Q1 2024 Cavco Industries Inc Earnings Call
Good day and welcome to the <unk> industries first quarter fiscal year 2024 earnings conference call. 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 and you will then hear an automated message advising your hand is raised to withdraw your question. Please press star one again.
Please be advised that today's conference is being recorded.
I would now like to hand, the conference over to your speaker today, Mark Busler corporate controller and Investor Relations. Please go ahead.
Good day, and thank you for joining us for chemical industries first quarter fiscal year 'twenty four 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 cause.
Forward looking statements, including statements of expectations or assumptions about capital's financial and operational performance revenues earnings per share cash flow or use cost savings.
Regional efficiencies current or future volatility in the credit markets or future market conditions.
All forward looking statements involve risks and uncertainties.
<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 gamco.
I encourage you to review captains 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 live broadcast Friday August four 2023.
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.
Now I'd like to turn the call over to Bill Boor, President and Chief Executive Officer Bill.
Okay.
Welcome and thank you for joining us today to review our first quarter results.
Well the earnings release provide year over year comparisons I'd like to focus primarily on the sequential movements, which I think are more relevant in understanding the current dynamics.
From an operating and financial results perspective, this quarter was very consistent with Q4.
Sequential volumes were essentially flat up about 2%.
Revenue was flat at 476 million and pretax profit was up slightly from 59 million to $61 million.
Our capacity utilization as measured over all available days remain consistent.
As well as approximately 60%.
So operationally, it's been a steady quarter at a reduced pace with most of our plants remaining on a four day schedule and costs are being well managed as indicated by the strong gross margins.
The most notable change this quarter was a meaningful pick up in wholesale orders.
Backlogs edged lower from seven to eight weeks to five to six weeks showing that production is still outpacing wholesale orders.
However, the change was more modest than in the past few quarters, meaning the pace of orders do that truth.
Order rates were up year over year end up considerably over Q4.
The pickup in orders is partly attributable to the improvement in retail inventories, which are now largely under control and it's partly due to increased home buyer activity.
We need to see these trends continue in order to achieve balanced with our reduced production rates and then we'd be able to start ramping capacity utilization up from there.
Yes.
In our retail business and across our independent dealers and communities. There's a continued confidence in the underlying demand.
It's based on traffic quotes and overall buyer activity.
Interest rates and general economic confidence remain the questions for the near term. However, given the positive order trends. We believe we've seen the bottom of homes wholesale orders and we're looking to return to full production schedules as soon as the market support develops.
I spoke about this last quarter, we continue to think it's worth noting in these tougher operating times that our plants have done an outstanding job of managing margins despite reduced production rates.
Factory built gross margins remained healthy at 24, 8%.
This was certainly helped by lumber and OSB pricing this quarter and by continued healthy selling prices.
The business model is centered on the ability to keep controllable cost in our factories as variable as possible and are healthier or a healthy profit and gross our cash generation. Despite the challenging order environment as a result.
It's been a fast two quarters since we closed on the solitaire deal.
Combined the companies continues to go well.
One area of focus has been on developing new models and updating the existing lineup with a focus on high quality lower price products in line with current market needs.
We've spoken in the past about the opportunities to round out product offerings across the combined retail operations and very good progress has been made there.
As we continue to work off the purchased inventory solitaires impacts on our results will develop as expected overall there've been no surprises and we're very happy with the acquisition of great people that have joined our kafka of families.
With that I'd like to turn it over to Alison to discuss the financial results in more detail.
Thank you Bill net revenue for the period was $475 9 million down $112 4 million or 19, 1% compared to $588 3 million during the prior year's first fiscal quarter.
Within the factory built housing segment net revenue was $457 1 million down $115 5 million or 22%.
$572 6 million in the prior year quarter.
This decrease was primarily due to a decline in base business wholesale and a decrease in average revenue per home sold partially offset by the solid care homes acquisition, which contributed $36 8 million in the quarter.
The decrease in average revenue per home was primarily due to more single line in the mix and to a lesser extent.
Pricing decreases.
After utilization Q1 of 2024 was approximately 60% when considering all available production days.
Nearly 70% excluding scheduled downtime for the market or whether it's just it was the fourth quarter fiscal 2023.
Financial services segment net revenue increased 19, 2% to $18 8 million from $15 7 million, primarily due to more insurance policies enforced and higher premium rates.
Consolidated gross profit in the first fiscal quarter as a percentage of net revenue was 24, 8%.
Up 40 basis points and a 24, 6% in the same period last year.
And the factory built housing segment gross profit increased 40 basis points to 24, 8% in Q1 of 2024 versus 24, 4% in Q1 of 2023.
Primarily by lower material dollars per floor.
As expected <unk> purchase accounting adjustments on acquired inventory continue to have a 40 basis point negative impact on our gross margins this quarter.
Under accounting rules.
We acquired upon purchase is recorded at fair value.
From a sales price airport when acquired inventories sold no operating income is recognized.
We anticipate seeing the same impact the next two quarters.
Gross margin as a percentage of revenue in financial services decreased to 24% in Q1 of 2024.
32, 6% in Q1 of 2023, resulting from higher insurance claim expenses from increased weather events, which included a very long period of daily storm activity in Texas.
Selling general and administrative expenses were 61 7 million compared to $66 1 million during the same quarter last year.
Increase in these expenses is primarily due to lower third party support costs and lower incentive compensation costs, partially offset by the addition of solitaire homes SG&A cost.
Interest income for the first quarter was $4 6 billion.
251% in the prior year quarter.
The increase is primarily due to higher interest rates and greater investment cash balances increased lending under commercial loan programs.
Other income net net this quarter was <unk> 1 million compared to $4 million of expense in the prior year quarter.
This increase is primarily driven by unrealized gains on equity securities held in the current year compared to losses in the prior year.
Pretax profit was down $18 6 million or 23, 5% to $60 7 million compared to $79 3 million for the prior.
A year period.
The effective income tax rate was 23, 5% for the first fiscal quarter compared to 24, 7% in the same period last year.
In the prior year period Energy Star credits had expired and had not yet been fully extended.
For the current period tax rate is more indicative of our future rate.
Net income attributable to <unk> shareholders was down $13 2 million or 22, 1% and $46 4 million compared to $59 6 million in the first quarter of the prior fiscal year.
Fully diluted earnings this quarter was $5 49 per share versus $6 63.
Per share in last year's first quarter.
Before we discuss the balance sheet I'd like to take a minute to talk about capital allocation.
As announced with our press release, the Companys Board of Directors approved a new 100 million stock repurchase program that may be used to purchase our outstanding common stock.
This increases the total availability of $135 7 million. This includes the remaining amount under the program previously announced last year.
That we will continue to responsibly deploy capital in keeping with our strategic priorities.
Our capital priorities remain plant improvement.
Further acquisition and ongoing evaluation of the opportunity in our lending operations.
Continue to use buybacks as a tool to responsibly manage our balance sheet.
Now I'll turn it over to Paul to discuss the balance sheet.
Thank you Allison.
When we compare the July one 2023 balance sheet to April one 2023, the cash balance of $352 2 million up $80 8 million or 29, 8% from $271 4 million at the end of the prior fiscal year.
The increase was primarily due to net income adjusted for noncash items, such as depreciation and stock compensation expense and other working capital adjustments, including inventory, which decreased $9 2 million from lower raw materials at our factories and finished goods at our retail locations.
Cash also increased due to the sale of consumer loans greater than originators, partially offset by commercial loan originations exceeding payments received.
Prepaid and other assets are down from lower prepaid taxes.
Normal amortization of prepaid expenses.
Property plant and equipment net is down from the sale of equipment acquired with Solitaire homes.
And lastly, stockholders equity exceeded $1 billion up $47 million.
$176 3 million at the end of the prior fiscal year.
This completes the financial review and now I'll turn it back to Bill.
Thanks, Paul.
Results this quarter highlight the ability of our organization to manage costs and generate cash even when conditions are challenging everyone. At <unk> is ready for what we view as an inevitable return of demand. So we can help more families get the homes they need.
With that Abigail, let's turn it over and open up the line for questions.
Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
One moment for our first question.
Our first question comes from Daniel Moore with CJS Securities. Your line is open.
Sorry about that was muted. Thank you Bill Alison Paul Good morning.
Thanks for taking the time and the questions maybe.
Bill very helpful.
Colors in terms of the cadence of orders and demand maybe if you can delineate across end markets, starting with retail than the REIT channel and community developers, what's the cadence of orders look like.
Throughout the quarter and thus far into fiscal Q2.
So I'm just looking for kind of relative differences between those.
Yes exactly exactly.
The rate of improvement and whether that has continued thus far in the current quarter.
Yes. It has continued I mean, I think we talked last time about.
Order levels and the fact that they left.
Fourth quarter.
Basically <unk>.
Confused the time periods March was stronger than January rate as you would.
Expect seasonally but it was good to see it and that's what we kind of reported on last quarter and that strength continued to carry through and as I said, we had a pretty nice sequential increase in order rates this quarter.
Let's take a deeper because I think as part of your question.
A lot of that strength I think is really coming from.
But the dealers.
Independent stores and are are obviously cat Cora on stores.
We've talked about.
The inventory problem in last quarter, we said that we really thought that was going to.
It's not like it immediately as an on off switch because that was going to largely be behind us.
Sometime during this first quarter and I think that's the case from a total inventory perspective, and so right away you kind of get the lift.
Starting to get to one to one orders rate they sell Allison door to another.
Another one from the factories. So that's kind of played out as we expected it to when we talked last quarter.
So a lot of the uplift in order rates.
<unk> has really come from the dealers the communities are lagging a little bit.
It's interesting to think about it I think they're they're dealing with their own form of <unk>.
Inventory problem.
And we've talked this in the past and I think it's hard to generalize across the thousands of communities that are out there, but I think I think the community inventory problem takes two forms.
Some communities.
Set houses they are ready to be occupied and they've seen a slowdown in filling those homes, so theyre not going to be ordering.
And then ordering as fast, it's not an either or but theyre going to be kind of on the slower side of wholesale orders.
And then other communities and we've talked this they have unset Hans they have inventory of homes. They previously ordered and that were largely delivered that they haven't been able to get set in place due to permitting and crew problems setup crews and so if they could set more quickly they feel they do have the demand.
Theyre not able to get the homes ready to be occupied so I don't mean to complicate this but I think we've got a little of all of that going on in the community side and the total effect is that while retail orders are on the upswing to new orders are lagging a bit.
We've talked to folks.
Are people talking to the communities and also at a higher level with some of our large reach.
And best estimates, we have heard already that.
This issue will start to ease up by the end of the calendar year, and we'll expect to see committee orders improve which would be upside from the pace of order and we've seen now.
And that's all you know every time I talk about that looking forward I always feel like I've got to say, that's all assuming macro economic factors kind of allow that.
We've seen what happens when there's kind of a shock or a big upswing in interest rates and things slow down but.
Macro factors permitting I think the communities will pick up.
Yet this calendar year.
So that was a mouthful Dan did I cover the basis.
Without a doubt.
That's extremely helpful and in fact, maybe just delineate a little bit further between communities and rates any difference or delta between.
The factors that you just described there.
And what they're saying about their likely.
Plans as we look to the balance of the year and next year.
Yes, I'm not sure what you're asking for doing a show and I was kind of talking through collectively the rights and therefore the community operators.
That's fine.
Just kind of finish that offline, but maybe talk about.
As you mentioned.
The in order to start to see an uptick in factory utilization you would see orders continued to build I believe I heard that correctly.
What are your expectations for shipments.
As well as Asps Directionally for fiscal Q2, which we accept.
Shipments to be basically flattish from here, a little maybe a little bit of pullback or what are your thoughts.
Yeah, we kind of stay away from guiding because I think it's still subject to changes in the market. So it's.
Kind of shy away from making a prediction about it and my comment was as you picked up it was that.
It's not only the level of backlog that matters, it's the direction of backlog and we haven't turned that around yet we saw another bit of drop in backlog. This time it was much.
Much.
Much smaller drop to the pace of that drops improving.
And I guess I'm being very repetitive here, but that pace was improving because the orders were up our production level was pretty pretty steady the last two quarters. So we just need that trend to continue.
I think it's on the right trajectory.
Where we will see backlogs for stabilized which would be great.
And then hopefully start to build with a four day schedule.
And again, hopefully return to a level that supports us starting to take plants on a local basis back up to full schedule. So I'm not trying to make a prediction as much as just saying thats.
Those are the trends that we're going to keep an island and we're going to be looking forward to that kind of we get our utilization back up.
Understood.
Pricing as well, Dan you asked about pricing as well and Thats very related right.
If the supply and demand balance supports I think the industries.
Sean good discipline in holding prices well as it has.
So all we need is for those backlogs stabilize to start turning a direction then that would support prices.
If something happens and disrupt.
Demand then I think it's a real risk as it always has in this industry.
Understood.
Helpful. I will jump back with a couple of follow ups, but turn it over thank you.
Thanks, Dan.
One moment for our next question.
Our next question comes from Greg Palm with Craig Hallum. Your line is open.
Hey, Thanks for taking the questions maybe starting off on following up on a couple of Dan's can you maybe quantify exactly kind of what youre seeing in terms of order rates, whether that said sequential or year over year basis, and then just specifically what are you. What are you seeing in July are you seeing.
In sort of same magnitude of what you are seeing in the quarter are you seeing better you're seeing worse and then maybe just kind of remind us what kind of normal seasonality is in terms of.
Order rates on a normal year.
Yes, I can take a stab and then ask the other folks.
Correct.
I'm wondering if I'm looking at some data here.
And I'll give you the numbers, we haven't historically done this but on a same plant basis, which basically what's not included in these numbers is the solitaire acquisition.
On a same plant basis, we're up about 25% year over year on orders.
Quarter to quarter, we were up about 65% so pretty big jumps.
Last year, I think I think I'm right about this last year, we were in a period.
Now, where we're starting to see cancellations in the orders drop off so.
I really think it's more instructive to focus on sequential.
On both.
And Greg could you remind me the second part of your question.
What are you seeing in July specifically in terms of order rates I mean anything thats, maybe seasonality different relative to the quarter and then I guess, if you can just remind us kind of what normal seasonality is for a typical year in terms of orders.
Yes.
Yes, I Wouldnt note anything different in July kind of a continuation coming off for the last quarter information I just shared so nothing of note there.
And seasonality is interesting we've looked at this and.
And if you take the year.
This is going to be way too simplistic, but I think if you looked at the year kind of.
Late March timeframe through October .
That tends to be considerably higher and then things drop off.
After October seasonally when you get into November December in the early part of the calendar year as far as the seasonality, but I'll tell you the seasonal shifts.
And some years, where you've got a lot of it.
Bigger things going on like we have like the interest rate adjustments and the macroeconomic drivers kind of shifting on folks as far as confidence the seasonal aspect can sometimes get dwarfed by that but we should we're not hitting a period, where we would expect things to drop off seasonally we should be.
And from that perspective would be in a good zone through October at least.
Yes, okay.
In terms of the commentary on the community orders.
And more and more or less on the <unk>.
Timing.
How is your visibility and I think what you said was expect to see.
Some orders I don't know if it was by year end or towards the end of the year, but can you give us maybe a little bit finer point on on when you think I know your crystal ball.
Not perfect, but just based on all the information we know today.
Yeah, well thanks for acknowledging this perfect because obviously along that way as you're asking the question.
I think my only statement is that.
Just about everyone, we talked to internally and externally kind of feels like this is something that will be worked through in the next couple of quarters. So that's why I didn't really pinpointed I don't know these things don't happen I always say that they don't happen wake an on off switch.
So hopefully we'll be able to see this ease during the period.
But even in talking to our big REIT.
Customers, they're kind of feeling like hey by the end of the year, we should be back to normal meaning.
Yes.
Yes.
So im defining it an inventory problem that they have this kind of work through.
So it's a little bit analogous to what we went through with the dealers.
The communities just seem to be a little different time schedule, so I can't pinpoint it by months.
Yeah, but just to be clear is that does that mean they order in advance. So they are ready to start taking more units by the end of the year or is your expectation that they start sort of ordering the units and then it's another.
Handful of weeks or months until they actually take delivery and set them up.
Yeah, that's kind of fine tuning.
We do expect that we will see if.
If we have an expectation we do expect that we'll see orders in that timeframe and keep in mind. Our backlogs are pretty short so all of our customers know that orders turn into shipments pretty quick when backlogs are the short so they won't be ordering with some assumption that that means for delivery for in the future.
It should be really you know when we have just short of a backlog which is a good thing in this regard.
Sure.
It should be pretty.
Pretty just in time, you know they make an order, we're putting it into production and getting it to them.
So anyway long winded way of saying I think the answer to your question is yes, we're hoping that we'll have.
Communities strengthening to support the quarter trends, we're seeing from street dealers right now.
Understood.
Last question around margins do you have I think you mentioned.
Increased claims in the financial services do you have sort of.
Any visibility on whether that might impact this quarter as well or do you feel like that was just sort of a one quarter kind of thing.
Yeah, you know, it's whether everything that our insurance company is doing to run their business I feel real good about their cost youre right theyre getting appropriate.
Premium increases, which are that's a whole process to get states to approved premium increases and then it takes a little time for the premium increases kick in but.
That business is operating as we expect it to they just had high claims and so.
In my view.
As a.
We had a number of storms, none of which were catastrophic so you didn't get into the reinsurance levels.
And when the kind of near term outlook, there's no reason to think that.
Correlates necessarily to a continuation of storm events for the rest of the year.
So it's kind of just.
From a planning perspective.
Past quarters kind of isolated and we're looking forward to.
Insurance company over time, they've done real well for us economically as far as getting a good return and making profits but.
Little bit of the nature of the game that periodically get hit with a rash of storms.
I'm not sure if that was your answer but going forward I don't see that there's any reasonably expect to continuation.
Yeah, Yeah, Okay. It sounds good alright, thanks for the questions.
Thanks, Greg.
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Our next question comes from James Ken Lewis Mcchord Mccanless with Wedbush. Your line is open.
Good morning, everyone. Thanks for taking my questions.
So bill Congrats cab COSE unit decline was about half of the 28% to 29% decline we saw in industry shipments I guess could you talk about how flexible you have had to be on price to out to do better than the industry. And then also on the flip side of that now that we've seen in lumber.
Prices starting to work their way up have you guys been tightening up on pricing.
Just in the eventuality that higher lumber prices are going to start to flow through.
Yes, I really don't think we have.
I don't think we've maintained or gained market share through pricing through being more aggressive on pricing.
We don't believe that's the case as we talked to all of our plants.
Constant touch with them.
<unk> calls every month.
We go through them.
Kind of sensing, what's right to do in their market and.
For the most part when theyre kind of looking and talking to their own customers the dealers.
Feel like we're priced right with.
As the other manufacturers so.
We.
I'd like to think that we've got really good relationships with our dealers I think that pays off over time and I would attribute.
Any strength there too.
Focusing on the independents and doing a good job for them, but I don't think it comes from pricing.
The question about lumber coming up we always talk about our gross margins.
Kind of the obvious way and that's partly driven by.
Those costs and that's partly driven by price.
But I've also said that.
For the last couple of years now I think the price, we charge as an industry, but us as well for our homes is a little bit this associated with the cost it's been driven by the supply and demand of our homes.
So.
I don't I guess, it's a way of saying given where we are now I'm not sure I believe that.
We're going to necessarily be.
Kind of correlating pricing uptick in lumber and OSB prices, if that makes sense will be kind of looking at it more from the standpoint of our competitive position.
And the supply and demand.
And all of those local markets.
Sure makes sense.
Could you talk about where chattel mortgage rates are now versus maybe <unk>.
Last quarter and last year.
Okay.
Yes, Jay this is mark so I can take that one so they've been pretty consistent sequentially. So right now theres still about $9, one five to about nine 4%.
Sounds good.
And then I guess the other question I had just thinking again about <unk>.
Capital allocation the new authorization.
Could you maybe talk about.
Whether you do more stock repurchase first or does it makes sense to expand on the floor plan side, maybe just some general thoughts about that.
James Let me help with that.
You step back we've been very diligent since that first authorization, which was a couple of years ago and using the repurchase authorization.
We do have $35 million on our previous authorization and the board just gave us another $100 million. So we really use these.
Buybacks at the balance sheet management tool and remains available to us and something that we plan to execute upon.
Yeah, we recognize that this creates maybe too much attention to when we are in the market in a given quarter.
Had markets.
The quarters in the past when we didn't see purchase.
And there's a variety of considerations and I wouldn't read too much into the fact that we were in the market except to say that we're not generally speculating on our stock price when we make these decisions.
Managing the balance sheet, and making sure we're conservative about possessing position any nonpublic information and still invest in our strategic priorities, which are.
Expansion of plant operations.
And.
Ongoing evaluation of opportunities and lending operations.
Right down the center of manufactured housing so taken as a whole.
Our continued focus on using stock buybacks as a responsible way to manage the balance sheet.
Got it okay. Thanks, that's all I had.
Thank you that concludes the question and answer session. At this time I would like to turn it back to Bill Boor, President and CEO for closing remarks.
Bill Please make sure your line is not muted.
Thank you it was apologize for that.
Despite our reduced production schedules and our.
Our plants are still operating efficiently and our retail organization continues to proactively drive lead generation and sales.
And we're providing valuable tools to our retailers and prospective homebuyers with our digital marketing advances.
All of this combined with our strong balance sheet puts us in a great position to take what the market offers at the moment and be ready to ramp up when the inevitable release of demand occurs.
The affordability problem continues to worsen.
While near term economic drivers can slow orders the underlying need and demand is only increasing.
So with that I want to thank you as always for your interest in <unk> and we look forward to keeping you updated on our progress.
Thank you for your participation in today's conference. This does conclude the program you may now disconnect.
Okay.
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