Cavco Industries, Inc. (NASDAQ:CVCO) Q3 2023 Earnings Call Transcript February 3, 2023
Operator: Thank you for standing by and welcome to the Third Quarter Fiscal Year 2023 Cavco Industries, Inc. 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. As a reminder today’s conference call is being recorded. I would now like to turn the conference to your host Mr. Mark Fusler, Corporate Controller and Investor Relations. Please go ahead.
Mark Fusler: Good day, and thank you for joining us for Cavco Industry’s third quarter 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 the 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, February 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 results for the third quarter of fiscal 2023. This quarter, we achieved another significant year-over-year improvement in revenues and profit. Revenue was up 16% and pretax profit was 29 %. Units sold were approximately flat and the improved financial results were driven primarily from year-over-year average selling price and gross margin improvement. Operationally, while adjusting to the changing market, our plants continue the reach high levels of efficiency. We generally calculate capacity utilization using all available operating days. For the quarter, this yielded an approximate 65% utilization. However, we operated about 84% of the total available days due to holidays, weather driven downtime and market downtime.
On a days operated basis, we ran at about 80% capacity utilization. This indicates that our plants are doing the right thing by adjusting to the market conditions while remaining ready to go when orders improve. Cancellations continued during the quarter, but only at about 60% of the previous quarter’s rate. And the bulk of the cancellations were in regions that had lagged the initial stages of the downturn. So in a sense the process has been moving through the regions and for some of the earliest hit areas, cancellations are no longer a major factor. As backlogs reduced to much lower levels, the cancellations naturally become less of a factor because the order to delivery timeframe is so much closure to real time. Retailer inventories are still an issue that clouds the picture of underlying demand.
This is because wholesale orders will naturally be slower than homebuyer purchases until retailer inventories are reduced to their targets. Inventory resolution will not be an abrupt change in the market. It’s happening every day and each retailer that individually gets to their target moves us closer to a one to one relationship between homebuyer demand and manufacturing orders. Third quarter order rates were hit from all sides. The economy’s effect on consumer activity, seasonality, and the industry wide excess inventory have all resulted in declines in the backlog. Our backlog is down 34% sequentially to $427 million or approximately 9 to 11 weeks at current production rates. Well, we normally don’t get into the first quarter updates. In this market, I think it’s important to share what we’re seeing in the first month and the new year.
We are seeing early indications of a seasonal pickup in traffic as well as in quotes, which have increased considerably in January. In fact, we view quotes as a leading indicator of future orders and over the past several weeks, quotes have been at or above the level we’ve seen in the last year and a half. These observations are positive indicators about underlying demand and that we might experience with seasonal pickup in order rates. So there is reason for optimism that a pickup in demand might accelerate the inventory correction and resolve an increased wholesale orders. It’s very difficult to predict when the inventory issue will be behind us because we’re still watching the see how orders develop going into the spring. However, my best guess is we have a few more months of feeling some level of the inventory drag.
For the most part, price has held up well to this point, recognizing that there is a range of competitive pricing pressure from location to location. This is and always will be a cyclical industry and prices never stay stagnant for very long. Again, the question about near term price movements will largely be answered when we see how orders develop in the coming months as well. Let me change course and touch on a few developments in our growth strategy. First, we’ve talked about this in the past. We successfully started up the new Hamlet, North Carolina plant this quarter. That plant is fully staffed with a strong management team and production of employees that carried over from the prior owner’s volumetric building operation. We needed to execute a complex transition to ready the plant for HUD production.
And that project was delivered on time and on budget. So really a great job by everyone at both in Hamlet. On January 3, we closed on the previously announced Solitaire Homes acquisition. We’re excited about the opportunities this combination brings. Solitaire has four production lines as well as 22 retail stores. We anticipate significant value added opportunities that include filling out product lines across the combined retail network, bringing best practices to the Solitaire production facility, and accessing their retail network to enhance sales in our insurance company. I’d also like to take a minute to discuss our work in the area of digital marketing. I might not talk enough about developments we are prospectively working on in the company.
So it’s important for me to make it a point to tell you when our major company efforts come to fruition. This is one of the situations because we’ve been working on this for some time now and have reached a big milestone. In January, we went live with cavcohomes.com, our new consumer facing digital home marketplace. Launching this new website makes it easier for homebuyers to discover and research 1,500 manufactured, modular and park model floor plans, and 2,700 stock models across our flagship brands. It also connects them to our 1,500 retailers and communities based on their geographic area. The home shopper can seamlessly research floor plans, photos, videos, virtual tours and product availability using any smart device. This new site enhances the experience for our retailers as well.
Photo by Look Up Look Down Photography on Unsplash
They now have the ability to have their own pricing photos, videos and special offers to the dealer specific microsites that we are providing for them. The site is integrated with our ERP system, giving retailers and customers easy access to dealer and product information, as well as current availability. And perhaps most importantly, our dealers benefit from the directed leads and phone calls generated by consumers using this digital marketplace. I know that’s a mouthful, but this is really a major milestone. It opens up a new era for Cavco to build our brand nationally and to more effectively reach and serve our customers. Launching with the site is the culmination of a tremendous collaboration between our technical and marketing teams. Through this work, we’ve not only built site, we’ve built a powerful organizational capability in the team.
And that digital marketing team under the leadership of Colleen Rogers, our Senior VP of Marketing Communications, will continue to add an improve upon the foundation they’ve created for the benefit of our homebuyers and retail partners. With that, I’d like to turn it over to Allison to discuss the quarter’s financial results in more detail.
Allison Aden: Thank you, Bill. Net revenue for the period was $500.6 million, up 16% or $68.9 million compared to $431.7 million during the prior year’s third fiscal quarter. Within the factory built housing segment, net revenue was $481.2 million, up 16.3% or $67.6 million compared to $413.6 million in the prior year’s third quarter. This increase was primarily due to a 15.9% increase in average revenue per home sold due to product pricing increases. Financial Services segment net revenue was $19.4 million, up 7.1% or $1.3 million from $18.1 million. This year-over-year increase was due to a higher number of insurance policies in force. Consolidated gross profit as a percentage of net revenue was 26.2% consistent with the 26.7% in the same period last year.
In the factory built housing segment, gross profit percentage increased to 25.5% in Q2 of 2023 versus 25.2% in Q3 of 2022, primarily due to product pricing. Gross margin as a percentage of revenue in Financial Services decreased to 46.6% in Q3 of 2023 from 61.2% in Q3 of 2022 due to the impact of weather related events in Arizona and Texas. Selling, general and administrative expenses were $58.9 (ph) million or 11.8% of net revenue compared to $60.3 million or 14% of net revenue during the same quarter last year. The SG&A dollar decrease is primarily due to lower cost of third-party consultants assisting with the energy tax credit project and was partially offset by greater incentive and commission wages on improved earnings. Net other income was $3.2 million compared to $4.3 million in the prior year quarter.
The decrease is primarily driven by $2.4 million in lower unrealized gains of corporate equity securities, partially offset by higher interest income earned on commercial loans and cash balances. Pretax profit was $76.1 million up 29.2% or $17.2 million compared to $58.9 million in the prior year period. The effective income tax rate was 21.7% compared to a benefit of 35.1% in the same period last year. Our third quarter of fiscal 2022 income tax included a non-recurring benefit of $34.4 million, pretax credits related to the sale of energy efficient homes. Excluding this item, our tax expense as a percentage of pretax income would have been 23.3% in that period. Net income attributed to Cavco shareholders was $59.5 million compared to net income of $79.6 million in the same period last year, the diluted earnings per share were $6.66 versus $8.57 per share.
In addition, I note our next quarter will include the results of our recent acquisition of Solitaire Homes. Through that acquisition, we acquired finished home inventory at the retail site. Purchase accounting requires us to record that inventory at fair value upon acquisition, which means we’ll not recognize a profit upon sale of those homes. As a result, we will see an impact to our margins of approximately 150 basis points to 200 basis points in the next couple of quarters as we sell through these homes. This is the same dynamic that happens on all acquisitions and the cash we will receive for these homes is not affected by the accounting treatment. We are bringing this to your attention because of the amount of inventory we are purchasing, which is driven by the fact that we’re purchasing several retail locations.
Before we discuss the balance sheet, I’d like to take a minute to highlight that we continue to execute on our capital allocation priorities with the recently closed acquisition of Solitaire Homes, the opening of our Glendale, Arizona and Hamlet, North Carolina manufacturing facilities and our share repurchase of 34 million in the quarter. The purchase of Solitaire Homes will utilize approximately $93 million in cash before closing adjustments, leaving us with just over $280 million in cash subsequent to the purchase. We will continue to appropriately deploy this capital including share repurchases. Now I’ll turn it over to Paul to discuss the balance sheet.
Paul Bigbee: Thanks, Allison. Today, I’m going to walk through changes in the December 31, 2022 balance sheet compared to April 2, 2022. The cash balance was $376.1 million, up 54% or $131.9 million from the end of the prior fiscal year. The increase is primarily due to net income adjusted for non-cash items and changes in working capital, providing cash of approximately $230 million. This amount was partially offset by common stock buybacks of $73 million and purchases of property, plant and equipment, primarily at our new facilities in Hamlet, North Carolina and Glendale, Arizona. Investments, including short-term, decreased primarily due to the return of capital from one of our joint ventures involved with home sales. Inventories decreased due to lower raw materials and a decline in inventory at the retail lots.
Prepaid and other assets were higher from greater prepaid income taxes, partially offset by lower assets recorded in regard to the repurchase option on delinquent loans that have been sold to Ginnie Mae. Property, plant and equipment is up primarily due to the purchase of the facility in Hamlet, North Carolina and continued development of the Glendale, Arizona facility as discussed previously. Accrued expenses and other current liabilities increased from higher rebates payable, more setup, freight, combination work and warranty reserves, all on higher sales. Lastly, stockholders’ equity was approximately $955.5 million, up 15.1% or $125 million from the end of the prior fiscal year. This completes the financial report, and I’ll turn it back to you, Bill.
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