Solitaire Homes, Inc. (CVCO) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Cavco Industries Announces Planned Acquisition of Manufactured Homebuilder and Retailer, Solitaire Homes. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to Mark Fusler, Corporate Controller and Investor Relations. Please go ahead.

Good day, and thank you for joining us for Cavco Industries' announcement of the planned acquisition of Solitaire Homes. Today on the call, we have Bill Boor, President and Chief Executive Officer; Allison Aden, Executive Vice President and Chief Financial Officer; Steve Like, Senior Vice President, Corporate Development; and Paul Bigbee, Chief Accounting Officer. The slide deck accompanying this presentation is available via this webcast portal or on our website at investor.cavco.com. Before we begin, we'd like to remind you that 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 expectations or assumptions about the expected benefits of the acquisition of Solitaire Homes, Cavco's financial and operational performance, cost savings, operational efficiencies 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 sense ] different information that is accurate only as of the date of the slide broadcast, Friday, October 28, 2022. 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?

Thank you, Mark. Good morning. Even though we'll be talking again in about a week on the earnings call, we thought it was important to take a few minutes this morning to give people a little bit of information on the acquisition we announced yesterday of Solitaire Homes. So we'll run through some slides. As Mark said, they're available on the website. High-level overview, Solitaire has been continually owned since its founding in 1965 by the Elliott family. So this is certainly a big moment in the history of that company. The Elliott's have build along with Pete Hogstad a really strong company that we're thrilled to be joining with. They're headquartered in Duncan, Oklahoma. There are 4 manufacturing facilities but to just be clear about it, 2 of those are lines that are in the Ojinaga, Mexico [indiscernible] plant system. So really 3 manufacturing locations for production lines. In 2021, they sold 1,577 homes. That excludes the Duncan, Oklahoma facility, which was started up earlier this year. That's a facility that was actually restarted. Solitaire also has 22 retail stores and a total of 950 employees. And finally, they have a dedicated transportation operation, which we think is a real strength in the market today where logistics has been such a challenge. Digging in a little bit on the manufacturing facilities, Demning, New Mexico is really focused on multi-section models. Duncan -- well, let me skip over to the Mexico operation that's been operating. Mexico is where they have 2 production lines and they focus on single-section models there. There's a dedicated warehouse across the border in Presidio, Texas. So they house raw materials there, transport them over to the Mexico production lines and then the finished product is probably back to the U.S. And then as I mentioned, the Duncan, Oklahoma facility was restarted this year, and it's focusing on multi-section models. Something -- somewhat unique, I guess, is the distribution channel. They're pretty much fully or completely integrated. Most of their product that's sold through retail is sold through their company-owned stores, a small amount going to independent retail and then the balance through communities. And on the flip side, their company-owned retail stores sell exclusively Solitaire product in their new home sales. So turning the page. This just gives you a sense of the geography with the plants I described in the 22 retail stores. One thing of note just because it's just to avoid complication, 10 of the 22 stores that Solitaire has owned were owned in a joint venture. However, with this transaction, we will basically own a 100% of all 22 stores. So you'll see some comments in the financial information we give you about unconsolidated joint ventures. That's just to clarify that transition. Turning the page again, talking a little bit about the transaction rationale. First, this will be an accretive transaction on an earnings and cash flow basis. We think that it's a very good price for both parties. Second, Cavco -- it provides Cavco with a unique cross-border manufacturing complex that I described. This is really kind of something we're interested in. This is a new capability. Pete and the team have made this work for a number of years. So they're able to achieve low cost, allowing them to be very competitive and it effectively can extend the reach of that plant from a geographic perspective because of low manufacturing cost. It's worth also commenting that they've been smart and smartly generous, I would say, in the Mexico operations in that market. And so they've done a great job of developing a loyal employee base by not just trying to be, I guess, cheap about their labor practices down there. So I think they really are viewed as a strong and very good employer. And so they've got great access to workers down there and good retention. So we really think they've been smart about how they've gone about the Mexico operation, and it's paid off very well for them. The transaction also expands our manufacturing footprint in the southwest region. And we really think there's a very complementary fit to our product mix. The -- I spoke earlier about their stores selling exclusively Solitaire products. So I wanted to talk just about some of the benefits we see in the transaction on the retail side. We now have the opportunity to sell a broader spectrum in both the previous Cavco or Palm Harbor Village stores as well as the Solitaire stores. Going a little deeper, the best example we can give is that Solitaire in their single-section production is they make tape-and-texture product. That's actually something we don't have in our system in that region. And so if you think about their stores, they've kind of had a product mix in their stores has been limited to what Solitaire produces. As we combine retail, we'll be able to round out the product mix in their stores. And then if you think about our previously owned stores, we're going to get a product that we haven't had in the past. So it's really going to give our sales teams a broader product mix to sell through their retail. And we think that's really going to be a good benefit of the transaction. And then I'll comment as well that we've talked for a long time about our capital allocation strategy. We've done share buybacks. We've done acquisitions. And this purchase will use a good portion of cash, but we'll still be in a very strong cash position post acquisition, and so we'll be retaining the financial and strategic flexibility. Next page gives you a little bit of the numbers. The purchase price is $93 million. That will be subject to closing adjustments. So we don't have a firm number at this point about the actual cash usage but it will be in that range. And looking at the lower left of the Slide 5, you can see their pro-forma net revenue and pro-forma EBITDA for the assets that we'll be purchasing. So looking at this on a multiple of revenue or a multiple of EBITDA, you can see on the right, it's approximately 0.6x net revenue and about a 5.6x EBITDA purchase price. And then finally, we just left the additional math kind of showing the geographic fit where this fits into our system. I've commented about the fact that we really think it gives us added scale in the Texas and southwest region. And I've commented on the product fit. So I really want to thank the Elliott and Pete Hogstad for the confidence they've shown. I know this is obviously a huge decision for a company like theirs that's been in business for so long. And I think it's -- we're thankful they decided to join forces with us. And I think it's going to be a great acquisition for us. So with that, I think we'll turn it over to any questions.

[Operator Instructions] Our first question will come from Greg Palm of Craig-Hallum.

I guess, starting off with the valuation multiple. So it's a couple of turns lower than what you paid for Commodore a little over a year ago and that, I guess, excludes whatever contribution there is from the Duncan' facility. So I guess first question is, what would that -- what would be the financials look like assuming full contribution from Duncan and the associated multiple? And then anything just to read into the fact that the multiple is so much lower than what you paid for Commodore?

On that last part, I think the comment I'd make is think about the mix of those businesses, they're pretty different. Commodore was largely essentially completely a manufacturing plant acquisition, 6 plants, but very low on the owned retail, whereas this transaction has a very significantly higher level of retail sales. And the way I certainly think about M&A in this business is the retail acquisition would trade at a lower multiple than a manufacturing acquisition. So on a mixed basis, I'd say that these transactions, in my mind are valued probably pretty similarly. So that's just to clarify that difference you're seeing. And then you're asking for some comments about the impact that the new facility, the restarted facility in Duncan will have. They're coming up the production curve. We're not at the point of giving any plant-specific volume forecast. Certainly, I think I made this clear, the 1,600 or so units that they sold last year was before that startup. And I guess, I'd comment that Duncan as it comes up the curve will be kind of a good pro rata contribution, it will increase on a module basis, it would certainly increase the production from 3 to 4 in ratio, if that helps.

Yes. I mean, I guess, is it a -- from a size of the plant or capacity, is it similar size as the others? I'm just trying to get a sense for how it compares and maybe even the potential margin EBITDA profile, maybe not as high as what you're seeing down in Mexico from a low-cost region, but just a little bit more color on maybe how that compares would be good.

Yes, it will be very similar in kind of production level to the other lines that they already have. Mexico is a bit lower cost, obviously, for the reasons we explained. So I would think of Duncan as kind of the typical plan along the same lines as what they have at Demning.

Makes sense. Okay. And then it's a 2 decent-sized acquisitions now in the last kind of year or so. Maybe give us a little bit of update on the status of the pipeline. What's your appetite from -- for additional M&A and just -- I'm just kind of curious as it relates to Solitaire and maybe some others that are in the pipeline, are you seeing any sort of change in appetite to sell just given a little bit of a slowdown and just obviously a much more uneven or challenging macro out there?

Yes, it's an interesting question. And I'm going to tell you at a high level, and then I'll comment a little bit, I'd say I don't see a significant change. Our industry has been interesting over time because while some industries, you see more M&A cycles, I'd characterize ours more as the opportunities come when the sellers are ready to sell, and it's not always driven by market factors. So I -- this is just a feel, and I think that's what you're asking for, Greg. My feel is that the M&A activity and discussions around M&A and deals has been pretty steady over time. This deal, just like the Commodore deal took a long time for us to get to this point. And I think that's because the Solitaire and Cavco both were patient to put together the right deal. So these things aren't all of a sudden popping because of any change in the market. Does that answer your question? And I guess I'd add that there's still opportunities out there, in my opinion.

And our next question will come from Jay McCanless of Wedbush.

Great. So -- and apologies if you guys referenced this already. But is CountryPlace going to have an opportunity to go into these new stores as well and be able to increase the amount of loans, et cetera, that they're generating?

Yes. I think all those kind of business synergies are on the table, and I even -- you're not asking, but I'd even add that the insurance business will have opportunities with this additional retail. So I think it's a great fit and a good example of how those businesses make sense.

I guess the obvious question with what Craig was talking about before with sales for everybody, I think, being a little bit softer higher rates, I guess, how have Solitaire sales been trending through October or really, call it, September, October and the same thing for Cavco just given some of the pushback that we've been seeing on rates?

Yes. Jay, I'd be a little careful because we're going to be talking about kind of the market conditions in a week, so I don't want to get too much into that. But what I can tell you is when we look at Solitaires' backlog and how their order rates are holding up. I don't know if this is helpful or not, but I'd say it's right in line with what we're seeing in our business in that area. So really not meaningfully different and we'll be happy to talk more about kind of more current market situation next week.