Cavco Industries, Inc. (CVCO) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the Cavco Industries Announces Planned Acquisition of The Commodore Corporation Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mark Fusler, Director of Financial Reporting and Investor Relations. Please go ahead.

Good day, and thank you for joining us for Cavco Industries discussion of the planned -- of the announcement of the planned acquisition of The Commodore Corporation. During this call, we will be hearing from Bill Boor, President and Chief Executive Officer; Paul Bigbee, Chief Accounting Officer; and myself. Before we begin, we'd like to remind you that the comments made during this conference call by management may contain forward-looking statements under the provisions of the Private Securities Litigation Reform Act of 1995, including statements of expectation or assumptions about financial and operational performance, revenues, earnings per share, cash flow or use, 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 Cavco's 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 Cavco. I encourage you to review Cavco's filings with the Securities and Exchange Commission, including, without limitation, the company's most recent Forms 10-K and 10-Q, which identify specific risk 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, Monday, July 26, 2021. Cavco undertakes no obligation to revise or update any forward-looking statements either 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?

Thanks, Mark. Welcome, everyone. We appreciate you joining us today on short notice. We're very excited to announce the acquisition of the Commodore business through an asset purchase agreement. And we wanted to take a few minutes to provide some additional detail and thoughts on what we believe is an outstanding combination of assets, leadership teams and cultures. Going on Slide 2, the company overview. Commodore is the largest private and independent manufacturer, and they're the fourth largest overall factory-built housing company behind Clayton, Skyline Champion and Cavco. They have a broad product mix and a variety of brands. And as you can see in the chart, their plants in Indiana, Emlenton, Pennsylvania and North Carolina produced mainly manufactured homes -- or modular homes, I'm sorry. This is a core strength in those modular heavy regions, and it fits well with our nationwide homes modular plant in Virginia. Overall, Commodore's production is about 60% modular and 40% HUD code homes. In regard to total homes shipped, Commodore's 3,700 represent about a 25% increase to Cavco's units shipped. Turning to the next slide. It would be easy to look at this acquisition solely from an asset perspective. But I think that would really miss what a strong and capable management team we've gotten to know at Commodore. This slide focuses on operations. However, in a broad sense, we've been very impressed by the team, Barry Shein, their owner; and Bob Bender, their Chief Operating Officer, have developed, and that's so important to how we view the deal. As previously stated, Commodore's 7 brands cover a broad spectrum of price points as well as customization from the lower price point, mostly HUD code production on the bottom left of the chart, to the more highly engineered modular products in the upper right. Despite this range of products, they bring a consistent approach to process innovation and improvement across their system. As our 2 companies come together, there will be operating approaches we at Cavco will offer. But in addition, I'm very excited about the technologies and the innovations Commodore has implemented and about the prospect of bringing those to our 19-plant manufacturing network. They have a highly integrated engineering approach, which drives efficiencies and product design. It has also enabled production technologies. As we visited the plants and saw what the team at Commodore has already accomplished in labor savings, cycle time improvement, quality improvement and waste reduction, we can't wait to leverage their experience and know-how in Cavco's plants. This is a great testament to the forward-thinking nature of the Commodore leadership team. Next slide provides a bit of a transaction summary. With regard to the transaction itself, the acquired assets include the 6 manufacturing plants; a commercial loan portfolio, much like the floor plan lending we already manage at Cavco; and 2 retail locations. Commodore's philosophy matches ours with regard to developing very strong long-term relationships with independent dealers, developers, retailers and communities. The transaction value is subject to adjustments that will be finalized at closing. We're estimating those adjustments at about $16 million, and that would result in an enterprise purchase price of $137 million and total outlay of $140 million after transaction costs. As the folks on this call know, we have a more than healthy balance sheet. So we will put our cash to work in funding this transaction, which is expected to close in our third fiscal quarter, the last quarter of the year -- calendar year. Slide 5. We wanted to talk a few moments to really categorize and highlight what this deal does for Cavco going forward. First, long before we knew Commodore might be interested in selling, we have been talking about our interest to grow geographically into the Northeast. This has really been the only large market area where we've not had a significant manufacturing presence. Looking at Slide 6, you can see that joining forces with Commodore is the perfect and singularly best move into that region. Their modular focus is ideally suited for that market. We expect this deal will open up future growth opportunities we would have -- we would have been stretched to pursue without the base that they give us. Looking at Slide 7 again, I've already spoken about our respect for the team Mr. Shein has developed. It's our general view that the manufactured housing business is a local one. And we, therefore, have a philosophy of empowering and relying upon local managing. This will be the case with Commodore where we expect the team to continue driving improved results. All brands and facilities will continue forward just as we've done with all of our past acquisitions. At the same time, it's my expectation that as the Cavco leadership and Commodore leadership teams began working together, we'll see meaningful improvement in operating excellence across the entire system of plants. I know there's always interest in synergies. We're not estimating any amount of synergies at this point in time, but that doesn't mean we don't believe in the value creation opportunities. They're real, and they'll be significant. In past acquisitions, we've been able to increase distribution opportunities for both the acquired plants and our previously owned plants in the region as we leverage dealer relationships in both directions. I've also already spoken about the manufacturing innovations and best practices our combined engineering and manufacturing people will be actively working to leverage. Right now, the name of the game in this industry is to produce more, and I really believe this deal will accelerate our efforts on an individual plant and combined basis. For those who have been watching Cavco over time, we've explained that we understand the need to invest our growing cash balance. Our capital allocation priorities are investing in our plants and continuing to pursue acquisition opportunities. The recent announcement of our Glendale, Arizona plant, our ongoing investment in our existing plants and certainly, this acquisition demonstrate our commitment to those priorities and that the opportunities are real. We have also added the share repurchase authorization to the toolbox to manage our cash balance. When we announced that late last calendar year, we emphasized that with our pace of cash generation, we could execute against the repurchase without limiting strategic opportunities. As shown on Slide 10, this acquisition puts a sizable chunk of cash to work while we maintain liquidity, so nothing changes about our capital allocation opportunities going forward. Based on our cash position at the end of March, our last reported period, this deal would bring the balance down to the $180 million range. And we will be releasing our first quarter results very soon and can provide an update on cash at that time. From a financial perspective, deploying cash into these assets that we estimate will generate EBITDA of about $18.7 million on a normalized basis. This results in a significantly accretive deal on both an earnings and cash basis. On Slide 12, we show the estimated transaction multiples of revenue, adjusted EBITDA and on a per plant basis. We believe this indicates a significantly value-added deal for our shareholders. And with that, we're ready to try to answer any of your questions.

[Operator Instructions] And your first question comes from Greg Palm with Craig-Hallum Capital Group.

Congrats on the deal announcement. It looks like it could be a pretty good fit.

Thanks, Greg.

I guess maybe to start off with a little bit of background on the actual sort of process and just sort of curious who from the kind of the current management team will be staying onboard once the deal is completed.

So you're asking about the management team at Commodore?

Correct.

Yes. We're hoping that the entire management team stays onboard. It's kind of our approach generally. I mean, over time, and we put no time line on this, we integrate and optimize. But we also run these businesses, as you know, when we've acquired them, we run them in a pretty continuous basis. So we're very excited about the management team and aren't expecting -- I don't know, we're hoping no one is going to leave as a result of the deal.

And I guess, in terms of the sort of the rationale, I mean, it seems like there's a number of them. I mean the purchase price seems to make a lot of sense, especially in light of kind of your current cash balance and cash flow potential. But then you think about geographically what this acquisition will do to kind of expand you into some markets where you don't have as much share today and getting into a little bit more modular housing. So I don't know. How does that all stack up? It just -- it seems like from a fit standpoint, there's -- this checks a lot of boxes. But just kind of curious what were sort of the big priorities as you sort of looked at the potential here.

Yes. I mean you've kind of named them, and it's hard to put one above the other. This just was a great fit. And we felt it was a great fit before we started having discussions with Barry and his team, and we continue to feel stronger about that. From just looking at it on paper, it does a lot of what you described. We've been asked and we've talked about strategically where we would grow, what our highest priority area for growth was. And the big opportunity was the Northeast. And there are other acquisition opportunities up in that area. But with the addition of Commodore, we have a better base to consider those kind of acquisitions. So it opens up some option value on future deals. Certainly, the -- their engineering strength in the modular component was attractive to us, mostly because that's -- that region skews more to modular. So it's kind of a fit for that local region that they're more heavily engaged in modular. And so it makes sense from that perspective. So everything you're saying, it's hard to put one above the other when we looked at this. And then as we got going and talking to Barry, Bob and others at Commodore about the -- I hate to use the overused word, but about culture and fit, from my perspective, it was outstanding. And I'd like to think that the folks at Commodore feel the same. I know that was very important not to speak for them, but I know that, that was extremely important to Barry Shein. So this is an example of just buying a very strong business and just being excited about the impact they'll have on Cavco, and hopefully, Cavco can help as well on their end.

Yes. And just maybe a clarification on the multiple and what you are talking about normalized adjusted EBITDA. So in terms of the add-back on the reconciliation, would those items in fiscal '19 and fiscal '20 be sort of onetime items? Is that what the add-back is? And as you think about go forward, I think what everybody is interested in knowing is what does the go-forward EBITDA level look like. I'm assuming there's revenue growth here, and thus, hopefully, EBITDA growth as well. So maybe the $18.7 million is understated based on that and some potential synergies. Is that a fair assumption? Or is there anything else that we should be thinking about?

Yes, a lot in that question. Where do you want to start? You're asking about the calculation of the normalized EBITDA?

Well, yes, I guess, it's a lot to unpack. But really, I think what a lot of investors are interested in is how does that normalized adjusted EBITDA level of $18.7 million, which is based on an average of the last 2 years, which includes some sort of add-back for earnings adjustment, quality, how does that compare to what the EBITDA level could look like this year or next year? I mean is it -- is the normalized adjusted EBITDA of $18.7 million, is that a good run rate going forward? Or should that level be higher thinking about growth and synergy potential?

Yes. We're not -- we weren't intending for the normalized EBITDA to necessarily be guidance per se. But yes, I mean, we view that as their -- currently their normalized level of earnings. Now I will say that, I mean, we've talked this to an extensive degree just in general in the industry over the last 1.5 years or so, there's a lot of flux. This industry has a lot going on in margins with the cost increases. I don't want to get too deep into that on today's call. It's not the purpose. But what I will say is that Commodore pursued a bit of a different approach with pricing over the last year or so where they've done more to protect orders in their backlog, while Cavco and I think a lot of other industry participants have basically not been able to protect pricing in the backlog. And so they've had some margin compression. We think that a couple of things are happening going forward. One is they've been able to work through a lot of that lower-priced product in their backlog. And then also, as you know, the -- some of the bigger cost inputs to the process have crested and are starting to come down. So we think their margins are kind of a little bit in flux. But again, on a normalized basis, this is how we view kind of their current earnings power. Anything to add?

No.

And your next question comes from Daniel Moore with CJS Securities.

Maybe you can elaborate a little bit on Commodore's advanced manufacturing techniques that you alluded to. What are they doing differently than you are? And how much incremental capacity for organic growth do you think that could open up over time?

Yes. This kind of -- this is a great topic of discussion. It's been -- people have talked a lot about things like automation in general terms. And what we've said about that through time is that we don't see like a silver bullet, but we do look for the kinds of improvements to the process that can really kind of cumulatively move the needle. And I think that's what Commodore's been doing a great job with. I'll give you a couple of examples. And they've -- and the important thing to understand about what they've done is that it's not just a matter of going out and popping a change into the production line. They've done things like put CNC machines into cabinet making to automate some of the process there. And my point about not being as easy as is dropping it in is it relies very much on having a really good engineering system behind that implementation because of the customization in this industry. So the magic of what they're doing a good job with is having that backbone and then being able to target on the floor improvements that utilize that engineering system. Another example is they've been able to use things like laser systems in flooring to be able to make the layout of the floor a little easier during the production process. And again, one floor is not like the next one, so it's dependent on that engineering background. So those are just a couple of examples. They've done some other things. And individually, they're meaningful, but it's the accumulation of those kind of opportunities that really starts to move the needle. We don't, at this point, have any estimate of what we think the impact will be. But as I said, when we visited their plants and saw some of the stuff they're doing, we just are excited about starting to work together with them and seeing what we can make happen.

That's helpful. Maybe if we could take 2 seconds and just kind of step back in terms of the fundamental differences between modular and HUD code. And more importantly, are there any discernable differences in demand trends or potential future growth that you see?

Yes. I don't really -- I don't personally think of it as being driven by different demand drivers, necessarily. I mean it's all -- I'd say this probably until you guys start rolling your eyes. It's all a local business in the end, and their plants are really well positioned in their local markets, whether they're modular or HUD products. So their backlogs are strong, just like everybody else's, and I think that's as good an indication of the general need for manufactured housing as anything. So Dan, I just wouldn't differentiate the demand dynamics at this point.

Understood. [indiscernible] what their current capacity utilization is compared to yours?

I don't know that we've looked at their plants from a kind of -- the capacity utilization numbers we've explained in the past is based on a little bit of art looking at the physical capability of the plant itself, the physical plant. And looking at this deal, we weren't really that focused on that per se. We did look at growth possibilities, and we looked at their plans to do our own assessment of how achievable those growth opportunities are, but we don't have a capacity utilization number at this point for their plants.

Okay. And maybe one more, just talk about their financing business. It's not huge, but is that $25 million portfolio relatively young? Are they putting new -- actively putting new loans on the books? And how aggressively do you see the opportunity to grow there?

Well, it's very similar to what we do. It's really oriented to their customer relationships. So I don't think it's a new activity by any means. It's more of an ongoing activity working to support those customers. So it's kind of a -- it's a maturity of what they've got is similar to what we do, and I think it will kind of sync in very well with what we do. So it's just an ongoing part of their business.

Okay. Now I'll take any further ones off-line.

And your next question comes from Jay McCanless with Wedbush.

The first question, just are you going to have to go for an antitrust review on this one?

I just kind of -- as a matter of process, we will. We don't foresee necessarily any issues with that. But yes, we'll need to go through the Hart-Scott-Rodino process.

Okay. And then I'm going to ask Dan's question but a little less delicately. Modular has always been, I think, the great idea that never really got any traction and never saw the kind of unit growth that we saw from HUD. I mean has Commodore's experience been different? And maybe could you talk about either in units or dollar what kind of growth they've seen in the last couple of years?

Yes. Again, I think right now, we're in a market situation where it would be -- it wouldn't make sense to differentiate them like that. I think that they've been very successful. I mean in the Northeast, modular is a much bigger part of the market demand. So they've been successful growing. They've added plants. And we think modular represents a good opportunity going forward. So I don't -- I just don't understand the differentiation, to be honest. We're expecting to be able to get good results in factory-built housing whether we're making modular or HUD code products.

Got it. Another question I had, and I know you guys don't give a formal EBITDA number, but it looks like there is about, I'd say, 150-basis-point difference between the EBITDA margin -- pro forma EBITDA margin for Commodore versus what Cavco put up in fiscal '21. How do you close that gap? Is it going to be some purchasing synergies? Or are there some other things you've identified to help Commodore get their EBITDA and sales margin up?

Yes. Again, I think that the margin analysis, if we try to add too many decimal points to that kind of analysis, we're probably a little off track in this current market because margins have been fluctuating so much. Ours has been moving significantly up and down over the last number of quarters because of the cost input changes. I don't -- I view them to have the potential to have similar margins that we have. Of course, we'll be looking for purchasing synergies and other types of cost and efficiency improvements, as I said, both directions. But we don't view modular as being a drag on our margins through time.

Got it. And then, I guess, the other question, just from a consumer financing standpoint, do they already have a finance organization? Or is this going to be more potential customers for what Cavco has in place already?

On the commercial lending?

No. No. For consumers, for people buying their homes. Do they have any type of financing arrangements right now? Or are you all just going to bring that to the table?

Yes. They don't do any meaningful consumer financing. It's all commercial lending. So -- and it's pretty far afield from where we do most of our lending, but those are all future opportunities to look at.

And your next question comes from [ Ian Lathey ] with [indiscernible] Fund.

Bill, congratulations on the transaction, looks quite good.

Thanks, [ Ian ]. Thank you.

Just a couple of questions, and maybe you mentioned it, but are the backlog levels similar for Commodore as for what you're currently experiencing in your plants?

Yes, they're very similar. I mean just like most everybody, I think they've got pretty deep backlogs.

Okay. And then what is the customer mix for Commodore between independent retailers, communities and builders?

Yes. We've had that information, yet I don't have it at the tip of my tongue right now. [ Ian ], I apologize.

[Operator Instructions] Your next question comes from DeForest Hinman with Walthausen & Co.

I got on the call a little bit late. But just to clarify, are all the Commodore facilities currently producing units? Or do they have some facilities that are idle?

They're all producing, yes. And I don't know if you've got access to the deck, but you can see the various facilities on one of the early slides you might have missed, but yes, they're all producing.

Okay. Perfect. And then just maybe -- I think I know the answer to the question, but maybe some of the other shareholders don't based on the -- some of the questions that were just asked. But the modular piece in the Northeast being dictated by the region, modular mix higher, is that just around a desire to build on a foundation codes in the area versus the slab in the South?

Yes, I think that's a piece of it. And it's the way those geographies kind of have grown up through the industry. So it's just the uniqueness, I think, in the Northeast area that it leans much more to the engineered modular product.

Okay. That's what I thought. And then on the -- just to clarify on the commentary on the capital deployment perspective. We're still open to repurchasing common stock, and we're still looking at additional acquisitions at this time.

Yes, kind of the nature of our balance sheet right now that we can do the repurchase and still be able to pursue deals like this one. So yes, there's no slowing down as far as our capital allocation priorities.

Okay. And then maybe with this deal completed, there are some other players out there, but I think the -- speaking from my own review, it seems like the number of acquisition targets is shrinking over time. Can you give shareholders an update in terms of how the Board thinks about the potential for a dividend policy?

It's something we look at, obviously, with the cash that we've had, and we'll continue to evaluate it. But at this point, the $100 million share repurchase allocation with our authorization was the tool that we worked with the Board to put in place as opposed to the dividend. It doesn't mean we're against looking at it or considering it in the future, but haven't done anything at this point.

And we have a follow-up question from Daniel Moore with CJS Securities.

Kind of a chicken or the egg question, but wondering if the modestly increased scale and potentially increased scale on the lending side could get you faster or closer to potential securitization opportunities faster.

If we do an earlier question about commercial lending, if we do decide to expand our lending bid right now, geographically, we're not set up there. But yes, anything that would increase our own consumer lending would move us closer to scale. That scale is hard to get to, though, for just about anyone other than 21st Mortgage that doesn't look to securitize. So I think securitizing on our own is a big challenge to get to that scale. But what's more likely is to be able to aggregate in some way. So having the in-house manufacturing, I guess, is directionally a step toward broader lending, but we'll take one step at a time, I guess, on that, Dan.

[Operator Instructions] I'm showing no further question at this time. I would now like to turn the conference back to Bill Boor, President and CEO.

Thank you. I do want to take a moment to welcome any folks from Commodore that might be on the call. We're really excited about what can be accomplished and excited about the opportunities this combination will create both individually and collectively. And at Cavco, we're extremely focused on expanding our impact on the affordability challenges in housing, and we really believe that working with the folks at Commodore, we can make an even bigger difference. I also really want to thank Barry and the Commodore leadership. A lot of work went into getting to this point. And through that, we took a big step in the process of getting to understand the fit of our organizations, which I really believe is unique and outstanding. So with that, thanks to everyone for joining us on short notice, and we look forward to updating you on our progress.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.