Q1 2023 Cavco Industries Inc Earnings Call
Good day and thank you for standing by welcome to the first quarter fiscal year 2023 capsules Industries, Inc. Earnings call webcast. At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
To ask a question during the session you will need to press star one one on your telephone. Please be advised that today's conference is being recorded I would now like to hand, the conference over to Mark Sizzler director of financial reporting and Investor Relations. Please go ahead.
Good day, and thank you for joining us for tactical industries first quarter fiscal year 'twenty earnings 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 Bigby, 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 state expectations or assumptions about capital's financial and operational performance revenues earnings per share cash flow or.
He used 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 <unk> 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.
Encourage you to review <unk> 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 broadcast.
August 15 2022.
<unk> got 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.
Welcome everyone and thank you for joining us today to review our results for the first quarter of 2023.
Catheter is happy to report another very strong quarter with record revenue and net income net income was up 121% year over year, and 12% compared to the fourth quarter for.
For many quarters, we've been asked about our ability to exceed pre pandemic levels of productivity and this quarter, we reached over 85% capacity utilization.
More tangibly, we shipped a record 5346 homes this quarter at 44, 5% more than a year ago.
I really want to congratulate our manufacturing organization, which is set and exceeded aggressive production targets, we pride ourselves on operating excellence and it's great to see it showing up so clearly in our results.
Yeah.
We are very well positioned for and confident in the demand drivers for our products. Despite the affordability impact of high prices and increasing rates.
While near term market dynamics are shifting some of those dynamics actually play in favor of manufactured housing affordability.
Affordability is extremely stretch for prospective buyers, but this doesn't eliminate a fundamental need for more housing units, particularly in low price ranges.
Certainly some would be buyers are getting priced out of ownership in the near term however, they still need homes.
Community operators, who continue to have aggressive growth plans are providing a solution with single family manufactured housing rental homes.
Also first time buyers are increasingly turning to manufactured housing as an alternative to site built homes given the rapid escalation in starter home costs.
Manufactured housing as an option as buyers might not have considered in the past. However, now they are.
And they are finding attractive energy efficient and high quality homes that meet their needs.
Looking at total housing market indicators risk missing the point that the needs are far greater where we provide solutions. For example, recently listing data show that while overall, new listings are up about 20%, which indicates a shift to a buyers market.
Listings for homes below $250000 continued to decline 10% to 20% in June .
I recognize the while you're interested in these bigger picture dynamics, you're probably particularly interested in what's going on right now.
In the near term order rates are down.
And production is running faster than the pace of setting new homes in the field.
As a result, our backlog ended the quarter at 25% to 27 weeks compared to compared to.
Weeks last quarter.
Keep in mind that 25, plus week backlogs are pretty healthy.
The backlog dropped approximately 10% from $1 $1 billion to $1 billion.
That drop was comprised of approximately 15% fewer units and 5% higher average selling prices.
Prospective buyers are feeling the effects of economic uncertainty and inflation. They see that previously anticipated rate increases have already occurred and delivery times are shortening.
So the urgency we've seen from a buyer.
Quickly get an order in has abated to some degree.
While retail traffic is still strong reflecting the underlying need buyers have become more patient, resulting in lower deposit ratios.
Retail inventories are up compared to recent periods due to a combination of difficulties getting homes set.
An accelerated deliveries as production rates have improved.
We're anticipating a near term reset of retail inventories, which means orders may drop below true buyer demand for what I expect to be a short timeframe.
Just to reiterate.
Reiterate prices and interest rates are high so the monthly payment impact is clearly a downward pressure on near term demand. This is offset by lack of supply of lower priced homes.
Market share gains for manufactured housing at price points site builders simply can't hit anymore, and aggressive community growth plans, which are less sensitive to the recent rate changes.
To provide a project update our new Glendale, Arizona factory is nearing completion and the plant looks great and we've been recruiting and training people at our nearby Goodyear factories. So we're ready for a successful startup.
The new planet Hamlet North Carolina is also coming along very well.
We expect a smooth transition.
As the previous owner wraps up their production and we complete plant modifications to begin ours.
The goal from the beginning for both V B C who's the previous owner of hamlet.
And Kafka has been to minimize any break in employment for the people that handle it and we're confident that we're on track to do that.
Both projects will be state of the art facilities and equally important I am very excited that they were both have model work systems and cultures.
Work has been done underwriting these operations for startup in both plants will begin production in the coming months.
With that I'll turn it over to Alison to discuss the quarterly results in more detail.
Thank you Bill net revenue for the period was $588 3 million.
78, 1% compared to $330 4 million during the past fiscal years first quarter.
Continental homes acquisition contributed $108 million of this year over year increase.
Sequentially from the fourth quarter of fiscal 2022 revenues increased 16, 4%, primarily driven by an increase in units shipped resulting from higher factory utilization.
Within the housing segment net revenue increased 83, 4% to $572 6 million from $312 3 million in the prior year first quarter.
This increase was driven by both the addition of Commodore operations and a 26, 9% increase in average revenue per home sold.
The increase in average revenue per home sold was due to product pricing increases.
Bill mentioned factory utilization exceeded 85% during the quarter, which is a record level during the last 10 year period utilization.
Utilization has benefited from product simplification.
State increase production head count and other process efficiencies.
Financial services segment net revenue decreased 13, 2%.
<unk> dollars 7 million from $18 1 million this year over year decrease was due to.
The unrealized losses on marketable equity securities versus gains in the prior period decreased loan sales volume and lower servicing.
These.
We are partially owned by.
By a higher number of insurance policies in force.
Consolidated gross profit in the first fiscal quarter as a percentage of net revenue was 24, 6% up from 22, 4% in the same period last year.
The increase is mainly the result of the factory, Okay segment, which climbed to 24, 4% in Q1 of 2023.
One 2% in Q1 of 2022.
This increase was driven by pricing, partially offset by increased material cost per module.
Q1, 2023 factory built gross margins of 24 four.
With 10 basis points lower than the Q4 2022 level of 24, 5% driven by higher material cost per module.
As discussed previously the acquired Commodore was price protected and therefore now yielding lower gross margins as a result, this downwardly impacted the Q1 consolidated gross.
We expect this impact to continue for the next couple of quarters as we work off the remaining backlog.
Gross margin as a percentage of revenues to services declined 32, 6% in Q1 of 2023.
Two 7% in Q1 of 2022.
By unrealized losses on marketable securities and the financial impact of greater weather related events upon our insurance businesses.
Selling general and administrative expense in the first quarter of fiscal 'twenty, three with $66 1 million or 11, 2% of net revenue compared to $40 8 million or 12, 4% of net revenue during the same quarter last year.
G&A dollars Grace is due to the addition of.
Later incentive wages on improved earnings and cost of third party consultants assisting with the energy tax credit project.
Net other income this quarter was 900000 compared to $2 5 million of income in the prior year quarter.
This decreases.
Driven by unrealized losses on marketable securities compared to gains in the prior year period.
<unk> offset by interest income earned on higher commercial balances.
Pretax profit was up 123, 4% this quarter to $79 3 million.
The $5 5 million for the prior year.
The effective tax rate to 24, 7% for the first fiscal quarter of 2023 compared to 23, 8% in the same period last year.
Net income attributable to Caf co shareholders was up 127%.
The $59 6 million compared to net income of 27 million in the same quarter prior year.
Net income attributed KEPCO common stockholders per diluted share quarter was $6 63 per share.
$2 92 per share in Q1 of fiscal 2022.
Before we discuss the balance sheet I would like to take a minute to highlight that this quarter, we exited nearly 39 million of stock repurchases.
<unk> $100 million originally authorized in October of 2020.
In May the board authorized an additional $100 million for future share repurchases.
It is important to note that we can.
<unk> to successfully execute against our capital allocation strategy.
As Bill mentioned in addition to share repurchases. We've also deployed capital purchase of vaccine in hamlet North Carolina.
And we're also nearing the completion of the development of our Glendale, Arizona Park model facility, which should begin operations in the next few months.
Now I will turn it over to Paul to discuss the balance sheet.
Thanks, Allison I'll be covering.
Balance sheet from July <unk>.
2022 compared to.
2022.
Our cash balance of $238 1 million down $2 1 million from $244 2 million at the end of the prior fiscal year.
The decrease was primarily related to cash used for repurchases of common stock and purchase of property plant and equipment.
Our new manufacturing plant in North China.
Firstly offset by net cash provided by operating it Steve.
Investments decreased from unrealized losses on equity Securities held at the end of the period.
Inventories increased due to higher levels of stock inventory at our retail locations as well as higher inventory purchases in preparation for increased.
Prepaid and other assets decreased from lower income tax receivables and lower assets were related to the loan repurchase option on delinquent loans.
Ginnie Mae.
While we are not sure.
We purchased these loans accounting guidance requires us to record an asset and liability for the potential of a repurchase.
So it's lower than four second turning to amount due to a reduction of loans in forbearance.
Accrued expenses and other current liability balances increased due to higher volume range warranty accruals and set up accruals on higher sales.
Partially offset by lower customer deposits.
Lastly, stockholders equity was approximately $851 6 million.
<unk> 2022 up $21 1 million from 800.
Hi.
As of April 2022.
With that I'll turn it back to bill.
Thank you Paul.
Before we turn it over to questions I'd like to touch on the updated provided in our earnings release regarding the FCC matter.
I'm happy to report that we've reached an agreement in principle with the SEC to settle the litigation yesterday, a step was taken in that process when the SEC <unk> co informed the court that we've reached this agreement.
And its pending final sign off by the Commission.
At this point I am unable to provide more details accepted the settlement terms are not material to the financial results or position of the company.
We will provide more details on that final approval is complete which we anticipate will be within 60 days.
This has been a long process and we all look forward to the resolution of putting this behind us.
With that Carmen, let's turn it over for questions.
Thank you and as a reminder to ask a question simply press Star one one on your telephone one moment, while we compile the Q&A roster.
Okay.
Okay.
Our first question comes from Daniel Moore with CJS Securities. Please proceed.
Thank you good afternoon, good morning to you Bill and Allison Thanks for taking the questions.
Start by saying Congrats it's been a long road sure you'll Miss all of those FCC related questions.
And happy to have that put behind you or close to it at least.
Just start with the remarkable growth rate in shipments my pencil out organic growth in the number of homes sold in the mid teens, maybe high teens, excluding count Commodore is that the right ballpark Allison.
Yes that is.
Okay.
And then maybe bill.
Just elaborate.
Order rates moderating.
To what degree have they moderated if you <unk>.
Two sort of quota current book to Bill what would that look like.
And what's your best guess of what annualized current demand kind of on a run rate basis looks like for MH.
Yes.
Tough question has been important to get the turn of this right I mean, they really get a good feel for it because there's certainly a transition but it's far from dire I guess is what I would say.
You can see the industry shipments has been very robust and I think the <unk>.
<unk> are still in the 125.
Right.
For HUD shipments on a seasonally adjusted basis so.
Shipments are strong there are still some constraints in retail and placing homes.
And that's kind of caused a continuation of the inventory backup at retail.
So.
And it's hard to give you a great feel for the numbers I would say that.
Orders are certainly off the highs that we have been experiencing.
But they are probably more on a par with kind of pre pandemic levels with.
Appropriate seasonality.
So we feel pretty good about it the one thing I mentioned in my comments that I.
I think is an important point to get as people are trying to.
Gauge the health of the market.
I view that strong retail traffic is still a positive even if we are going through a little bit of an adjustment with the retail inventories.
So you asked the specific question I'm not sure I was able to give you a very specific answer Dan but happy to continue if you can follow up.
Ask me, what I'm, leaving out.
No that's great that's helpful, but maybe pulling on the same string.
The community builder market and opportunity set is massive relative to the.
Current size of the overall MH market so.
Are they may be waiting for backlog to come down a little bit more.
<unk>.
Gabe gauging true demand is very difficult. So what is it that sort of gets them off their hands and maybe accelerates that that part of.
Your demand profile, a little bit more.
Yes, that's I mean communities are a real source of strength right now I haven't seen any.
Sitting on their hands with regard to the communities. They are still looking to get more homes.
We've talked to us in the past if you just a little bit of the history, because I think it's important before the pandemic for a number of years communities while there.
Maybe about 30% of the market they were providing most of the growth.
And for the last bit after a short pause at the beginning of the pandemic for the last bit both retail and communities, we're going very strong couldnt get enough houses.
Communities still have very aggressive growth plans.
Capital behind them, they're not us.
Hence it is in their purchasing to the.
Interest rate changes that we've seen.
And.
Tried to make this point in my comments as well Theyre really a solution to what is going on for the buyer.
Alright, as mortgage rates and the monthly cost of buying has really gone up and it made it very difficult for some people to <unk>.
<unk>.
Our communities are very heavily into the rental business and so they are buying manufactured homes, placing them in the communities for rent and Thats a solution for that family. They can.
Purchase was still needs a home.
So I really expect communities to be a source of strength for for the business going forward and they are not showing any signs of slowing down that I see.
Perfect and maybe one or two more on the margin front and I'll jump out but.
Still very healthy gross margins in the quarter, despite the drag from lower profitability in financial services as well as Commodore Allison can you, maybe just quantify those a little bit how much of a drag was the <unk>.
Lower financial services profitability as well as the lingering impact of.
Price protection.
Commodore backlog thanks.
Sure.
Take a step back here and talk about the key elements that really quite an outcome.
Last several weeks.
Lower commodity prices.
<unk> products and <unk>.
It will work its way through our material cost is it.
Tim.
Later this week.
With your question on Commodore.
What we saw this quarter as an impact was pretty similar to what we saw last which is a little north of 200 basis points.
And it is an important point to note that we're working through.
These backlog homes that were previously price protected and that we expect commerce pricing and margins to come into line with the rest of our system and that will produce a positive uplift uplift in future quarters.
So it's all good news.
Labour pricing will come through.
One element.
Difficult to predict is what the commodity prices.
We will do and then also there could in the future partial offset the higher labor costs and other material pricing.
Those are the main elements.
Perfect.
I will jump back with any follow ups. Thank you very much.
One moment for our next question please.
Comes from the line of Greg Palm with Craig Hallum. Please proceed.
Awesome. Thanks.
And congrats on the results here I, starting maybe as a piggyback off the last question Allison.
I think you use that same language for a couple of quarters now in terms of the impact from Commodore lasting a few more quarters can you get a little bit more specific in terms of.
Will it get less of an impact this current quarter when will completely be run off.
At least in your opinion at this point.
Sure sure.
Consistent with our comments last quarter is as we expected the range.
As a drag this quarter.
Bill following fourth quarter at this level and then we will be we will see during the next two years.
Three quarters an uplift.
Price protected backlog gradually then.
Current into revenue uplift.
We're still.
Gary.
Very happy with the outcome of our Commodore acquisition.
This is a known issue it's a temporary issue and.
The deal is.
In a very rewarding we've already.
Our integration effort and the unit production is exactly what we would expected so all in all the reductions in line with what we expected and the profitability won't be too long term.
Okay fair enough.
What about PSP is I think what I heard was ASP increased due to pricing was any of it mix related or was it almost entirely just pricing and then I guess the next question is.
Sustain this.
Level in wake of recent commodity input cost deflation at least for for several items any thoughts there.
Yes, I can jump in on that.
<unk>.
It's really our price mix has not shifted that significantly.
We looked at that and it's been pretty stable recently.
In fact, when we compared mixed this time last year. This quarter last year. It was almost identical so you can pretty much attribute the ASP change to pricing.
And I think your other question was given.
Some of the larger commodities, particularly I assume lumber and OSB coming off their highs recently do we expect that we could hold the price is that right Greg.
Yes, just the sustainability of that going forward, yes.
Being consistent in our view.
Industry backlogs on average are pretty pretty good and so I do think there is still.
<unk> ability to maintain margins.
And if.
If we have spots where backlog start to drop rapidly then I guess you could see some price competition, but so far we've seen very little of that.
Yeah, Okay understood.
And I guess, just kind of last one for more of a big picture.
Standpoint, I wanted to dig into this.
Channel.
Comment a little bit more in terms of strength that community.
A little bit more moderation at retail I mean, do you view the community strength as something Thats, just more cyclical in that there's pent up demand because that channel shut off for so long during and post Covid do you think that theres something more structural or secular <unk>.
On there and if that's the case.
Do you sort of view your own capacity footprint in light of that knowing that at least in the community channels, There's obviously certain states and areas, where theres outsized exposure there.
Yes, I don't know I mean.
I think it's not it's not temporary I think they've got I talked to particularly the larger Reits Dave.
They've got very aggressive long term growth plans and theyre not.
Our temporary those based on anything Thats going on right now in the market that I can see.
Discussions are kind of pretty.
Pretty much up to date so.
Again, I think they are a source of strength I think there are a little bit counter cyclical to interest rates because of that.
For the reasons that I talked earlier.
So we think that theyre going to be pretty solid we've got exposure across the country to communities when I think about our whole system geographically and our customer relationships I.
I feel like we're pretty balanced right along the lines of the industry.
Historically, they've represented about 30%.
And I.
I think we get our share of that in some areas, Florida, we have a little extra exposure to communities in Florida is an area. That's for US is very strong right now.
So.
It's kind of the point I was trying to make that.
Kind of shifting times with interest rates and everything there are some.
Aspects to the MH dynamics that.
The buffer the demand exposure to those kind of drivers and I think community is a real source of strength.
Understood.
Alright, I'll hop back in the queue. Good luck going forward. Thanks for taking the questions. Thank you.
Thank you and as a reminder to ask a question simply press Star one one on your telephone.
And for our next question please.
Our next question comes from Jay Mccanless with Wedbush. Please go ahead.
Hey, Thanks for taking my questions and congrats on getting almost to the finish line at the FCC issued glad glad to see it's going to be in the rearview mirror soon.
The first question I had was on the stock the new stock repurchase plan.
Third exploration date on that.
Did not have an X.
Okay.
And then.
Also had some questions about price, but you've answered most of those I guess my question is once you get through these price protected contracts what type of step up.
Senator dollar basis do you think we're going to see on the average price.
I'm trying to figure out how to dimension that for you I mean, we've kind of talked about the.
Drag that we're seeing on our consolidated gross margins, but it sounds like you're asking a different question.
Well just.
If these are price protected I guess whats the differential right now between the legacy <unk> and the price protected contracts that youre selling from Commodore maybe that's maybe that's the way to ask it.
Yes, how much on a percentage basis as the pricing lower on that backlog.
Yes.
Mercury Allison do you have a view on that we've kind of tended to look at it on a margin sense since the products or even different rate.
Yes, I mean I think it.
Yes.
It's important to kind of think about the context of it right. So I think that it's not one particular range of prices the pricing.
It's coming from the different models of their pricing and also the <unk>.
And a different rate than the various facilities I think important to this no.
We are tracking to the uplift in the margin would represent.
A gradual movement to the to the overarching pricing, which tends to be just a little bit under the total company ESP simply because of some of the mix of the modules that they are activating the market.
Okay.
Jay I might not be hitting the mark on this I'm just thinking about your question I mean, if we've got a couple of percent drag on our consolidated.
Margins.
And the gross margins are in the range that they're in great then.
You could kind of do the algebra to figure out how much of a drag it has on our average selling price on a weighted average basis, but again given that there are 25% of our.
Production now.
The discounted prices pretty significant in that backlog at this point.
And Thats, what we are struggling to get through.
Okay and did you and I apologize I think you said two more quarters Allison.
Until that potentially could happen.
Yes, I think next quarter will look about the same range of the impact that we saw the fourth quarter and then the next two quarters.
Basically be a ramp up toward.
That's more akin to the consolidated for the base business.
Okay.
And then I guess with with lumber having come down and now it's seems like it's trying to stabilize maybe go up slightly is that giving you the ability to not take that next price increase or.
Is everything else besides lumber moving up enough to where you have to keep still trying to push price where you can.
I think a certainty.
No I was going to say certainly it's a good point that every other input including labor has continued to have some significant inflation. So it's important that we can stay ahead of that.
Okay.
Okay, great. Thanks, again for taking my questions. Thanks, Jay.
One moment for our next question please.
It comes from the line of Daniel Moore with CJS Securities. Please proceed.
Yes.
From a production standpoint produced comfortably over 5000 units this quarter.
Citing the efficiency gains that you've made plus Commodore.
Just thinking about supply chain labor et cetera is that some number that's sustainable for you in the near term.
Are you seeing any incremental challenges that might make that a little bit more difficult as we think about modeling the next couple of quarters.
Yes, I think there is probably generally good news in that front.
Staffing.
Worked pretty hard to get our staffing up I'm, not saying that we're where we want to be in all of our plants, we still got some numbers to yet.
But we've made a lot of headway, which has really enabled the volume increases we reported.
And now I.
I think theres more benefit to be had because once you get the numbers right.
He has got to do a good job of keeping them.
Keeping those individuals and then they develop skills as a team.
That provides more benefits in manufacturing so I feel like we still got.
Progress to take in that regard.
And this will be the first time I've said, this and I hope I'm not <unk> ourselves supply generally feels better.
Not that we don't have issues.
You're putting together a house one thing thats not available to you can stop everything but there is certainly a feel that the supply issues are are better than they have been.
Logistics is still a concern I talked about the.
The difficulty is getting.
Homes set in the field that continues to be an issue logistics or as much of that as a setup crews, but both are a factor.
But generally the materials needed to build the house, we're feeling slightly better on.
That's great great to hear and know.
One week shutdowns or anything like that in the quarter that we should be upcoming quarter that we should be aware of.
Not that I can foresee.
Perfect. Thanks again, thanks, Dan.
Thank you and I'm not showing any further questions in the queue ill pass it back to management for any final comments, okay. Thank you.
The increasing need for affordable housing is certainly been exacerbated by supply limitations in the rates.
But as I said earlier rising homebuyer costs don't erase the serious need for our homes.
There are opportunities in markets like this.
As the basic need to provide affordable solutions grows.
Grows our product and market opportunities.
After watching our leaders anticipate and proactively adjust to various challenges over the last few years I'm very confident in our ability to stay on top of the market dynamics and to adjust as needed.
So we look forward to keeping you excuse me, we look forward to keeping you updated and we thank you for your interest in Kafka.
And with that ladies and gentlemen, we thank you for participating in today's conference you may now disconnect.
The conference will begin shortly.
Raise your hand during Q&A, you can dial star one one.
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Okay.
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Okay.
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Yes.