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

Thank you for standing by, and welcome to the Cavco Industries Inc. First Quarter Fiscal Year 2027 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, Mark Fusler, Corporate Controller and Investor Relations. Please go ahead, sir.

Good day, and thank you for joining us for Capital Industries first quarter Fiscal year 2027 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 that management may contain forward-looking statements. Forward-looking statements include statements about our future or expected business and financial performance and are not promises or guarantees of future performance. There are 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. For a discussion of material risks and important focus factors that could affect our actual results, please refer to these contained in our statements and filings with the SEC, which are also available on our Investor Relations website and at sec.gov. This conference call also contains time-sensitive information that is accurate only as of the date of this live broadcast, Friday, July 31, 2026. Cavco 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?

Thanks, Mark. Welcome, and thank you for joining us today to review our first quarter results for fiscal 2027. It's only been about 2 months since our year-end call in late May when we told you that March had showed a big pickup in orders, and there was an associated backlog increase. The good news is that, that order momentum has carried through the first quarter and even with sequential shipments being up 13%, our backlog still grew more than 50% from last quarter's ending level. Sequential orders were up double digits in every region. And as a result, backlog grew significantly across the country as well. The Q1 backlog is also 50% higher than a year ago. And last year, it was declining rather than growing. Shipment improvement across the country led to a quarterly record of 5,657 units. Our production increases resulted in capacity utilization of 75%, still significantly below levels we're able to sustain, so there remains significant room to reach higher volume levels, assuming strong orders persist. This is the first quarter in our history that revenue exceeded $600 million. It was up about 10%, both sequentially and year-over-year. So just to conclude on these points, we raised production and shipments significantly and still saw a large increase in orders and backlogs, both sequentially and year-over-year. Factory-built gross margin dropped 40 basis points from last quarter, driven by 2 factors. Part of the downward pressure came from increased costs in manufacturing. The other factor was related to retail pricing. Wholesale pricing to independents remain generally stable across all regions, so that was not the driver. However, in our company-owned retail markets, which are concentrated in the Texas area, we saw increased price competition and these lower retail prices contributed to the sequential gross margin decline. We do continue to see higher retail traffic in Texas, but closing rates declined. This indicates that demand is good, but competition for qualified buyers intensified during the quarter. Shifting to Financial Services. As reported last quarter, we have found reliable purchasers of meaningful loan volume which has enabled a nice improvement in loan origination and sales. This quarter, the origination growth met our expectations, and we anticipate we will be able to grow loan sales into future periods. Separately, while the first quarter is a seasonally higher insurance claims quarter, that operation continued their strong performance and exceeded our profit expectations. The favorable insurance claims results over the past couple of years have resulted in lower reinsurance costs as well. Very recently, we also received important outside confirmation of the strong insurance performance and trajectory when A.M. Best moved to a positive outlook for our financial strength and issuer credit ratings. Shifting to capital allocation. Our strong cash generation enabled us to continue investing in planned expansions and strategic projects, while still repurchasing another $30 million of company stock. In a little over 5 years since we began our buybacks, we have now deployed over $600 million in repurchases with the objective of maintaining a responsible balance sheet. Over 19% of our outstanding shares have been bought back through this return of capital to our shareholders. And we finished the quarter with a healthy $243 million of unrestricted cash. Finally, a few weeks ago, the Road Housing Act became law. The bipartisan support for the new law and the prominence of manufactured housing elements within it are indicative of the growing awareness that our industry is an in-place solution to the affordable housing shortage in our country. The benefits of this law will show themselves over time as we are able to place innovative home designs in urban and suburban locations with improved market acceptance appropriate regulations and better support for our homebuyers funding needs. As I've commented in the past, pay attention to what's happening at the state level as well where more states are engaged in lowering unnecessary barriers to our homes being placed where they are needed. Now I'll turn it over to Allison to give more details on the financial results.

Thank you, Bill. Net revenue for the first fiscal quarter of 2027 was $610 million, up 9.5% compared to $556.9 million during the prior year period. Sequentially, net revenues increased $59.8 million, driven by an increase in units sold, partially offset by a decrease in average revenue per homes sold. Within the factory-built housing segment, net revenue was $586 million, up $50.3 million or 9.4% from $535.7 million in the prior year quarter. The increase is primarily due to the addition of American HomeStar and an increase in legacy average revenue per home sold. The increase in legacy average revenue per home was primarily due to a higher proportion of homes sold through our company-owned stores and more multi wise in the mix, partially offset by product pricing decreases. Financial Services segment net revenue was $24 million, up $2.8 million or 13.3% from $21.2 million in the prior year quarter. This increase was generated by higher loan sales and gains on the insurance subsidiary's equity portfolio. Consolidated gross margin in the first fiscal quarter as a percentage of net revenue was 22.1%, down from 23.3% in the same period last year. In the factory-built housing segment, the gross profit was 20.8% in Q1 of 2027, down from 22.6% in Q1 of 2026. The reduction was due to higher cost per unit sold. Financial Services gross margin as a percentage of revenue increased to 52.4% in Q1 of 2027 from 40.9% in Q1 of 2026. The increase was primarily due to the growing impact of premium rate increases, gains on the insurance subsidiary equity portfolio and underwriting changes on policy in addition to higher loan sales. Selling, general and administrative expenses in the first quarter of 2027 were $81.8 million, or 13.4% of net revenue compared to $69.1 million or 12.4% of net revenue during the same quarter last year. The increase in these expenses was primarily due to the addition of American HomeStar, along with the increases in compensation and employee-related costs and sales and marketing efforts. Interest income for the first quarter was $3.3 million, down from $5.1 million in the prior year quarter, resulting from lower cash balances after the purchase of American HomeStar. Pretax profit was down 14.6% this quarter to $55.8 million from $65.3 million for the prior year period. The effective income tax rate was 24.2% for the first fiscal quarter compared to 20.9% in the same period of the prior year. The effective tax rate increased compared to the prior year period, primarily due to a reduction in Energy Star tax credits. Net income was $42.3 million, compared to net income of $51.6 million in the same quarter of the prior year, and diluted earnings per share this quarter was $5.43 versus $6.42 per share in Q1 of 2026. During the quarter, we repurchased $30 million of common shares under our Board-authorized share repurchase program. leaving approximately $188 million under authorization for additional repurchases. Now I'll turn it over to Paul to discuss the balance sheet.

Thank you, Allison. In the quarter, we had an increase in cash and restricted cash of $8.6 million, bringing our balance to $266.2 million. Cash provided by operating activities was $74.5 million, cash used in investing activities was $27.5 million related to planned improvements in equipment and cash used in financing activities was $38.4 million primarily due to the share repurchases Allison just referred to. When we compare the June 27, 2026 balance sheet to March 28, 2026, accounts receivable increased from the increase in homes sold in the quarter. Total commercial loans receivable increased on greater loans originated with more shifting in the long term due to the nature and timing of the contracts. Inventories increased from raw material purchases in anticipation of increased costs at our facilities and more finished goods at retail locations for anticipated sales activity. cruise expenses and other current liabilities increased from higher customer deposits, volume rebates and warranty accruals as a result of higher sales, partially offset by lower bonus accruals due to the fiscal year 2026 payouts. Lastly, treasury stock increased due to stock buybacks executed in the period. And then with this, I'll turn it back to Bill.

Thank you, Paul. Just to summarize our opening remarks, it was great that we saw the momentum in March really carried forward through the first quarter and it led to record volume and strong backlog growth. The demand environment has felt very uncertain for a long time. But currently strong orders and backlogs are supporting increased production across the system. So with that, Jonathan, why don't we go ahead and open the line for questions.

And our first question for today comes from the line of Daniel Moore from CGS Securities.

Backlog growth, 50%, as you talked about, implies net new orders reaching the highest quarterly level that we've seen since 2021. Just talk about what's driving that, break it down between retail REIT communities. And I was going to ask about pockets of strength geographically, but it sounds like it's pretty broad-based. Any additional color there would be great.

Yes, it has been broad-based. I mean when we looked at the regional dynamics on orders, the ones that had the biggest numbers are ones you really would expect to coming out of winter, the Midwest and the Northeast. So I think the big message there is as we said and you identified is that it's pretty broad-based. We don't always see that sometimes these things can move differentially we saw double-digit sequential growth in every region. I want to like take me to your next part of your question.

Just between retail REIT communities, anything relative areas of strength there?

Yes, I'm sorry. Yes, we saw that as well. On a percentage basis, I won't go into the actual percentages, but across the 3 channels that we track, builders, developers being one, communities being another and then retail, all of those were up 10% sequentially. So community, we've talked the last several quarters because it can be very balance, but it was strong this quarter, and none of the channels seem to really be out of the game of increased orders.

And in terms of the cadence, has that increased continued into June and into July as we kind of look into fiscal Q1 and at this stage? Is it fair to say we're starting to see a more accelerated kind of share shift away from site built? Or is it a little too early to call?

Yes, I'm always kind of hesitant to call trends too quick. I will tell you, I mean, we're just finishing up July here, right? So -- and we don't like to go too far into reporting on the next quarter, but I will say we haven't really seen a crack. So we're still seeing generally a continuation. Yes. I think Watch in manufactured housing relative to site builders is always interesting. They're showing from my look, they're showing a lot more volatility over a number of quarters when you just compare new home sales to MH shipments. I don't know always what to read into that. I know they're dealing with more issues around inventory in the market and trying to wean themselves off in sands and those are problems manufactured housing just doesn't have right now. We generally don't have incentives, but we don't have inventory plugging up the retail channels. So we've got some advantages there. And I do think that followed a few of the site builders calls this quarter, and it seems like, if anything, they continue to move up in price point. And so generally, I think about that upward horizon of what the playing field is for manufactured housing, and it just keeps feeling like it gets bigger, right? So talk out a lot, and I hope it's not redundant. But at the upper price points, the question is really how much competition overlap do we have with site builders, and I feel like they continue to move up and abandon first-time buyer type prices, I don't think they can hit them. And then at the lower horizon where our prospective customers are just trying to figure out if they can qualify for a low-price quality home that's where the real pain has been. And we haven't seen those folks get much relief with interest rates or anything else. I do think it's telling, in my opinion that we've seen this increase in orders, not just for a month, but over a few months now, and it feels to me like people have somewhat accepted the level of interest rates we're at. We got a little bit of stability in rates earlier, which helps the buyer get all the way through the process and have some consistency in what their loan is going to look like when they get to the end of the process. And I think it's just people were struggling to get homes and it just kind of started to push through again. It's the opposite of when industry sometimes pull orders forward. In this case, it seems like we had some very real pent-up demand that has started to really press through. So the comparison with site builders is always an interesting one, but my big takeaway is I see them continuing to move up in price point.

And can you just tell a little bit more color on what's happening inside the plants in real time? Are we starting to ramp production month-over-month given the increase in backlog holding steady, what are you seeing there?

Yes. Yes. backlogs are a funny thing, right? I mean they're never stable. They're always either going up or down. We have generally and looking across our plants across the country, we have a bias where the plants are increasing production. And we saw it this quarter. I mean we got to pick up in orders in March, and we produced and shipped more homes in the first quarter. And as I was trying to indicate right now, the backlog support us continuing to increase production. The majority of our plants will hardly any, were down, the majority were up compared to flat from quarter-to-quarter. The dynamic is interesting because when folks go a long period of time without a good backlog, and they're struggling to keep -- just keep the orders coming in to produce. Sometimes we can have a tendency to want the backlogs to be big before we really press behind them. And so we try to counteract that human tendency to want to cushion. And right now, with the backlogs at the levels they are, and I'm not sure we mentioned it, we're kind of in the 7- to 9-week range. That's up quite a bit. Our discussions with our plants are a push behind us because big backlogs aren't great either, right? So it's a nice feeling to be able to lean in a little bit on these orders and backlogs.

Helpful. Last for me, a lot of moving parts, obviously, but the pricing pressure you talked about at retail, was that largely kind of Texas and surrounding markets? Or is that something that you're seeing more prevalent across the country?

Yes. We know that we experienced -- what we experienced in our stores. I don't -- part of the reason why I highlighted in my remarks that our stores still are largely concentrated in Texas we've expanded out of there for sure, but there's still a core concentration there. That was to say that I don't think we should assume that, that gets extrapolated across the rest of the country. I think -- it's been an interesting dynamic. I hope that my comments explained it reasonably well because if you're a manufacturer in Texas, you're feeling really good, right? Your prices are stable -- maybe you're going to have an opportunity if orders keep coming in and backlogs grow to even increase a little bit. And then on the retail side, they've got a lot of people out there shopping, and I think it just got a little competitive this quarter. So we'll keep our eye on it. Not having company-owned retailers or visibility into what's going on as other -- in other markets is a little less clear, but I just don't think we should draw rash conclusions about what's going on countrywide or even if this is just a dynamic we've seen in the near term here. We'll keep an eye on it.

And our next question comes from the line of Jesse Lederman from Zelman.

Could you help us understand like would the pricing pressure a captive retail? I know it seems to be concentrated in Texas and like I don't want to make it like too big of a deal, but -- is that because the stores you think had too much inventory and that could end up filtering through to reduce orders from the manufacturing facilities? Or can you help us kind of think through the moving pieces there and what you think the cause of it was the pricing pressure at retail?

Yes, that's a good question. It's important. Probably I should have brought it out somehow in my comments. You're picking me up a little bit. We definitely have not seen inventory really pick up. I think the I think it's a transaction-by-transaction dynamic that they've got a lot of people shopping, and those people are jumping around store to store and the retail folks have just gotten pretty and I'm going to use the term aggressive, and I don't want to be extreme, but they've been competing for those orders. I made the comment that closing percentages were down, but that's down on higher traffic, so we're still getting sales and things are still moving through the system, but with a lot of shoppers out there, it just seems like for the moment, at least, it's gotten pretty competitive. And I wouldn't -- I also would say it's not dramatic, like we're not seeing ourselves or others selling at prices that aren't profitable in retail. It's just a little tighter -- if you think about the spread between the selling price at retail and their invoice on the home, they have other costs. But if you just think about that spread, it's a little bit tighter than it was before. And maybe that's just the market kind of settling out as all those folks are out there shopping.

Sure. That makes sense. What's the appetite to continue to compete on cost in those markets versus like wanting to maintain your retailer margin? Like how do you kind of think through those dynamics?

Yes. Every day, every store is kind of the answer to that. I think it's just -- we have good healthy discussions with all of our retail, particularly the regional level, kind of just making sure we're all keeping our eye on that balance, right? I mean I think it's an indication that we operate in a market. And so those guys are out there trying to do the calculus around whether -- we're going to make more near-term profit if we tighten up that margin and get the extra incremental sale or if we're going to make more total profit if we don't. And right now, it's kind of leaned a little bit more towards getting that order. Again, I don't want to overblow it. I think that it's -- and it's not -- it's something that gets worked out kind of at the operating level with our close involvement.

Okay. But good to hear it doesn't sound like it's anything to where they're looking at destock and that will filter through to fewer orders from the independent retailers?

Yes. Jess, that's where I think your question is actually really helpful to make sure the picture is complete. We have not seen inventory increase in our retail or in the independents that we sell.

Okay. Great to hear. A couple more from me on the SG&A, assuming a certain percentage of those costs are variable, of course, just kind of isolating what that implies for the fixed portion of SG&A looks like those costs were up roughly 2% sequentially, which would obviously already normalize for American Home Star. So it sounds like maybe that was like some stock-based comp and whatnot -- is that expected to persist? Or will those costs kind of unwind a little bit back to levels from fiscal 4Q as we move through the year here?

I think what's important is to highlight that from last quarter to this quarter, we were able to leverage our SG&A as a percentage of revenue, which is at the core of our business model. And if you look from an absolute dollar increase perspective, the quarter-to-quarter increases were associated with investment that we would expect when we're working toward having a pipeline growth, so our sales and bonus commission structure, those parts that drive the sales growth and drive the pipeline growth, we see those expenses come through SG&A. And that was a big part of the change from this quarter to last quarter. We've also been invested in our sales and marketing. And again, that's -- those are long-term investments that we make. The dollar impact can become lumpy, depending on activities that we have in marketing from 1 quarter to the next. But what we saw in SG&A and the raw dollar increase is kind of consistent with what we'd expect continued very thoughtful major increase for sales and sales support activity along with consistent, but small investment in shared services, and we continue to be able to leverage SG&A as a percentage of revenue as we move forward.

Okay. That's really helpful, Allison. So it sounds like to summarize, there are some incremental costs, fixed costs kind of isolating for the revenue growth and leveraging the variable costs that will probably kind of remain in kind of the structure for the next few quarters at least that are more structural in positioning the company for the expected growth in the future. Is that right?

That's a fair characterization.

Okay. And last one for me, I could requeue after is on the gross margin. Allison, you've given some really great commentary on costs in real time. and what we can expect based on maybe some cost in what you know from during the quarter and subsequent to quarter end and how that may flow through to subsequent quarters relative to what you just printed. So would love any commentary there, given you did gross margin down 180 basis points year-over-year despite pretty steady capacity utilization. So would just love any commentary you can give there.

Yes, of course. And I think what we'll focus on here is a little bit of what everybody probably wants is an understanding of how tariffs are impacting our COGS. Well -- and we know there's an upward impact on our COGS. However, it's really difficult to precisely estimate the impact of tariffs. I think this quarter, our best overall estimate is that case was negatively impacted by about $5 million of tariffs and just inflationary costs compared to the prior quarter. And what we've talked about is our suppliers' ability to really pass through that tariff. It is a large function of the level of demand for their products. So is the demand for lumber and steel, which are the 2 main commodities we're watching start to heat up, we are likely to see that impact our profit margin. But I think it's important that we're not seeing anything that we didn't expect. We continue to focus on the core of our COGS, which is low fixed cost, being able to leverage their factory overhead offset as much increase in materials that we can. So we're seeing that working, and we feel comfortable with where we're positioned going forward.

Okay. That sounds good. And so that $5 million seems relatively steady, which that was $5 million was last quarter and your expectations moving forward aren't materially different than that $5 million.

Yes. We all have limited visibility at this point to the impact of [indiscernible], but that's a fair statement.

Okay. And are there mitigating efforts that you're using to kind of work down that $5 million? Is there any way you think all else equal, you could get that number lower? Or have you kind of exhausted those options?

No, we absolutely continue to work forward. Our supply chain and our purchasing group is 1 of the strongest I've ever had the pleasure of being with and they have been on top of the situation now for going on 18 almost 24 months. So there's a lot of activity around supply chain. There's a lot of strong partnerships that we've had in really across all the commodities, particularly lumber and steel. We'll continue to leverage those and fight the good side.

And our next question comes from the line of Greg Palm from Craig-Hallum.

Just wanted to follow up on the last, I guess, thinking about the margin levels because we've been dealing with inflationary input in tariffs for sort of years and I know the impact maybe gotten a little bit worse, but is it more of a byproduct your inability to pass through these costs now? Just given all of a sudden, we're recognizing, obviously, a much bigger headwind now than we have been.

Yes, I can comment on that quickly. Also might want to add to what I say. Yes. The -- I've been kind of -- I've had a view for a long time that our product markets have kind of separated from cost to a great extent. So we really are not a cost-plus manufacturer in any way. Having said that, when our costs go up, if we've got the opportunity -- well, say it a different way. We -- our selling price on a home is based on the demand and what the market says that home is worth, not necessarily the cost we put into it. So I think the way this plays out is if we continue as an industry to see higher backlogs and higher capacity utilization, then you could expect price to go up, and that will be an upward pressure on gross margins regardless of what's going on in cost. So I don't know that everyone shares my view, but to some extent, my mental model is that these things are somewhat separate. If we had the opportunity to increased price in the market because the demand suggested that we do it. So that's my view. And I know that's kind of different than others in some cases, and it's a pretty extreme view. But -- it's not as simple as saying, hey, our price went up, so let's go raise our cost on up. So let's go restor price of equal amount to see if we can get it back.

Go ahead if you continue to finish the thought or not?

No, I was just checking to see if people are on the table here in what I said.

I think that's an excellent way to cover the point.

So I guess you kind of alluded to demand and if others in industry, I mean do you think others are seeing the level of orders that you're seeing right now, I mean, just based on what you've announced in terms of backlog implied orders, July, I mean do you think that this is an industry thing where everybody is seeing the same activity?