Cavco Industries, Inc. (NASDAQ:CVCO) Q2 2024 Earnings Call Transcript

Cavco Industries, Inc. (NASDAQ:CVCO) Q2 2024 Earnings Call Transcript November 3, 2023

Operator: Good day. And welcome to the Cavco Industries Second Quarter Fiscal Year 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today Mark Fusler, Corporate Controller and Investor Relations. Please go ahead.

Mark Fusler: Good day. And thank you for joining us for Cavco’s — Cavco Industries second quarter fiscal year 2024 earnings conference call. During the call, you will 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 would like to remind you that 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, November 3, 2023. 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?

Bill Boor: Welcome and thank you for joining us today to review our second quarter results. I thought, I’d jump right in with some perspective on what we are seeing in the market. As we previously reported, the dealer inventories that created a big drag on wholesale orders through the first half of the year are now generally under control and our company-owned stores and broadly throughout our independent dealer network, homebuyer interest as reflected in online leads and store traffic is healthy. However, as everyone knows the macroeconomic environment is not providing any relief for those prospective buyers. Having said that, we continue to see quarter-to-quarter order improvement, that trend is largely coming from street dealers with community still lagging as expected and discussed last quarter.

Looking forward, as those community operators work through their inventories, that would be another positive for wholesale manufactured housing orders. Against that backdrop, we continue to operate at a reduced level. Production was down from last quarter as certain plants dealt with the lack of orders and continued to slow production. In line with production capacity utilization was down slightly, but still in the range of 60%, with the already mentioned order improvement, we hit a balanced point at the current overall production rate. As a result, our backlogs were consistent with last quarter. We ended the period at $170 million, which equates to five weeks to seven weeks of production. Clearly, we are anxious and prepared to move plants back to full schedules, as soon as the market supports.

In the meantime, our plants have done an outstanding job in maintaining healthy profitability and cash flow through the market challenges. In the second quarter, our housing gross margin was 23.2%, down 1.6% from last quarter and 3.6% from a year ago, when we were running full schedules and 80% utilization. Allison will go into the gross margin shifts, but the point here is that reducing shipments about 17% year-over-year to match lower demand and still maintaining margin to that extent only happens through discipline and operational excellence. Our retail business has performed exceptionally well. They adjusted quickly to the changing market conditions last year and stayed committed to their winning processes. On a same-store basis, excluding the added volume from Solitaire retail, homes sold through our company-owned stores were up slightly from the previous period.

More importantly, the manufacturing and retail teams are working cohesively on product decisions and selling strategies to produce optimal results across the operations. This teamwork has demonstrated itself as we brought the Solitaire stores into the retail operation and filled out product offerings to improve inventory turns. Overall, our revenues were down sequentially from $476 million to $452 million and pretax income was $52 million, compared to $61 million last quarter. We generated strong cash flow, returned $47 million through share repurchases and added $25 million to our cash balance. We remain convinced of the dire need for our homes over time and our strong balance sheet enables us to pursue investments in organic and external opportunities, despite the near-term conditions.

With that, I’d like to turn it over to Allison to discuss the financial results in more detail.

Allison Aden: Thank you, Bill. Net revenue for the second fiscal quarter of 2024 was $452 million, down $125.4 million or 21.7%, compared to $577.4 million during the prior year. Within the factory-built housing segment, net revenue was $434.1 million, down $125.5 million or 22.4% from $559.6 million in the prior year quarter. The decrease was primarily due to a decline in base business homes sold and a decrease in average revenue per home sold, partially offset by the Solitaire Homes acquisition, which contributed $35.6 million in the quarter. The decrease in average revenue per home was primarily due to more single-wides in the mix and to a lesser extent product pricing decreases. Factory utilization for Q2 of 2024 was approximately 60%, when considering all available production days, that was nearly 70% excluding scheduled downtime for market or weather, consistent with our last two quarters.

Financial Services segment net revenue increased 1.1% to $18 million from $17.8 million, primarily due to more insurance policies in force and higher insurance premium rates, partially offset by fewer loan sales. Consolidated gross profit in the second fiscal quarter as a percentage of net revenue was 23.7%, down 360 basis points from the 27.3% in the same period last year. In the factory-build housing segment, the gross profit decreased 350 basis points to 23.2% in Q2 of 2024 versus 26.7% in Q2 of 2023, driven by lower average selling prices, partially offset by lower material cost per floor primarily due to lower lumber prices. Gross margin as a percentage of revenue in Financial Services decreased to 35.9% in Q2 of 2024 from 44.6% in Q2 of 2023 from multiple severe storms in Texas and in Arizona.

Selling, general and administrative expenses were $61.5 million, compared to $66.9 million during the same quarter last year. The decrease in these expenses was primarily due to lower third-party support costs, and lower incentive compensation costs, partially offset by the addition of Solitaire Homes SG&A costs. Interest income for the second quarter was $5.8 million, up 214% in the prior year quarter. This increase is primarily due to higher interest rates and greater invested cash balances. Net other income this quarter was $0.7 million, compared to $0.5 million in the prior year quarter. Pretax profit was down 44.3% this quarter at $51.7 million from $92.8 million for the prior year period. Net income to Cavco stockholders was $41.5 million, compared to net income of $74.1 million in the same quarter of the prior year and diluted earnings per share this quarter was $4.76 per share versus $8.25 per share in last year’s second quarter.

Now I will turn it over to Paul to discuss the balance sheet.

Paul Bigbee: Thanks, Allison. I will cover the balance sheet changes from September 30, 2023, compared to April 1, 2023. The cash balance was $377.3 million, up $105.9 million from $271.4 million at the end of the prior fiscal year. The increase is primarily due to a few factors; first, net income adjusted for non-cash items such as depreciation and common — and stock compensation expense; and secondly, working capital changes related to inventory decreases of $19.7 million from lower raw materials at our manufacturing facilities and less finished goods at our retail locations, decrease in prepaid and other assets of $17.8 million, increase in accounts payable and accrued liabilities of $9.9 million, and decreases in consumer and commercial loans.

These cash inflows were partially offset by common stock repurchases of $47.2 million. Restricted cash increased from cash collected on serviced loans in our Financial Services segment in excess of what was distributed. Consumer and commercial loans decreased from loan sales and the pay down of associated loans and fewer new loan originations. Prepaid and other assets decreased from lower prepaid income taxes and a reduction in delinquent Ginnie Mae loans, as well as the normal amortization of prepaid expenses. Property, plant, and equipment net is down from the sale of unutilized equipment acquired with the Solitaire Homes acquisition we completed last January. Accrued expenses and other current liabilities were up slightly from higher insurance losses in warranty reserves, partially offset by lower customer deposits.

Lastly, stockholders’ equity exceeded $1 billion, up $43 million from $976.3 million as of April 1st, 2023. With that, I will pass it back to Bill.

Bill Boor: Our results this quarter highlight the ability of our organization to manage costs and generate cash even when conditions are challenging. Everyone at Cavco is ready for the inevitable return of demand, so we can help more families get the homes they need. Abigail, can we please open the line for questions?

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from Daniel Moore with CJS Securities. Your line is open.

Daniel Moore: Thank you. Good morning, Bill, Allison, and Paul. I appreciate the time and taking the questions. Maybe I will start with just the order trends, Bill. Obviously it ticked a bit higher, which is nice to see. That said, we are entering the typically slower period seasonally. Just maybe talk about your expectations for orders and shipments in fiscal Q3 relative to Q2 and when you expect to be in a position to start to increase production rates?

Bill Boor: Yeah. Thanks, Dan. Yeah. I mean, I think, you are absolutely right. We are now entering the period we hit about November, December, and typically, if you could isolate seasonal patterns that would mean a slowdown in shipments. Some years, we don’t really see that because it gets dwarfed by the macroeconomic factors that are probably a bigger impact. But certainly, that’s not a — it’s something we have to really be keeping an eye on and we are not at this point speculating on how that’s going to develop. We are encouraged by the — by a few things. One is, we have reported a few quarters where we have intended to even exaggerated view of this, but a few quarters where orders have increased quarter-over-quarter and this quarter continued that.

So that’s a real positive. And then the other thing that, I guess, I’d point to that, sure, it was lost on you and others is that, we have been able to kind of stabilize the backlog. So we feel like we are in balance right now going into it and more personally focused on macroeconomic drivers than the seasonality. But if we can come through these winter months in good shape, then I think it will be a real positive sign.

Daniel Moore: Maybe ask another way, so far in the quarter, production rates held pretty steady with what we saw in fiscal Q2?

Bill Boor: I think generally they have, we have kind of hit a balance point here, which is what we are trying to convey to people and we would like it to be a balance point at a higher production level for sure, but it’s good to feel like orders are supporting, at least the current production levels. So I’d say that’s continued.

Daniel Moore: Okay. Excellent. B Yeah.

Daniel Moore: And maybe just in terms of the gross margin, the — if you could dive into it a little bit more to rank order, sort of the impacts, obviously, on the Financial Services notwithstanding, focusing on the residential housing or focusing on just the housing segment, between input costs mix, fixed cost absorption, what were the kind of the key elements that may be pushed to lower sequentially and are you seeing any pricing or competitive pressures or is it more a function of those things that I have just mentioned?

Allison Aden: I think maybe a way to think about margins this quarter to Q1 is really margins in this quarter were kind of the store is really more around cost and not really around price. We saw price hold fairly consistent, but we have seen inflationary pressures that’s driving up price per OSB, which as you know, is one of our larger inputs for materials. So that’s caused — that slight elevation is caused — is finding its ripple effect through the margin and obviously something that we will stay close to. We continue to be very efficient in our cost structures and our plans as we adjust to production levels and we can always — we can certainly see consistent leverage of fixed costs at the plant level and then also at the SG&A level.

Daniel Moore: Got it. And so would — given that and where we have seen OSB pricing, likely this kind of piece hang around in those levels, the gross margin likely to, right, remain in those levels for maybe one more quarter and would you expect to start to see some increase beyond that?

Allison Aden: I think, we don’t really project on gross margins, but we — the fact is that we stay very close to pricing, which has been really consistent and rational. And then, of course, the input cost that the majority of our materials are lumber and OSB. So as those contracts and that level of — and the cost pricing increases or decreases, those fall through our margin in about a 60-day trend. So that’s — that information that can be accessed. And then our overhead support continues to be leveraged. So all-in-all, I think, as we stay close to the story that’s evolving on the OSB, we should be able to factor that into where we currently are at the Q2 level for Q3.

Daniel Moore: Very helpful. One more. I will jump out. Are you seeing more of a mix shift to lower price point entry-level homes. Is that trend continued and just maybe talk about your expectations for ASPs as we look forward over the next couple of quarters?

Allison Aden: So we are seeing the trend go toward more single. But as we have kind of said in the past, we think about margin — gross margin associated with the singles and multi. More of a function of time or time spent of productivity within the plants and not so much a distinguishing factor between multi and single at the gross margin level. Clearly, there is a price point differential at the revenue level.

Bill Boor: Hey, Dan, just to jump in. There are definitely, I mean, as you know, following the industry for a long time for many, I think, years, we were seeing a move toward multi section in the mix, and for several quarters, now we have reported that that’s reversed, the quarter-to-quarter change wasn’t that significant, but it was a little bit more to singles again. And I think that’s — our view is that that’s just a really strong indication of the affordability challenges people are facing out there and folks who have still been coming out to shop for homes, we reported consistently the traffic is healthy. So they are out there. They are trying to figure out how to solve their home need. Many of them, I think, are coming to the realization that they are going to have to accept less than they might have been able to purchase in years past.

So I think that’s really what we are seeing through that continuing trend toward single. Over the last year, it’s been pretty dramatic. Over the last quarter, it was pretty mild as far as the shift.

Daniel Moore: Perfect. Okay. I will jump back with any follow-ups. Thank you.

Bill Boor: Thanks.

Operator: One moment for our next question next question. Our next question comes from Greg Palm with Craig-Hallum. Your line is open.

Greg Palm: Hey, everyone. Thanks for taking the questions. I wanted to follow up a little bit on kind of the community REIT channel and figure out whether your visibility has improved, changed at all, relative to a few months ago?

Bill Boor: Yeah. This is a good topic to hit on. I commented very briefly on it that, they really haven’t come back at this point. The street dealers are carrying the load right now. A lot of that we have talked in the past is really driven mostly by communities that have spaces to fill and they have got inventory, but they are having trouble getting it placed as fast as they would like. All my discussions with operators — community operators is that, it’s not a question about whether there’s a resident demand, it’s just been a function of them having inventory on hand, kind of similar to the previous problem at street dealerships and how fast they can place that product. So I think we even commented last quarter that we expected it to be not trying to pinpoint too many estimates when we don’t have perfect visibility.

But last quarter we said, that was probably last through the calendar year and I think that’s still true. I don’t know that we will be completely through it in the current quarter or whether it will leak into next year a little bit, but once that does clear, just as when we saw the street dealer inventories get balanced, that’s a positive for our orders. Greg, I will open up another topic, because you and I have talked about this over time. I think everything I am saying is, the way to think about it is, it’s very true for existing communities. Just even following some of the public statements for some of the REIT operators, now we are starting to hear people say, hey, if the cost of capital keeps going up, new development is something they are going to hold off on.

So not really thrilled to hear that, but it stands to reason that as interest rates continue going up, those operators are balancing, whether to invest in new developments or to just kind of hold the capital or pay down debt. We haven’t heard that consistently. It hasn’t been a loud message. But it’s something I think for us to keep our eye on. Not really an impact on the inventory discussion we have had. But just kind of a down the road thing to keep an eye on.