Q3 2023 Cavco Industries Inc Earnings Call
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Okay.
Thank you for standing by and welcome to the third quarter fiscal year 2023, Casco Industries, Inc. Earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question at that time. Please press star one on your telephone as.
As a reminder, today's conference call is being recorded and allogeneic therapies to your host Mr. Mark <unk> corporate controller and Investor Relations. Please go ahead.
Good day, and thank you for joining us for capital Industries third quarter fiscal year 2023 earnings conference 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 <unk>, 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, including statements of expectations or assumptions about cat because financial and operational performance revenues earnings per share cash flow or use cost savings operational efficiencies current or future volatility in the credit markets.
Our 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 KEPCO.
Courage, 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 I.
<unk> 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 all.
Accurate only as of the date of this live broadcast Friday February 3rd 2023.
Capital 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.
As required by law.
Like to turn the call over to Bill Boor, President and Chief Executive Officer Bill <unk>.
Okay.
Welcome and thank you for joining us today to review our results for the third quarter of fiscal 2023.
This quarter, we achieved another significant year over year improvement in revenues and profit.
It was up 16% and pretax profit was 9%.
Units sold were approximately flat in the improved financial results were driven primarily from year over year average selling price and gross margin improvement.
Operationally, while adjusting your changing market our plants continued their recent high levels of efficiency.
We generally calculate capacity utilization using all available operating days for.
For the quarter this yielded an approximate 65% utilization.
However, we operated about 84% of the total available days due to holidays weather driven downtime and market downtime.
As operated basis, we ran at about 80% capacity utilization.
This indicates that our plants are doing the right thing by adjusting to the market conditions, while remaining ready to go when orders improve.
Cancellations continued during the quarter, but only at about 60% of the previous quarters rate.
Bulk of the cancellations were in regions that have lagged the initial stages of the downturn.
So in a sense the process has been moving through the regions and for some of your earliest hit areas cancellations are no longer a major factor.
As backlog has reduced to much lower levels cancellations naturally become less of a factor because the order to delivery timeframe is so much closer to real time.
Retailer inventories are still an issue that clouds the picture of underlying demand.
This is because wholesale orders will naturally be slower than homebuyer purchases until retailer inventories are reduced to their targets.
Inventory resolution will not be an abrupt change in the market, it's happening every day and.
And each retailer that individually gets to their target.
Moves us closer to a one to one relationship between homebuyer demand in manufacturing orders.
Third quarter order rates were hit from all sides.
Economies effect on consumer activity.
Seasonality.
And the industry wide excess inventory of all resulted in declines in the backlog.
Our backlog was down 34% sequentially to $427 million.
Approximately nine to 11 weeks at current production rates.
While we normally don't get into the first quarter updates.
In this market I think it's important to share what we're seeing in the first month of the new year.
We are seeing early indications of a seasonal pickup.
Both.
Which have increased considerably in January .
In fact, we view quotes is a leading indicator of future orders and over the past several weeks quotes have been at or above the level, we've seen in the last year and a half.
These observations are positive indicators about underlying demand and that we might experience a seasonal pickup in order rates.
So there is reason for optimism that a pickup in demand might accelerate the inventory correction and resulted in increased wholesale orders.
It's very difficult to predict when the inventory issue will be behind us because we're still watching to see how orders develop going into the spring.
However, my best guess is we have a few more months of fueling some level of the inventory drag.
For the most part prices held up well to this point recognizing that there is a range of competitive pricing pressure from location to location.
This is and always will be a cyclical industry and prices never stays stagnant for very long.
Again, the question about near term price movements will largely be answered when we see how orders develop in the coming months as well.
Yeah.
Let me change course, and touch on a few developments in our growth strategy.
First we've talked about this in the past we successfully started up the new hamlet North Carolina plant this quarter.
That plan is fully staffed with a strong management team and production employees that carried over from the prior owners volumetric building operation.
We needed to execute a complex transition to ready the plant for HUD production.
And that project was delivered on time and on budget, So really a great job by everyone involved in hamlet.
On January <unk>, we closed on the previously announced Solitaire homes acquisition. We're excited about the opportunities. This combination brings solitaire ads four production lines as well as 22 retail stores.
We anticipate significant value added opportunities that include filling out product lines across the combined retail network.
Bringing best practices to the solitaire production facilities in.
In accessing their retail network to enhance sales and our insurance company.
I would also like to take a minute to discuss our work in the area of digital marketing.
I might not talk enough about developments, we are prospectively working on in the company. So.
It is important for me to make it a point to tell you what our major company efforts come to fruition. This is one of those situations because we have been working on this for some time now and have reached a big milestone.
In January we went live with Casco homes Dot com, our new consumer facing digital home marketplace.
<unk> new website makes it easier for homebuyers to discover and research 500 manufactured modular and park model floor plans and 2700 stock models across our flagship brands.
It also connects them to our 1500 retailers and communities based on their geographic area.
The home shopper can seamlessly research floor plans photos videos virtual tours and product availability using any smart device.
This new site and enhances the experience for our retailers as well.
They now have the ability to add their own pricing photos videos and special losses offers to the dealer specific micro sites that we are providing for them.
The site is integrated with our ERP system, giving retailers and customers easy access to dealer and product information as well as current availability.
Perhaps most importantly, our dealers benefit from the directed leads and phone calls generated by consumers using this digital marketplace.
I know thats, a mouthful, but this is.
Really a major milestone it opens up a new era for Caf go to build our brand nationally and to more effectively reach and serve our customers.
Watching the site is the culmination of a tremendous collaboration between our technical and marketing teams.
Through this work we've not only built the site, we built a powerful organizational capability and the team.
And that digital marketing team under the leadership of choline Rogers, our senior VP of marketing Communications, we will continue to add to and improve upon that foundation they've created for the benefit of our homebuyers and retail partners.
With that I'd like to turn it over to Alison to discuss the quarter's financial goal for detail.
Thank you Bill net revenue for the period was $506 million up 16% with $68 9 million compared to $431 7 million during the prior year's third fiscal quarter.
Within the factory built housing segment net revenue was 481 2 million.
Eight 3%.
$67 6 million compared to $413 6 million in the prior year's third quarter.
The increase was primarily due to a 15, 9% increase in average revenue per wholesale due to product pricing increases.
Financial services segment net revenue was $19 1 million up seven 1% at $1 3 million from $18 1 million.
This year over year increase due to a higher number of insurance policies in Florida.
Consolidated gross profit as a percentage of net revenue.
86%.
With the 26, 7% in the same period last year and.
And the factory built housing segment.
The gross profit percentage increased to 25, 5%.
Q2 of 2023 versus.
25, 2% in Q3 of 2022.
Primarily due to product pricing.
Gross margin as a percentage of revenues financial services decreased.
46, 6%.
Please 23 from 61, 2% in Q3 lastly, too.
Due to the impact of weather related events in Arizona and Texas.
Selling general and administrative Grace.
$8 9 million.
411, 8% of net revenue.
$63 million or <unk>.
2% of net revenue during the same quarter last year.
The SG&A dollar decrease was primarily due to lower cost with third party.
Assisting with the energy tax credit project.
Partially offset by greater incentive and commission blazing unimproved Danny.
Net other income was $3 2 million compared to $4 3 million in the prior year quarter.
The decrease is primarily driven by $2 4 million and lower unrealized gains on corporate equity securities, partially offset by higher interest income earned on commercial what was the cash balances.
Pretax profit was $76 1 million up 29, 2% or $17 2 million.
The $58 9 million in the prior year period.
The effective income tax rate was 21, 7% compared to a benefit of 35, 1% in the same period last year.
Nice quarter.
Turning to April .
Included a nonrecurring benefit.
$4 million with tax credits related to the sale of energy efficient.
Excluding this item our tax expense as a percentage of pretax income would have been 23, 3% in that period.
Net income attributed to <unk> shareholders with $59 5 million compared to net income of $79 6 million in the same period last year.
Diluted earnings per share were $6 66.
$8 57 per share.
In addition, I would note our next quarter will include the results of our recent acquisition of Solitaire.
Through that acquisition, we acquired finished home inventory at the retail side.
Purchase accounting requires us to record that inventory at fair value upon acquisition.
Which means we will not recognize profit upon sale of those phones.
As a result, we will see an impact to our margin of approximately a 150 to 200 basis points. The next couple of quarters as we sell through these zones.
This is the same dynamic that happens all acquisition and the cash we received for these homes is not affected by the accounting treatment.
We're bringing this to your attention because of the amount of inventory.
It is driven by the fact that we're purchasing several retail location.
Before we discuss the balance sheet I'd like to take a minute to highlight that we continue to execute on our capital allocation priorities with the recently closed acquisition of Solitaire homes.
Glendale, Arizona in hamlet North Carolina manufacturing facility.
Share repurchase of $34 million in the quarter.
The purchases will.
We will utilize approximately $93 million in cash before closing adjustments, leaving us with just over $280 million in cash subsequent to the purchase.
We will continue to appropriately deploy this capital including share repurchases.
Now I'll turn it over to Paul to discuss the balance sheet.
Thanks, Allison today, I'm going to walk through changes in the December 31, 2022 balance sheet compared to April .
2022.
Our cash balance was $376 1 million up 54% or 131.
$9 million from the end of the prior fiscal year <unk>.
Increase was primarily due to net income adjusted for noncash items and changes in working capital provided cash of approximately $230 million.
This amount was partially offset by common stock buybacks and $73 million in purchases of property plant and equipment, primarily at our new facilities in hamlet North Carolina in Glendale, Arizona.
Investments, including short term.
<unk>, primarily due to the return of capital from one of our joint ventures in Baltimore film sales.
Inventories decreased due to lower raw materials and a decline in inventory at the retail lines.
Prepaid and other assets were higher from greater prepaid income taxes, partially offset by lower assets recorded in regard to the repurchase option on delinquent loans that had been a faulty Fannie Mae.
Property plant and equipment is up primarily due to the purchase of the facility in hamlet North Carolina and continued development of the Glendale, Arizona facility as discussed previously.
Accrued expenses and other current liabilities increased from higher rebates payable more setup freight foundation work and warranty reserves.
On higher sales.
Lastly, stockholders equity was approximately $955 5 million up 15, 1% or $125 million from the end of the prior fiscal year.
This completes the financial report and I'll turn it back to you Bill.
Thanks, Paul.
As Alison Paul explained our balance sheet remains very healthy, which supports continuation of the consistent capital allocation path, we've been delivering upon.
While the industry is working through the abrupt order drop off over the past several months and the resulting decrease in backlogs. We view. These mini cycles is something to be well managed within a much bigger picture of the dire need for housing.
We view the return to a strong market were manufactured housing demand stretches available capacity is inevitable given the nationwide lack of affordable housing.
And we feel very good about our continuing strategy well.
We will continue to invest in operational improvements in growth and we will continue using share repurchases to responsibly manage the balance sheet.
With that Valerie Please open the line for questions.
Okay.
Alright, Dan Moore with US I think I see it in the queue.
I am indeed that did not hear the prompt there Greg.
Great.
Go ahead, Dan Good morning, Thanks for taking my questions I appreciate it.
Maybe start with Bill just.
Can you delineate at all between trends.
In terms of traffic.
Heres quotes across retail versus your reach and institutions as well as maybe community developers just there your different end markets.
Are you seeing what are you seeing cross segment and our.
Are you seeing more interest from customers trading down from traditional site built.
Even if it's not translating directly to orders because of the inventory issue.
Yes, I can take a stab at that.
First I think we've been pretty consistent through this time period that communities have remained strong so the.
Big impact we've seen recently.
Decreased retail activity has mostly been more of the street retailer side.
So I'd say communities continue to be strong and a lot of our comments here, which.
I want to present, a very balanced picture and we've got a few data points here in January we thought it was important to talk about January because I know <unk>.
Level of interest in trying to figure out where we're going here. It's just a few data points that are encouraging data points most of that reflects.
What I would characterize generally.
Optimistic mood on the street retailer side coming back up.
So.
Communities have been consistent street retailers slowed down the inventory is still there, but there looks to be some reason for some optimism with the data points, we have in January as far as.
The trade down I think that's been consistently happening I'm always a little bit frustrating because we haven't figured out a great way to get people a sense of the magnitude of that dynamic, but we know it goes on and we know it because we've got retail thats, having thats talking to folks that.
Mike come in and say.
I didn't expect that.
Hi, a manufactured house, but given the way things are going to want to see what you got and they end up buying something theyre happy with and I think we also hear it from our independent retailers, So I can't really.
To give you any sense of how big that trend as well.
I know that.
Certainly is something that this industry has taken some ground on over the last.
A years actually with the run up in pricing.
That covers damage you have other aspects I Miss.
No thats very helpful.
The kind of switching gears, I guess a little bit.
Backlog of about nine to 11 weeks do you.
Should we think about production.
Over the next say one to two quarters.
Do you expect to curtail production given the decline in backlog. So are you comfortable continuing to produce over 4000 homes before.
Before we obviously before we at layer and solitaire, given the order rates that youre seeing.
Just trying to think about how youre kind of managing that backlog versus when you would need to see.
Significant uptick in orders.
That's probably a really important question to talk about for a minute because.
On.
The last last couple of years, we reported.
Backlog numbers and it was just across the board right I mean everything has gone up.
And it didn't there wasn't much differentiation region to region and it didn't really matter because the numbers would be great Dan but.
Sure.
The expand on your question, a little bit and give you a little bit more flavor. When we do that that kind of estimate of weeks.
Very much an average now in a situation like this and.
Excuse me the situation does vary from plant to plant and region to region, meaning we do have plants that have considerably less backlog than we've got some that have very very strong backlogs.
During the scripted part of the call that.
We did have some market downtime this past quarter.
And it takes different forms.
Standard holiday outages that we took advantage of where backlogs are lower and some of our plants a good number of our plants actually have adjusted a four day work weeks.
So that was what was going on that kind of lowered our.
Our running time is available days to about 84%.
And we will continue in that mode until those individual plants that see even lower end backlog and weeks they start to see it stabilize and come up.
So very long winded kind of conceptual answer to you but.
I do expect that we will still not operate all available days.
But as we see cancellations abate.
And get closer to a one to one.
Flow through of Homebuyer orders, which I think is happening every day.
And if we get.
And as the seasonal order pickup that we're starting to see signs of.
That's all good news for reducing that market downtime.
Sure.
Yes.
So to us and again, we're always a little bit hesitant to get into the motive.
Giving up to the minute updates in these calls we like to focus on the quarter, we're reporting on.
But I did comment alone quotes being pretty significant significantly up also kind of tell you that we've looked at orders written not net of cancellations and last few weeks they've been.
Honestly comparable to about late summer early fall of last year.
So.
I'm going to keep qualifying by statement that a couple of data points doesn't mean, we're out of the awards by any means but they are they are good data points.
No that's really helpful Bill I guess.
And I know you don't want to get into the exact guidance in terms of production number of units, but it sounds like Q4, the last quarter. It was a reasonable proxy for where we will be give or take.
In the short term versus a big leg down or anything of that nature.
Yes.
Yes, lastly, maybe one or two more asps.
Just expectations.
<unk>.
As raw materials come down and we expect those to continue to tick modestly lower.
Yes.
Yes.
Maybe a little bit of an outlier on this question because the site every day that a little bit less to materials and being a direct relationship and a little bit more to how backlogs are gone and how competitive it gets for manufacturing orders.
There again.
I apologize that I can't give you a generalized answer but it really is playing out in local markets. We have seen some markets, where backlogs dropped quickly and to lower levels, where they are spending some.
Backsliding on price and we've seen others, where.
It just doesn't make sense to reduce price because.
With backlog still remain or the issue of.
Dealer inventories is really what's restricting orders not a reduction in price.
So.
Again hard to generalize we are in a more competitive environment in some geographies and if backlog stabilize I think.
Be able to kind of get through this with a lot with not a lot of price leakage.
Very helpful. Lastly from me ill jump out Allison I apologize there was some disturbance and I missed what you said about SG&A.
Was lower in the quarter sequentially.
What were the factors and just how do we think about.
Maybe including Solitaire.
Yes, Thank you Paul I apologize for the background noise.
Due to the reduction in third party expenses.
Last year, we were right in the middle of our tax.
Credit efficient project. So we have a large outflow for us.
Florida.
Are these slightly offset other than commissions and variable compensation.
We have moved forward based on our own.
Basically SG&A still being in the.
The component.
Got 40% sustainable and that we can leverage as we expand and contract.
Okay, I'll jump back with any follow ups. Thank you.
Thanks, Jeff.
Thank you.
And our next question will come from Danny <unk> from Craig Hallum. Your line is open.
Yeah on for Greg Palm today, Thanks for taking the questions.
I was hoping to just hit on that last one real quick on SG&A I mean.
It still was.
Quite a bit lower than the street was modeling here.
So I guess before layering on Solitaire is is that say 59 million number.
A reasonable baseline to go off of.
I think the current quarter that we just left kind of represents more of a steady state if you will know.
Good.
Sure.
A year ago and amount.
Significant as we've talked about because we were going.
Working with very expertise on the third party side for the tax credits that Youre seeing now is more relatively.
Related consistent level.
It has some fluctuation.
On SG&A, which helped our model because 40% of it is variable compensation and commission structure.
The industry.
I will follow with the revenue.
If you model that.
The level.
Yes.
SG&A is loving Daryl.
Probably realistic.
Sure.
Okay.
That's helpful.
I guess just kind of in terms of the overall demand backdrop, maybe for that current quarter, what kind of cadence you saw throughout the months I. Appreciate the color on January it sounds like starting to see things pick up and then maybe just more broadly.
Sure.
I guess realistic scenarios for industry shipments for this calendar year 'twenty three.
Okay.
Yes, that's a million dollar question right last one.
Whats the question on the cadence in the last quarter.
For this fiscal fiscal quarter, three how I guess more of a monthly cadence on how you saw that play out throughout the quarter home okay.
Yes, you got it I mean, it's interesting because think of those months theres a lot of holidays in there and they're seasonal slowing too so it's a little bit messy to interpret.
Month to month within that quarter.
I guess.
One of the things that we commented on is that cancellations were for.
For the entire quarter, where about 60% of what they were the previous quarter, which I think is a good sign as well.
So.
I would say cancellations were improving throughout the quarter kind of theres still present, but theyre going down and order rates typically slow down more in December than they do on the other months.
So a lot of things going on there.
Okay I'll leave it there for now thanks.
Yes.
Thank you and as a reminder to ask a question. Please press star one one again Thats star one one.
And our next question will come from Jay Mccanless from Wedbush. Your line is open.
Hey, good afternoon.
My first question.
With solitaire any kind of guidance you could give us on what you think run rate annual revenues would be and then also maybe what collectively.
Calendar year 'twenty, two shipments were from the combined entities.
Yes.
Solitaire kind of what we said is overarching Lee.
The deal will add about 10% overall so.
Also at similar Asps and gross margin as the rest of us as we work through the rest of the fiscal year, we did touch on that for the next two quarters.
Because of purchase accounting the margin will be down a bit.
The reason is that we know about and expect that basically if we can think about it as we've chatted about in the prior quarters, which is about a 10% increase to our overall.
Capacity, 10% manufacturing capacity manufacturing capacity, yes, Jay I think you had asked revenue I don't want people to tack that on to company level revenue.
Understood.
Trying to make sure you get a sense of how we need to model this out.
The second question what.
Yes, it's that's where I want to be really balanced I mean, we're trying to give you guys as much of an up to date view of what we are sensing in the market as we can.
But.
No.
It doesn't mean, we have a clear view of how things are going to unfold here in the next couple of months I would say.
When we turned the corner on the calendar year.
I was.
Really focused on are we going to see a seasonal uptick.
Alright, because the doomsday scenario would have been.
When higher activity on traffic deposits ultimately orders.
If we turn the corner in the economy was kind of weighing in the game.
We didn't see that seasonal the indications that seasonal pickup.
What would have been.
And that would have been a negative sign.
As I explained the good news is that over a period of a few weeks here to get beyond the first week or so of January we finally start seeing some data.
Really kind of encouraging data around traffic.
Quotes as I talked in the earlier discussion and that I think I've said here and one of the answers that even orders were back up to levels that were pretty healthy times. So the early indications are good we're going to keep our eye on it there's a lot going on in the economy. There is still uncertainty out there.
I think all of that stuff.
After unfold for us really know how things are going to shape up for the year.
I think for the industry.
Industry shipments sometime in calendar years ago started off with an unbelievably strong first half.
Pushing three quarters of the year and we finished up overall and shipments as an industry, but that was with the tail off there in the last couple of months.
Thank you.
We're quite happy that I think November in the seasonally adjusted rate.
Rate of November industry shipments was down in the mid 90000 range.
So there was a bit of a tail off there.
We're probably going to start off a little slow in this calendar year and if things go well it will be a reversal of last year and Thats what were kind of open floor.
Gotcha.
We've seen mortgage rates come down really since October .
Are you seeing the same type of decline in mortgage rates for chattel.
Yeah.
No chattel Steves chattel has a tendency would be real sticky. So we haven't seen chattel move really at all over the last couple of months.
Yes.
It tends to be independent of land home rates. So.
Nothing to note as far as improvement there.
Chattel rates again im looking around because I don't have all the data I think chattel rigs running in the high eights to about 9% right now.
Good afternoon. Thank you.
Okay.
About half of the year.
Got you.
And then.
And I apologize.
I touched on this earlier, but just what are you hearing from the park operators. These days how are they thinking about 'twenty three.
What should we expect to hear from them.
Yes, I mean, there's been a bit of a rock in the <unk>.
Whole thing, we've just been steady.
I'm generalizing, but I think it's a good generalization that community operators.
It's particularly larger each that we deal with quite a bit.
<unk> been pretty steady with significant growth plans a lot of capital to put to work.
What's that they can't get paid for it if they don't.
<unk>, so I've talked in the past.
There is I used the term buffer a little bit maybe too often talking about this industry, but.
One of the buffers I think we have in downturns really is within the communities where they.
Their model maybe to have.
Person.
One that home and put it on one of their lives and they can get the land lease payments, but they also are doing a lot of buying homes and renting them and so they kind of become a solution for that homebuyer that can't afford right now to own.
And I think that gives us some resiliency to this community operators. When you look at it from a demand perspective, so they've been very consistent I don't think theres been much at all.
Waning in their demand through this whole period.
Yes.
That's great to hear.
I mean, what do you think now just the mix of commute.
Community operators versus retail dealers.
And then maybe versus what it was last year.
Sure.
I don't think it's I don't think I'd note a huge shift I mean over time, that's been about 30%.
Community operators are about 30% of the industry. So I get your question stands to reason as they are growing like Crazy and Street Grill sellers take a pause that's going to shift a little bit.
I don't think it shifted that dramatically.
Focus on it personally.
Okay, great. Thanks for taking all my questions.
Yes. Thank you.
Thank you and I am showing no further questions from our phone lines I would now like to turn the conference back over to Bill Boor for any closing remarks.
Okay. Thank you Dan it's been great to report on another quarter of strong results and I think the financial results continue to highlight the ability of this organization.
Across manufacturing retail lending and our insurance operations. Our leaders are working really closely together and they're flexibly responding to the market dynamics and theyre staying focused on the through the cycle opportunities, which I think is really important.
I want to thank everyone as always for your interest in <unk> and we look forward to keeping you updated.
Okay.
Thank you. This does conclude today's conference call. Thank you for your participation you may now disconnect everyone have a wonderful day.
Okay.
The conference will begin shortly to raise and lower Johan during Q&A you can dial one one.
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Okay.
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Dan.
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