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

Thank you for standing by, and welcome to the Cavco Industries Fourth Quarter Fiscal Year 2023 Earnings Call and Webcast. [Operator Instructions] As a reminder, today's program is being recorded. And now, I'd like to introduce your host for today's program, Mr. Mark Fusler, Corporate Controller and Investor Relations. Please go ahead, sir.

Good day, and thank you for joining us for Cavco Industries Fourth Quarter and 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 Bigbee, 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 Cavco's 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 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, May 19, 2023. Cavco 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 would like to turn the call over to Bill Boor, President and Chief Executive Officer. Bill?

Thanks, Mark. Welcome, and thank you for joining us today to review our results for the fourth quarter of 2023. This quarter saw the full impact of the economic pressures and retail inventory issues we've been experiencing through the latter months of calendar 2022 and into this year. Our volumes were down 10% year-over-year. Revenue dropped approximately 6% or $29 million and pretax profit was down about 15%. So, it's clearly been a challenging operating environment. On the positive side, we have seen improvement in order rates with net orders up meaningfully compared to the last 2 quarters. In fact, on a same plant basis, net orders were about double what we saw in Q3. We spoke last quarter about watching orders, as we entered the seasonally stronger selling season and it's a good sign that we also saw that order rate improve throughout the fourth quarter. And while average selling price is off sequentially, pricing has held up well despite the drop in industry shipments. Overall, our average selling price was down about 6% sequentially. However, the majority of that decline was mix driven as opposed to price reduction. A very important component of our business model and something we focus on in downturns is keeping our cost structure as variable as possible, so we can maintain profit and cash flow at lower volumes. This is something that can be seen in this quarter's results. Factory-built gross margins remained high at 24.4%, essentially flat year-over-year despite the negative impact of Solitaire purchase accounting. Certainly, this was helped by pricing and commodity cost improvement compared to last year. However, it's also due to outstanding cost management in our plants, as they transition to reduce schedules. Despite same plant production rates being off 24% from the peak last summer, gross margins have held. And on a comparable basis, excluding onetime items in Solitaire, SG&A was lower than last year's quarter. Our leaders have adjusted quickly and very well, and we are demonstrating a focus on cost and efficiency we consider to be key to our success. The bottom line is that in a challenging demand environment, we posted operating income of $54.3 million in similar free cash flow generation. I'm very proud of these results that demonstrate the expertise, resilience and nimbleness of our operating teams. Regarding market conditions, it's difficult to generalize across the system in an environment like this, but I'll try. For some time, we've been facing a retail inventory issue that has kept wholesale orders below actual industry retail sales. We're nearing the end of that issue and getting closer to a 1:1 ratio of home hire demand and manufacturer orders. I've commented before that this issue will not go away suddenly. And my comment here is not to say that every local area and dealer has gotten to their target inventory. However, in general, this issue is largely behind us, and that's a positive for order rates going forward. As I've kept in touch with both independent retailers and our own stores, there's a lot of optimism. Retailers are seeing healthy traffic. Quotes have remained at a high level, frankly, higher than we saw over the previous 2 years. We watch quotes, as a leading indicator of future deposits. The traffic and quote data support the view that to the extent interest rates and macroeconomic factors allow, the fundamental need for our homes is building positive pressure for future order improvement. We've seen in the total housing industry that new home sales are starting to improve, further indicating that buyers are adjusting to the interest rate changes and in many cases, adjusting their expectations of the home they can afford. Supporting this view after several years of product mix shifting toward multi-section homes, we're now seeing that trend reverse towards single section homes. As Allison will cover in more detail, this quarter, we completed the Solitaire acquisition and continued share repurchases, while maintaining a strong cash balance. So our capital allocation approach remains unchanged by the current order environment. I want to express my sincere appreciation to all of the folks at Solitaire and within Cavco who have worked on various aspects of the integration. It's hard work, and they've made really great progress. I've spoken in the past about the really -- the very real benefit of rounding out product offerings, both in the Solitaire and Cavco-owned stores, our retail team has moved quickly and this is well underway. We're also focused on product updates and product development, particularly aimed at lower price point homes. So through a lot of hard work, everything is moving forward with a very good combination. Let me switch gears. Last quarter, I talked about the milestone achieved in January, when we went live with cavcohomes.com, our new customer-facing digital home marketplace. I won't repeat all the aspects involved in this game-changing improvement, and how we support our dealers and our prospective homebuyers, but I do want to give a sense of our progress. Early traffic and lead generation has been strong and is expected to continue growing. We've been very happy with the reaction of our retailers, particularly our smaller retailers have been enthusiastic about having an easy-to-use website they can update with prices, photos and videos. And all retailers are benefiting from the additional exposure and leads being funneled to them for follow-up. With the site now in place and fully functional, we will be continuing the process of adding more Cavco brands and expanding the suite of customization options to support our retailers and homebuyers. With that, I'd like to turn it over to Allison to discuss the financial results in more detail.

Thank you, Bill. Net revenue for the period was $476.4 million, down 5.8% or $29.1 million compared to $505.5 million during the prior year's fourth fiscal quarter. . Within the factory-built healthy segment, net revenue was $456.1 million, down 6.6% or $32.2 million from $488.3 million in the prior year quarter. Decrease was primarily due to a decline in base business units, partially offset by a 4.4% increase and average revenue per home sold and $28 million for the Solitaire acquisition. Financial services segment net revenue increased 18.4% to $20.3 million from $17.2 million, primarily due to the more insurance policies in force and higher premium rates, partially offset by lower interest income earned on the acquired consumer loan portfolio that continues to amortize. Consolidated gross profit as a percent of net revenue was 25.3%, down 30 basis points from the 25.6% in the same period last year. In the factory-built housing segment, the gross profit decreased slightly to 24.4% in Q4 of 2023 versus 24.5% in Q4 of 2022, primarily due to Solitaire purchase accounting adjustments on acquired inventory. Under accounting rules, the inventory acquired is recorded at fair value, which approximately to sales cost. Therefore, when acquired inventories sold low revenue is recognized, this reduced the factory-built and consolidated gross margin percentages by 40 basis points in the fourth quarter. Gross margin and its percentage revenue in financial services decreased to 45.7% in Q4 of 2023 and 58.5% in Q4 of 2022, as a result of weather events in Texas and in Arizona. Selling, general and administrative expenses were $66.4 million or 13.9% of net revenue compared to $59.7 million or 11.8% of net revenue, during the same quarter last year. The increase is primarily due to higher expenses incurred, in leveraging third-party consultants assisting with energy tax credit projects, higher legal costs, specifically related to an indemnified former officer and his ongoing SEC litigation costs, deal costs related to Solitaire and the addition of Solitaire SG&A costs in Q4 of 2023. Interest income for the fourth quarter was $3.9 million, up 212% in the prior year quarter. The increase is primarily due to higher interest rates on our invested cash balances and increased lending under our commercial loan program. Net other income this quarter was $0.7 million compared to negative $2.5 million of expense in the prior year quarter. This increase is primarily driven by gains on corporate equity securities in the current year compared to losses incurred in the prior year. Pretax profit was down 14.6% this quarter to $58.6 million from $68.6 million for the prior year period. The effective income tax rate was 19.1% for the fourth fiscal quarter compared to 22.1% in the same period last year. The lower rate was the result of tax credits related to the sale of energy-efficient homes, available under the Internal Revenue Code Section 45L in the current quarter. Net income attributable to Cavco shareholders was $47.3 million compared to net income of $53.6 million in the same quarter of the prior year. Diluted earnings per share this quarter was $5.39 per share versus $5.80 per share in last year's fourth quarter. Before we discuss the balance sheet, I'd like to highlight that we continue to execute on our capital allocation priorities with the recently closed acquisition of Solitaire Homes and share repurchases of $30 million in the fourth quarter. The purchase of Solitaire Homes utilized approximately $106 million in net cash, leaving us with over $270 million of cash subsequent to the purchase. We will continue to appropriately deploy this capital in keeping with our strategic priorities. Now I'll turn it over to Paul to discuss the balance sheet.

Allison. Comparing the April 1, 2023 balance sheet, April 2, 2022, our cash balance was $271.4 million, up $27.2 million from the end of the prior fiscal year. The increase is due to net income adjusted for noncash items and changes in working capital, partially offset by the acquisition of Solitaire Homes, common stock buybacks and purchases of property plant equipment, primarily related to the purchase and development of our Hamlet, North Carolina facility and continued development of our Glendale, Arizona facility. Investments, including short term, are down primarily due to the return of capital from a joint venture and sale of corporate marketable equity securities. Inventories increased from the Solitaire acquisition, offset by declines in raw materials and home sales at our retail locations. Prepaid and other assets are higher, resulting from prepaid taxes associated with higher taxable income in the current year and timing of estimated payments. Property, plant and equipment is up primarily due to the Solitaire acquisition and the purchase of our facility in Hamlet, North Carolina and the development of our Glendale, Arizona facility, as previously discussed. Accrued expenses and other current liabilities increased from higher rebates payable, more set up freight and foundation work and higher warranty reserves. Lastly, stockholders' equity was approximately $976.3 million as of April 1, 2023, up $145.8 million from $830.5 million as of April 2, 2022. This completes the financial report and now I'll turn it back to Bill.

Thanks, Paul. As Allison and Paul explained, our balance sheet remains very healthy, and this supports a continuation of a consistent strategy and capital allocation path we've been delivering upon. The demand downturn and need to work through industry inventory fits within our expectation that manufactured housing as a cyclical business. However, these cycles are within the broader context of an increasing need for our homes. . With a strong balance sheet of proven ability to adjust as needed and against the backdrop of the dire need for affordable housing, we're staying focused on the bigger picture and opportunity to positively impact that housing crisis. We will continue to invest in operational improvements and growth, and we will continue using share buybacks to responsibly manage the balance sheet. With that, Jonathan, please open the line for questions.

[Operator Instructions] And our first question comes from the line of Daniel Moore from CJS Securities.

Maybe ask one or two extras today, given a lot of moving parts. But, you touched on the order rates. Maybe a little more clarity on kind of cadence of new order rates sitting in Q4 and thus far into Q1. In other words, do you have enough net new orders coming in to maintain the level of production and sales we saw in Q4, over the next few quarters? Or do we anticipate needing to further curtail production at least in the near term?

Yes. We pulled back on production, as I indicated, with the decline in production rate. And certainly, as the order rates are coming in now, I think we're kind of in a balance. In fact, I always will point out that there are differences, plant to plant, region to region. We've got some plants that have gone down to a 4-day work week that are feeling optimistic and getting ready to go back to 5. So, it's differential. But I'd say across the whole system, we're in the seasonally stronger period of time as well. So I'm feeling pretty good about the balance we have right now.

Got it. So at least in the short term, I wouldn't expect further declines and maybe start to pick up a little bit in terms of production.

Yes. That's where I think we're trending. Everything is subject to kind of a shaky economic environment, but we're feeling pretty optimistic. And as I said, I take a little bit from everything you're picking up. We were at an industry than a couple of weeks ago. And I'll tell you the tone was very positive there as I talk to retailers. So, getting the inventory behind us is a big deal. We talked about that and then suddenly kind of disappears from a conversation when it's no longer an issue. But even that 1:1 ratio creates a pickup in manufacturing orders, that I think will be really helpful.

Very helpful. It may be difficult to answer, but you produced, let me get the number here, including Solitaire, 4,477 homes in the quarter. Any sense for what the underlying retail demand for your businesses and factories look like? Obviously, we were still in a destock period from inventory. So I wonder, if you have any sense for that?

I'm not sure how to answer that. I think it's kind of similar to your first question, right, about where is the balance? Sorry -- I mean, I guess, yes, I don't think I can give you anything with any precision. What I can tell you is that as we -- you might remember the last quarter, we said, "Hey, the thing to watch is whether orders pick up, as we get into the stronger selling season." And consistent with my comments, you look at the if you dissect the quarter a little bit, we left the quarter at a much higher order rate than we entered it. So again, I feel like we're -- we've done a good job of pulling back production rate, keeping costs variable. And now, with the optimism we're seeing in retailer activity and the subsiding of the inventory issue, I think we're in pretty good shape. I'm not sure, I can give you anything more than that.

No, that's helpful. And now that we're through Solitaire, the purchase accounting, how should we think about gross margins, at least in the factory-built housing portion of your business over the next 1 to 2 quarters, say, relative to Q4?

I think, if we think about gross margins consistent with what we've talked about before, and we've got you think about kind of 3 areas. In pricing, I think, we touched on that we're holding our own -- still seeing some pressure, but certainly holding our own. From a cost perspective of raw materials and the commodities are still somewhat consistent, and partly offset by non-commodity items. With regards to the Solitaire, the 40 basis points for the purchase accounting, we do expect that, as we anticipated when we made the purchase to continue to in a couple of quarters. But long term, Solitaire will perform to our manufacturing gross margin and ASP rates.

Yes. It's important on the new home sale that I saw out there, there's no negative margin impact. It's just getting through 0 margin homes from purchase accounting, and that will take us a little while, as Allison said.

Very helpful. Then it dovetails into my next question, which is just in terms of Solitaire, do you expect it to begin to contribute positively to pretax income this quarter? Or might that take a little bit longer? And what's the glide path to getting to your average margins factory-built housing margins?

I think, we can think of it kind of in a life path associated with moving through the purchase accounting. The other thing is that we talked about was we have a site at Dunkin that has just come online during the purchase, and we will see that ramp up that will help add and be accreted.

Got it. Do you have the capacity utilization in the quarter? I didn't see that in the release?

Yes. Can you talk about that [indiscernible] one more?

Yes. So kind of on a just full operating days available, we were just about at 60%. As Bill mentioned, we did have those scheduled down days on the 4-day work week. So we're just about 70% considering those.

That's helpful, Mark. Okay. And lastly for me, I appreciate the commentary about cavcohomes.com. Where do you see that maybe 2, 3 years out, in terms of is there a target percentage of homes that you see coming from that sales channel? Or just a kind of incremental to growth over time? Any color on that would be helpful.

And Dan, I don't know if I have any merit target, but I'd put it in a bigger context than even what you're posing the question because we know how much everyone is doing their homework for any significant purchase online. So, I think it's really kind of central to our strategy. I would not be surprised if the vast majority of home sales a couple of years from now, I kind of -- we believe that are happening today that they're starting with that online experience. So we think it's right at the core of how homes are going to be marketed, and we also think that it's a huge benefit to us in our relationship with dealers because we're really supporting the dealers. As I said in my comments, and I didn't want to be too long-winded in them, but for many small dealers, their eyes are lighting up, when our folks talk to them and say, "Hey, it would be very easy for you to have a micro site that markets your dealership with all of our automated data behind it. And you can add photos and you can add information." So they're going to be so much more effective, and our relationship with them is that much deeper. And then, as we continue to -- we've gotten good results in the early days on visitors and conversions. Conversions, meaning a visitor who actually ask for more information or it's a button and calls the dealer that site provides for them. So we're seeing good early numbers on that. And what that's all about is kind of funneling targeted leads to those dealerships. So I know I'm talking a little bit in concepts, but I think, I think this is the starting point for the vast majority of home sales for us, possibly now, but definitely as time progresses. So as far as targets, I don't know what to say, except most.