loss. So thats a 1 million two of the increase and then in addition to that of course, we had the growth in.

Loans that are being made loan activity is up and then we also had have larger portfolio larger book of business in our insurance business.

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Revenue growth from that area as well.

Okay that makes sense and then just sticking on the financing side of things here sounds like a few other competitors do at least country place of announced some new programs really even at lower FICO score. So wanted to get your opinion on how that might.

True overall accessibility to finance industry wide and whether that's something that you expect to follow suit with country place as well.

Take a shot yes, we definitely have noted some of those programs that are coming out and we're we're encouraged by it I think blending it has been a constraint it's pretty well discussed in the industry.

So.

No no one wants to see the industry get overage skis on anything like that but I think we're far from that at this point. So we think it's a good development.

And so far as country place mortgage I guess, all I can really says we're constantly kind of evaluating and looking at where we should.

Focus our origination efforts, that's an ongoing process and the company.

And we see some opportunities there so.

We're going to kind of continue doing what we always do look for opportunities in origination strategy and and pursuing them. So.

The the loosening up if you want to say that as of.

Lending programs I think is right now at a very healthy pace, it's not something to be concerned of it's good.

Got it okay.

Hi.

You have a in opinion or or maybe a it's I don't want to say a a target, but just sort of an on assumption of maybe what the industry growth rate might be calendar year 20 versus calendar year 19 wholesale shipments you gave a lot of color on sort of first half 19 second half and.

Related growth rates I'm, just curious if you have assumption sort of built in or not.

You don't really have a pin down projection or assumption we.

Tend to shy away from doing that and get into obsessed about trying to predict it.

But I do think that.

Yes without dive in too much in the weeds I think about this a lot and maybe it's time to just let it go into history, but 2019 might be looked that is kind of flat.

Type year, but you got to always remember that there are lot of sales that were pulled from 2019 forward and 18. So that was really what I was trying to get add in my comments that once the dust has cleared on that inventory at retail inventory situation, which were all tired of talking about once the dust is cleared in years.

Really looking year over year on more comparable months and quarters.

Theres a lot a reason to Ics to see that right now the industry's growing.

Kind of low to mid single digits, and we don't see that changing.

And how do you view the inventory situation out there I mean is it cleared entirely as a clear in most regions and I mean, how we sort of the level of inventory either out your own stores or from the independence in your opinion.

I'd venture to say, it's largely cleared I think about issues behind us.

Perfect all right I'll leave it there thanks to the time.

Thanks, Greg.

Thank you.

I'm not showing any further questions at this time I would now like to turn the call back over to Belvoir for any closing remarks.

Okay, not a lot I really appreciate People's interest, we're always available to continue the discussion. Thanks, a lot for join US today and have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

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