Q3 2021 Cavco Industries Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the third quarter. The school year 2021 constantly Industries, Inc. Earnings Conference call and webcast. At this time all participants are in listen only mode. After the speaker's presentation. There will be a question and answer session to ask the question. During the session you will need to press star one on your <unk>.
Allophone as a reminder, today's program may be recorded I would now like to introduce your host for today's program Mark <unk> director of financial reporting and Investor Relations. Please go ahead Sir.
Good day, and thank you for joining us for cap of the industries third quarter fiscal year, 'twenty and 'twenty One earnings conference call. During the call you'll be hearing from Bill Boor, President and Chief Executive Officer, Paul Bigby, Chief Accounting Officer and myself.
Cash flow argues 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 the campus 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 capital Inc.
Courage you to review of catalyst filings with the Securities and Exchange Commission, including without limitation of 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.
Some factors that may affect the company's results include but are not limited to the impact of local or national emergencies, including the COVID-19, pandemic and such impacts from the state and federal regulatory action that restricts our ability to operate business.
And the impacts on customer demand and the availability of financing for our products, our supply chain and they've availability of raw materials for the manufacture of our products avail.
The availability of labor and the health and safety of our work force, our liability and access to capital markets. The re.
Risk of litigation of regulatory action.
Central Reputational damage the capital May suffer as a result of matters under inquiry.
Adverse industry conditions.
Our involvement in vertically integrated lines of business included manufactured housing consumer finance commercial finance and insurance.
The market forces and housing demand fluctuations our.
Our business and operations being concentrated in certain geographic regions.
Cost of any of our of our executive officers.
Additional federal government shutdowns and regulations affecting the manufactured housing.
This conference call also contains time sensitive information that is the only accurate as of the date of this live broadcast Friday January 29 2021.
<unk> 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.
I would like to turn our call over to Bill Boor, President and Chief Executive Officer.
Welcome and thank you for joining us today to review of results for the third quarter.
I want to start today by saying that we've made good progress pushing our production level of towards pre COVID-19 levels and our intention is to keep pushing beyond those levels.
We increased capacity utilization to 75% for the quarter up from 65% in Q2.
This is despite a resurgence in COVID-19 that is directly driving absenteeism in the plants and display continuing supply challenges that are of serious today as they have been over the past year.
These gains on the result of our plant staying focused and working hard to hire retain and build skills and managing the supply disruptions very well.
As indicated we intend to keep pushing beyond pre COVID-19 utilization levels, we need to in order to address the extremely high backlogs, which continued to build during the quarter.
This backlogs now stand at $472 million up 47% from last quarter.
Based on current production levels that equates to approximately 26 of 28 weeks.
This is of continuing story of exceedingly high demand.
We estimate the production challenges of added about three weeks of that backlog or said another way. If we had no production disruptions over the last three quarters orders are such that the backlog would still be more than 23 weeks.
Last quarter, we reported that order rates were up 65% year over year.
That continued through the third quarter of 65%.
Okay.
It's widely understood that the cost of supplies of gone up considerably. After a brief drop in the October and November timeframe lumber and OSB has shot up again.
On lumber the Sps the spruce pine for indicator price.
Ended the quarter up of 150% from April and OSB was up 200% over that timeframe.
Our plants have done an outstanding job of keeping up with these cost increases with higher average selling prices.
This is of disruptive and difficult process for the plants dealers and ultimate homebuyers.
And the process continues with more price increases going into effect during the fourth quarter.
On a percent basis gross margin typically get squeezed during periods of rapid cost escalation and that's what we've seen in the third quarter. Our intention is to maintain our overall dollar profitability in an environment with very volatile input costs of isn't limited to materials, but also includes labor.
And as I said, so far we've been able to keep up.
Our retail operations are performing very well one of the advantages of having palm Harbor villages as part of cash flow is that we understand firsthand the impact of price increases on long lead times.
Our owned retail operation is subjected to the same dynamics as our independent dealers.
They have more opportunities than houses to sell.
From day, one and the pandemic the retail operations shifted gears and they've done a really good job of generating leads and supporting homebuyers through phone up saying he leads on the.
The story is much the same as last quarter continuing strong demand.
We've seen traffic and sales follow a seasonal pattern with slowing over the holidays that that pattern has been of the significantly higher level year over year.
We also had a very strong quarter in financial services generally financing is available to qualified buyers and rates have stayed very low through the quarter.
As a result, both mortgage and home only originations are strong and.
And on the insurance side policy counts are up.
Unlike last quarter when the number of storms was unusually high this quarter claims were seasonally low so very strong results in that regard.
I want to avoid stealing all of the financial headlines from Paul and Mark, but I will say that we continue to generate a significant amount of cash. We believe we have good prospects for investing in growth both organically and through acquisitions.
The will preempt the question regarding the share repurchase authorization from the board, which occurred in mid quarter by reporting that we did not execute any repurchases before the earnings window closed.
As we said when the authorization was announced this as an important tool for us to manage our balance sheet and to the extent we repurchase shares over time, we don't expect that to limit our ability to strategically invest in the business.
Again, we feel it was a good quarter when all of our operations did a very good job of managing through disruption and uncertainty progress increasing throughput has been encouraging and that continues to be our focus.
With that I'll turn it over to Paul to discuss the financial results in more detail.
Thanks, Bill and good afternoon, everyone.
So I'm going to go through the results of operations for the third quarter of fiscal 'twenty 'twenty, One and then I'll turn it over the Mark to go through the balance sheet.
Net revenue for the third quarter of 2021 of its $288 8 million of $5 five per cent compared to $273 7 million during the prior year's third quarter.
As you would expect most of this was within the factory built housing segment, where net revenue increased five 3% to $278 million from $257 1 million in the prior year quarter, Inc.
The increase was due to a 13% increase in average revenue per home sold.
Primarily from product pricing increases to pass along changes of material costs.
Product mix.
That shifted slightly more toward double wide homes.
Price increases were partially offset by a six 8% decrease in units sold.
And again, we had home production challenges around high factory employee absenteeism hiring and building materials supply shortages.
In the financial services segment net revenue increased eight 4% to $18 million from $16 6 million, mainly the result of higher home loan sales volume and more insurance policies in force compared to the prior year.
Additionally, the third quarter included $1 million more unrealized gain on equity investments in the insurance subsidiaries portfolio on the prior year period at 300000 and unrealized gains. These increases were partially offset by declines in interest income from the formerly securitized loan portfolios that continue to amortize as.
Got it.
Consolidated consolidated gross profit in the third quarter as a percentage of net revenue was 25% down from 21, 9% of the same period last year the day.
And it's mainly the result of factory built housing segment decreasing to 17, 4% in the third quarter 2021 versus 19% in the prior year quarter.
Where the higher material costs impacted the margin percent.
Each factories have been implementing product price increases at a rate that is covered input cost increases however, gross margin percentage of not yet been maintained.
Lower factory built housing gross margin from our partially offset by improved gross margins in the financial services, which was aided by lower weather related claims and higher unrealized gains on marketable equity securities.
SG&A expenses in the fiscal 'twenty one third.
Third quarter as a percentage of net revenue was 12, 3% compared to 13, 5% during the same quarter last year. The decrease was primarily from the D&O insurance premiums, becoming fully amortized with no expense from the current quarter compared to $2 $1 million on the prior year period.
Additionally, during the quarter of the company received a $400000 of insurance recovery of prior legal expenses related to the SFC inquiry.
Hang on net expense of 300000 compared to last year.
<unk> 900000 cost is positive year over year comparisons were.
Partially offset by higher corporate related charges.
Other income net this quarter was flat at $2 2 million. The current quarter did include unrealized gains of 800000 on corporate corporate equity investments higher than 300000 in the prior year quarter. This increase was offset by reductions in interest income earned on cash and commercial loan receivables given lower interest rates.
Pretax profit was up four 9% this quarter to $25 9 million from $24 7 million from the prior year period.
The effective income tax rate was $23 nine for the third fiscal quarter compared to 15, 5% in the same period last year, the lower effective tax rate in the prior year was primarily the result of $1 7 million of tax credits from the 2020 appropriations Bill the 12.
The 21 consolidated Appropriations Act was signed into law on December 27, 2020, the day after our quarter closed and therefore this will be reflected in the fourth fiscal quarter.
Net income was down five 7% from $19 7 million compared to net income of $20 9 million in the same quarter of the prior year.
Net income per diluted share of this quarter was $2 12 versus $2 from 25 in last year's third quarter.
Now I'll turn it over to Mark to talk about the changes in the balance sheet. Thanks, Paul So comparing the December 'twenty six 'twenty 'twenty balance sheet as of March 28, 2020, the cash balance was $327 5 million from $241 8 million nine months earlier increase was primarily due to five items, which include number one.
On net income net of noncash items to changes in working capital, including greater accrued expenses and other current liabilities balances, which includes higher customer deposits received the result of higher order rates and longer lead times.
Three lower net commercial lending activity.
Core principle collection on consumer loans, which are all partially offset by purchases of property plant and equipment.
The current portion of consumer loans increased from a greater number of loans classified as held for sale due to the timing of the loan sale.
Investments increased from the recovery of the underlying equity markets during the period.
Prepaid and other assets of higher from the assets recorded in regards of the loan repurchase option for delinquent loans that have been sold the Ginnie Mae.
While we are not obligated to repurchase these loans accounting guidance requires us to record an asset and liability or the potential of a repurchase.
And that balance increase from additional loans in forbearance.
Long term consumer loans receivables decreased from principal collections on loans held for investment that were previously securitized.
Operating lease right of use of assets and related liabilities increased from the five year renewal on belief that one of our manufacturing facilities.
The crude expenses and other current liabilities increased from higher customer deposits, which have grown the factory backlogs as well as delinquent loan repurchase option discussed above.
Lastly, stockholders equity was approximately $661 7 million as of December 26, 2020 up $54 1 million from $607 6 million as of March 28 2020.
Bill that completes the financial report.
Thanks Mark.
Jonathan let's turn it over for questions.
Certainly ladies and gentlemen, if you have a question at this time. Please press Star then one on your Touchtone telephone pay per your question has been answered and you'd like to remove yourself from the queue. Please press the pound key our first question comes from the line of Daniel Moore from CJS Securities. Your question. Please.
Good afternoon of perhaps good morning, thanks for taking the questions Bill.
Dave maybe to start with the.
In the past when we've seen backlogs rises quickly dealers who've tried to kind of jump in line to make sure. They get orders are you seeing any evidence of that just your confidence throughout the that's all the buyers behind the other.
The if there are indeed, all of the buyers behind the incremental orders in second with backlog stretching out you know close to six months.
You know of any risk or concern of losing some of those orders.
Yes.
It stands the reason we have seen it in the past so it's logical to think that there could be some of that and we're going to keep our eyes on that over time, we can do things that.
Hope the kind of validate orders as far as checking that there is an actual retail alright, a homebuyer behind the retail sold orders. So we're going to keep our eye in that regard, but I would tell you I guess generally that our feeling right. Now is that there is not a meaningful amount of that going on.
And with your other question I think was.
The backlogs this law of them resolved in and people kind of and losing orders basically if I understood it right in.
I don't think we're seeing a lot of that and there's two points to be made there one.
The.
Someone's looking at buying a home from cash Cowen is frustrated with the long lead time, which we certainly understand I don't think they have places to go Unfortunately to get a shorter lead time.
Kind of got a sense that our.
Pretty much area by area of our competitors are facing similar long backlogs.
And the other is that I really think it can't be lost on anyone that well I think this demand is very real we've talked about it in the past that it's the result of the whole long period of under building for general housing.
On the low interest rates.
Certainly of catalyst well on that pent up demand to come forward. So I don't think people are just deciding out of the frustration to any great degree are deciding out of frustration over backlogs that they just.
By now because it takes too long I think they are interested in trying to get those interest rates.
So there's a risk of your identifying the we'll keep our eye on but from our perspective.
This demand is very real.
That's very helpful excellent with the switching to the margin profile with price increases that you put through.
You know I guess when you look at the factory built housing side of the business.
How long do you expect to take to get gross margins back to that more normal kind of 19% to 20% level.
The get closer to this quarter or are we just still chasing price increases any any any color there would be helpful.
Yes, I mean price increases are still occurring in the industry.
The the new year.
The question about how long until the percentage back.
You do it the.
I'm sure people are you do have the kind of keep aware of the fact that you can you can cover our costs. The increase in the percent will still drop is costs are going up this fast and prices are going up this fast.
We told people in the past that.
This has been an unusual period of price increases because the industry and US included and we really haven't protected orders in the backlog.
And I think this quarter was a great example of some of the.
Because we achieved a pretty considerable increase in average selling price.
So as far as how long until we recover too.
Here per cent margins the <unk>.
Wicker with quickest way, we'd be of cost drop and I'm not sure I'm in a position to predict that.
Understood.
And maybe just in terms of capacity.
What steps are you taking on the labor side aside from just obviously raising wages to attract more of labor.
You may now and unlock capacity and you mentioned your.
The progress you've had the increasing throughput was encouraging can you elaborate or quantify that at all.
Yes, it's a lot of things so it's hard to just point of one thing and say, that's what's doing it and I really it's I probably already of made the point I really want to compliment our folks out there that are working everyday to make every house they can make.
The the wage work that we're doing.
We do that on a local basis, but making sure of wages are appropriate.
That's that's certainly for hiring it's also for retention and when we retain our people the skills on our teams go up and that makes a big difference to throughput so kind of stating a little bit of the obvious but that's the kind of work that I think is going on and I think we're having some success with hiring still a challenge I think I can say.
Across the board.
We're understaffed of you and as we've been able to increase productivity.
So we're.
We're doing we're doing some things that are.
Kind of near term immediate impact stuff I think most notably wages and we're also.
Looking at this as a long term dynamic so we're not just addressing the.
Months of months Labor Challenge, we're doing things like putting in place some pretty significant training programs that we think are already starting to impact retention and.
It's a lot of stuff I wish I could just point of one thing, but I think the <unk>.
Things that we're looking at are really starting to.
Well theyre going to position us better as far as labor going forward.
One thing I would add to that as wage incentives. So we have incentives at several of the plants, where people get a bonus if they stay of weak and its significant bonus. So just to get that retention per week, and then at a month to get a little bit of a higher bonus. So none of the incentives have been helpful as well that's of great.
So it's definitely put in some of those kind of attendance and retention bonuses that I think have been meaningful.
Very helpful. I'll sneak one more in and then jump back queue, but in terms of the E. S. P.
It was the the 13% jump as the predominantly just pass through of raw materials.
The mix shift as well.
It was primarily from the increase in the homes sold price the.
The product mix shift of more double Wides was was a smaller portion of that add most of it with some of the price per unit.
Got it okay I'll jump back with any follow ups. Thank you.
Net.
Thank you. Our next question comes from the line of Greg Palm from Craig Hallum Capital. Your question. Please.
Great. Thanks.
Just starting off with with demand I'm curious any significant difference in demand levels by geography, and then what about channel I mean, it's been the strength of sort of across the board, but is it skewed more towards retail then the community a little bit more color would be helpful.
Yes geographically on this is gonna be of continuing theme from discussions we had in the past if there was one area that was.
Got it figure out of my my adjectives well here. If there was one area that was less extraordinarily strong for this experienced through the last several quarters. It was kind of Florida and it was a little bit more communities.
What I reported on that as we are seeing that trending up so we're seeing commodity business kind of get back to you.
Trending towards levels that we would've expected.
On the rest of the country from our perspective has been pretty strong overall, it's hard to really differentiate and there certainly is an area, including Florida that we'd call week.
And then you're also asking about channel again the.
The.
The community business. The last couple of years was growing more rapidly than street dealer business and when the pandemic started.
Kind of shifted pretty abruptly win.
Some of the some of the community operators kind of just took a pause on orders.
You'll remember that they didn't cancel orders, but the held them.
And that kind of shifted things and a lot of the strength I'd say the majority of the strength we've seen over the last three quarters has really been.
Back to the street deal or type of retail business.
So that's been kind of the observation from the channel perspective, but the communities are coming back I think last quarter, we reported that in the southwest where we do on a lot of community business.
We consider it to be back to normal.
Yes, it makes sense.
I know you don't typically provide guidance, but just trying to get a little bit of more color around your expectation and how that backlog gets converted to revenue of both kind of in the near term and then looking ahead I mean.
At what point in some of those obviously hinges on the pandemic.
Scarcity of labor and whatnot, but whats your own sense of how that sort of would progress over the next year.
Yeah, we're not seeing any weakness in any indicators of weakness in demand in.
Kind of feels like a little bit of a broken record because I was talking about this before the pandemic started that.
I really believe that there is.
A huge amount of.
Pent up demand waiting for the opportunity to buy houses and <unk>.
So I don't think this is the short term phenomenon of my opinion.
As far as how it gets met you know I don't know how long demand will be of orders will be 65% up year over year, we have now two quarters of that level.
We haven't seen it subside.
But.
The word.
We're going to get as much.
Our answer has its pretty obvious we're going to get as much out of the plants, we have and frankly when you get into this kind of the situation you have to consider where additional capacity can come from so all of that.
So all of those are considerations that were pretty active with right now.
Would you be disappointed if you didn't see.
Volumes of our production rates continue to increase at a gradual pace throughout calendar 'twenty one.
Oh, it's going to be directly related to what kind of challenges we have.
So I guess I'm kind of.
And very close conversation with our operating leaders and.
We're watching that ebb and flow every every week basically about the <unk>.
Pendants and of our facilities the ability to hire and supply.
We're very concerned about supply right now I think as I said in my comments, that's as much of an issue today as it has been through this entire experience and maybe more.
So.
The disappointment I think we're managing some moving day.
Dynamic situations.
But yeah, our intent is to just get better and better at this.
It was an interesting quarter from that I mean, I'll give you kind of the.
My my observation one of my takeaways as.
This past quarter wasn't any easier than the previous two from an absentee and supply perspective, and yet our plants have gotten significantly better at getting homes built so.
I'm pretty proud of that and I think we'll be able to continue doing that but if we have supply disruptions that even potentially shut our plants down.
I'll be disappointed net but I won't be disappointed in our ability to operate.
Yeah.
We should have started with the congratulations to you on the team because yes, given all the puts and takes out there the execution was really good.
Last one from me as it relates to.
Just kind of margin.
Thinking ahead, and we're we're all assuming you're thinking at some point commodity costs will normalize who knows when but if that's the case and you were able to hold.
Current pricing, where it is assuming that demand is still strong I mean, what happens to margins in that scenario have you run the math I mean, I'm, assuming somewhere above pre COVID-19 levels, if asp's or <unk>.
15, or 20% higher but would love to kind of get your high level thoughts.
Yes, I mean.
I think we all kind of of observed this through time right that you get the compression when costs are going up and then after selling price kicks in which we're seeing happen pretty quickly. The reaction time on that's been pretty quick.
Then if cost of side, you kind of period with the higher percent margins and so on.
This has been a pretty.
Most of the right word of pretty violent increasing costs that.
But we've seen I mean the.
It's been dramatic growth in magnitude and speed and we've been able to pretty much follow that with pricing.
So if cost of side I mean, we will see some pretty significantly high gross margin percentages for a period of time and we've got a long backlog. So theres, just the supply and demand elements of the pricing side.
Yeah makes sense, Okay, alright ill leave it there of best of luck going forward. Thanks.
Thanks, Greg.
Thank you. Our next question comes from the line of Jay Mccanless from Wedbush. Your question. Please.
Hey, good morning, everyone. Thanks for taking my questions.
P J.
So with the New administration I know, we've seen press reports about potential.
Potential first time homebuyer tax credits and some other things designed to help housing or are you guys hearing the manufactured housing might be included in any of those credits and then other any other highlights either from a regulatory or from a demand standpoint the <unk>.
You've heard or seen from the student administration that we should be watching.
I'm not even sure on them as well of the speed as I should be on a lot of it to be of to be blatantly honest.
But I do think the generally we expect continuing support of.
Of the manufactured housing industry.
Isn't really on points of your question, but I think it's related to the industry or the administration change.
We've had a really good.
Four years with HUD.
And kind of being smart about regulation as far as the.
Appropriate regulation, but not too.
Too much bureaucracy that doesn't add value and we've really made some headway with them as an industry.
And I don't see any reason why that would.
We would be concerned about that necessarily.
So.
And I'd say this too I mean anything that kind of programs that they are considering as far as helping homebuyers.
Don't get me wrong, we're all for that.
Right now the problem supply.
So on.
Trying to do things for manufactured housing like debt local municipalities too.
Recognize that.
The zoning that keeps the manufactured housing out that.
That would be helpful.
On doing things that help us kind of get our products out there would be the kinds of things that really is going to make a difference in us meeting the need that we're seeing.
Yeah absolutely.
And then on the lending side could you just talk about where travel rates of moved during the quarter and are you all still seeing really good availability on that front for travel customers.
Yeah as I said I mean, if if someone's qualified they are they are not having any problem getting the loan right now.
And as far as kind of what's going on with the channel market I'd, just say generally we talked last quarter I believe that channel rates dropped.
From there kind of stable historical level of seven 5% E and the dropdown into the five five and a half range in and it's kind of been there it's still still down at those levels. So right now we see chattel lending is pretty supportive of.
Of the demand that we're seeing.
Okay great.
Okay, that's right in the any update on the SEC investigations.
Not other than what we've already disclosed I will acknowledge this is the first call since we had the.
Since we reported and disclosed that we had of wells notice from the FCC on the company and that was kind of in the latter part of November.
But <unk>.
Similar to previous discussions I view that as a step in the process.
It's not something I won't ever pretend like it's something that we wanted but I also feel like it's the step forward from a process perspective so.
And that wells notice just to remind everyone that basically.
It means that the staff at the FCC is considering a recommendation of the commission of an enforcement action.
So we are.
We got to just keep running the process with them, we got to keep supporting their process and Oh.
I hope for resolution, but I really can't speculate on when or what that might be.
Understood. Thanks for taking my questions.
Sure.
Thank you. This does conclude the question and answer session of today's program I'd now like the hand, the program back to Bill Boor, President and CEO for any further remarks.
Yes. Thank you.
Yes, just to wrap it up we've kind of been beaten this pretty hard but demand is really beyond any expectation, we had nine or 10 months ago.
We're I think we're doing a good job of operating through some very real challenges and risks.
And the.
The people that make up our company has stayed very focused on making a difference for our homebuyers, we do that with the homes, we build but also the loans and insurance, we provide so I'm pretty proud of all of that and at the beginning of the pandemic, we rallied around that intention and I believe it's really showing in our progress on strong results. So with that I really want to thank every.
The one for your interest and cash co and I hope that each of you and your families are staying healthy and safe.
Thanks, everyone.
Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.
The year.
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