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spk07: Ladies and gentlemen, thank you for standing by. Welcome to the fourth quarter and fiscal year 2022 CAFCO Industries earnings call-in webcast. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you'll need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to turn the call over to Mark Fusler, Director of Financial Reporting and Investor Relations. You may begin.
spk02: Good day, and thank you for joining us for Capital Industries' fourth quarter and fiscal year 2022 earnings conference call. During the call, you'll be hearing from Bill Bohr, President and Chief Executive Officer, Allison Aden, Executive Vice President and Chief Financial Officer, and Paul Bigby, 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 under the provisions of the Private Securities Litigation Reform Act of 1995. including statements of expectations or assumptions about Capco'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 four looking statements involve risks and uncertainties which could affect Capco's actual results and could cause its actual results to differ materially from those expressed in any four looking statements made by or on behalf of Capco. I encourage you to review Capco'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 27, 2022. CAPCO undertakes no obligation to revise or update any forward-looking statement, whether written or oral, to reflect defense or circumstances after the date of this conference call, except as required by law. I would like to turn the call over to Bill Bohr, President and Chief Executive Officer. Bill?
spk05: Welcome, and thank you for joining us today to review our results for the fourth quarter and fiscal year. Fiscal 22 is another year of increased revenue and operating earnings, our 12th in a row. Each of the last several years, as we've turned the corner, we've been facing a different set of challenges, which makes it particularly gratifying to be able to report record results. The year before last, fiscal 21, our revenue and earnings gains were both in the 4% to 5% range. This year, we not only hit new records, revenue grew by 47% and earnings by 119%. The acquisition of Commodore had a significant impact, but even without that addition, we would have grown the top line by about 15% and profit by well over 100%. Most importantly this year, we provided 16,697 homes to families across the country. It's tempting to attribute these results solely to market forces, given the strong demand and significant price increases. But underpinning our financial performance was an improvement in capacity utilization from approximately 75 percent in the fourth quarter a year ago to over 80 percent this past quarter, which is above pre-pandemic levels. Despite continuing labor and supply issues, we're making about 11 percent or 1,600 more homes than we were before the pandemic. Our plants have been extremely focused on improvements to increase staffing and retention. and the work they've been doing to reduce product complexity has been paying off with more homes, which is what our customers have needed the most. On a same-plant basis, production was up 14 percent compared to last year's fourth quarter. We have not seen a drop-off in customer quotes, which we watch as a leading indicator of demand. Similarly, retail traffic and deposits have remained healthy. Our backlog was flat on a sequential basis and up significantly year over year, and orders remained strong in the quarter, again, above healthy pre-pandemic levels. And we've accomplished the needed reduction in weeks of backlog through the significant increase in productivity. Our backlog ended the quarter at 32 to 34 weeks. Additionally, our well-run financial services operations continue to consistently provide steady growth and strong returns. And our ability to serve our customers is greatly enhanced by our lending and insurance businesses. In the coming months, our new plants in Glendale, Arizona, and Hamlet, North Carolina, will begin operations. During fiscal year 22, we initiated these state-of-the-art projects. We acquired Commodore, which added approximately 25% to our capacity. And we made throughput investments across our plant systems. While making those strategic investments, we also completed the $100 million stock repurchase authorization earlier this month. All of this is consistent with our stated capital allocation objectives and demonstrates our ability to return value directly to shareholders without limiting our growth strategy. And our board of directors provided a new reauthorization this week, giving us continued access to this important tool to responsibly manage our balance sheet. I commented at the beginning of the call that every year setting new records is a challenge because of uncertainties in the coming year. The specific uncertainties change from year to year. Over the past few years, it was clearly a question of COVID's impact on economic activity, and that risk has not gone completely away. Certainly, labor and supply challenges persist. This year, we face questions regarding the impact of increasing rates and general economic pressures. And stating the obvious, the rate increases we've already seen dramatically increase monthly payments, thereby decreasing affordability. We know that over the past couple years, the price increases have left many hopeful buyers without the ability to own a home in the near term. Interest rate increases continue that concerning trend. But what can be forgotten is the huge undersupply of housing, particularly less expensive housing. Rising rates don't erase that fundamental undersupply. And additionally, we know that as their options become more expensive, some buyers will move to lower price point home buying alternatives. While we aren't able to specifically quantify it, the movement of buyers from site-built into manufactured housing is real, and we expect that to continue in this rising rate environment. This has happened historically, and the value and quality of manufactured homes competing for these buyers has never been better. The extent to which these positive dynamics offset the impact of higher rates and increased home prices on demand is not yet known, and of course we'll be watching closely. I'm very confident in the increasing role manufactured housing will play in solving the deficit of housing over any strategic planning timeframe. Beyond taking share in traditional MH markets, we have the added opportunity of increasing shipments into urban areas, a dynamic we have barely scratched the surface of. So we remain optimistic, and I have extreme confidence in this organization's ability to successfully monitor and adjust to any shift in market dynamics, as I've seen our people do time and again. With that, I'll turn it over to Allison to discuss the quarterly results in more detail.
spk01: Thank you, Bill. We're pleased to once again report that CAVCO achieved record-breaking net revenue and net income results for the fourth quarter of fiscal year 2022. Net revenue for the period was $505.5 million, up 64.9%, compared to $306.5 million during the prior fiscal year's fourth quarter. The common home's acquisition contributed $89.2 million of this year-over-year increase. Sequentially, from the third quarter of fiscal 2022, net revenue increased 17.1%. mostly driven by an increase in unit shift resulting from higher factory utilization. Within the factory-built housing market, net revenue increased 69.5% to $488.3 million from $288 million in the prior year quarter. The increase was driven by both the addition of commoner operations and a 31% increase in average revenue per home sold. The increase in average revenue for homes sold was largely due to product pricing increases and, to a lesser extent, a product mix shift to more multi-section homes. We're pleased to report that factory utilization exceeded 80% during the quarter, slightly higher than pre-pandemic levels. While home production continues to experience hiring challenges and building material supply disruptions, We've been successful in increasing our production headcount and achieving efficiencies from product simplification. Financial services segment net revenue decreased 7.2% to $17.2 million from $18.5 million due to lower interest income earned on the acquired consumer loan portfolio, lower unrealized gain on marketable equity securities, and lower home loan sales income. These decreases were partially offset by a higher number of insurance policies in force. Consolidated gross profit in the fourth fiscal quarter as a percentage of net revenue was 25.6%, up from 23.1% in the same period last year. The increase is mainly the result of the factory-built housing segment increasing to 24.5% in Q4 2022, versus 20.6% in Q4 of 2021. This was driven by pricing and operational improvements partially offset by increased material costs per module. Material costs increased from third quarter levels, resulting in a lower growth margin sequentially from 25.2% in Q3 of 2022. The acquisition of Commodore negatively impacted the Q4 consolidated gross margin by approximately 200 basis points. The acquired Commodore backlog was price protected and therefore now yielding lower gross margins as this backlog converts to closed sales. During the process of working our way through the price protected backlog, we expect the legacy Commodore gross margins to continue to negatively impact our consolidated margins for the next couple of quarters but it improved after that. Growth margin as a percentage of revenue in financial services decreased to 58.5% in Q4 of 2022 from 61.9% in Q4 of 2021 from greater weather-related events and lower realized and unrealized gain on marketable equity securities. Selling, general, and administrative expenses in the fourth quarter of fiscal 2022 were $59.7 million or 11.8% of net revenue compared to $44 million or 14.3% of net revenue during the same quarter last year. The increase is due to both the addition of Commodore and to higher incentive and commissioning wages on improved earnings. Net other expenses quarter was $1.2 million compared to $3 million of income in the prior year quarter. This decrease is primarily driven by unrealized losses on marketable equity securities, partially offset by higher interest income earned on our commercial loan balances, which increased as a result of the Commodore Homes acquisition. Pre-tax profit was up 131% this quarter to $68.6 million from $29.7 million for the prior year period. The effective interest tax rate was 22.1% for the fourth fiscal quarter compared to 15.2% in the same period last year. This increased tax rate is due to a lower level of tax benefit from exercise stock options in the current year compared to the same quarter last year. Net income attributable to Capco shareholders was up 112.6% to $53.6 million compared to net income of $25.2 million in the same quarter of the prior year. Net income attributable to CAFCO common stockholders per diluted share this quarter was $5.86 versus $2.71 per share in Q4 of fiscal 2021. Now I'll turn it over to Paul to discuss the balance sheet. Thanks, Alison.
spk03: So I'll be covering changes in the April 2nd, 2022 balance sheet compared to the April 3rd, 2021 amounts. The cash balance was $244.2 million, down 24.2% from $322.3 million a year ago. Uses of cash during the year include the acquisition of commoner and craftsman homes, repurchases of common stock, higher inventory balances, and purchases of property plan equipment. These uses of cash were partially offset by net income reduced by non-cash items, changes in working capital, sales of consumer loans greater than loan originations, and principal collections on consumer loans. The acquisition of Commodore and Craftsman Homes resulted in increases in primarily all assets and liabilities, including accounts receivable, commercial loans receivable, inventories, property plan equipment, goodwill and intangibles, accounts payable, and accrued expenses. Accrued expenses and other current liabilities also increased due to higher wage accruals from deferred payroll tax payments under the CARES Act and higher volume rebate amounts and customer deposits. Consumer loans receivable decreased from principal collections on loans held for investment that were previously securitized. Prepaid and other assets increased from the income tax receivable related to the 45L energy-efficient tax credits recognized in the third quarter of fiscal 22. Redeemable non-controlled interest is a new line item that represents the value of the non-controlling shareholders' interest in craftsman homes. Lastly, stockholders' equity was approximately $830.5 million as of April 2, 2022, up $146.9 million from $683.6 million as of April 3, 2021. With that, I'll turn it back to Mark.
spk02: All right, I think we're ready for Q&A.
spk07: Yep. Ladies and gentlemen, if you have a question or a comment at this time, please press the star, then the one key on your touchtone telephone. If your question has been answered and you wish to move yourself from the queue, please press the pound key. Our first question comes from Daniel Moore with CJS Securities.
spk06: Thank you, and thank you, Bill and Allison, for the color. Maybe just talk about obviously doing a great job with capacity, utilization up to 80%. Do you see the opportunity to continue to increase unit production as we move into the first half of fiscal 23?
spk05: Yeah, we don't have any specific targets, but we've got some real momentum with us on productivity. And, you know, I think, as I said, a lot of that comes from doing a better and better job around labor. We've seen the fruits of a lot of work there. And then the continued product simplification. And if you think about it, we've had long backlogs. So even when you decide and kind of simplify your product mix at a plant, you've got to work through a lot of orders that you're committed to delivering to get to that simpler product mix. So I really do think there's upside from there. I don't have the ability right now to try to quantify it for you there, Dan.
spk06: No, that's helpful. How about on the supply chain front? Do you see any incremental bottlenecks coming down the pike or things kind of Is this the new normal or getting easier in any way?
spk05: I don't think it's getting easier. It is feeling more normal. I've kind of laughed with some folks that it's as difficult now as I think it has been throughout this experience, and yet it feels kind of normal at this point. Our plants have done a great job, but every time a different material becomes a challenge, it is a new thing to solve. And as I think folks know, I'd say that the While generally the supply problem has been very persistent, it's transitioned to a lot more driven by logistics and trucking more recently. I have not talked to anyone that has been able to give me any insight into when it will let up, but we're expecting it to be persistent going forward for a while.
spk06: That's helpful. And lastly, on margins, Just talk about the cadence of margins going forward. Do you expect, you know, another 200 basis points of impact from Commodore for the next two quarters and then it falls off? Or should we sort of, is there a glide path between now and, let's say, you know, the end of fiscal Q2? Thanks.
spk01: Thanks. I appreciate the question. And just consistent with what we shared on our last conference call with Commodore, we would expect for the next couple quarters for the 200 basis point drive to continue. and then it will begin to ease off after that as the price protected in the backlog begins to convert to sales.
spk06: And last one, Bill, I apologize, but you talked about the order rate being strong, keeping up with your production. Are you seeing any cancellations, anything from your either retail partners or retail customers themselves, anything meaningful on that front?
spk05: Yeah, and I hope what I say here, and please ask a follow-up question if it's not clear, but I'll tell you, to really back up and look at what we've been seeing, you know, and again, I hope this isn't a complex answer. I think it's important. You know, the last several months, we've seen pricing, particularly the end of the calendar year, early this year, as much as it was going up before, it almost accelerated. And then right on the heels of that, we had interest rates start to move up. And so I've almost described it as like a swirling or a shifting going on. Some of the existing orders, people kind of fell out of being qualified for the homes they had ordered. The dynamic has largely been, though, that if a deal falls through for a retailer on a retail sold unit, there's very likely another buyer there that can pick up that unit. So there's been a lot of shifting. But it's not necessarily an indication of underlying demand. Traffic is still high, and we're still getting deposits, seeing in our retail as well as our independence. So we really haven't seen a tail off of demand, but we've definitely seen a bit more chaos because of the really rapidly accelerating monthly payments that people are facing. So it's really yet to be seen what impact rates and price are going to have on underlying demand, in my opinion. I really don't think we've seen indications of a drop-off at this point, but we've seen a lot of disturbance in the market, as I described. So what's going in our favor as we face this is the flow down from site build into manufacturing that I alluded to. I'm always going to refer back to just the fundamental undersupply of housing in the country. There is true demand out there. I'm not trying to paint either a rosy or pessimistic picture, but I think we're looking for indications of demand at a time when really what's going on is a bit of a reaction to that pricing and interest rate shock.
spk06: Now, rather than confusing, that's actually extremely helpful. I appreciate the color. I'll jump back to any follow-ups. All right. Thanks.
spk07: Our next question comes from Greg Paul with Craig Hallam.
spk08: Yeah, thanks, everyone. Just maybe following up on that sort of question on demand, I'm just curious if you can talk about whether it's pretty consistent across the board from all channels, i.e., both retail and community, and whether you're seeing any differences in terms of pockets of geographies where maybe quarter-to-date demand is whether that's measured by traffic, orders, quotes, whether it's significantly different across various geographies.
spk05: Yeah, that's a good... The community versus retail is an important point as well. I've been with customers in the last month or so quite a bit, and the community, the interest of community operators, particularly the larger REIT-type community operators, their growth plans and their demand, they're still talking to us about can we get as many houses as you can make. So I really think communities are potentially going to be the strength for a while. That demand seems to be very real and very strong right now. And that doesn't mean, again, I don't know that I'm predicting a big retail drop-off. I'm just seeing communities, which some of us will remember several years ago, they were driving the growth of this industry. And right now they seem poised to really really pick up, in my opinion. So it does feel like that's a little stronger to me right now, but we're trying to sort through it like everybody else. And I wanted to catch the other part of your question there, but can you remind me?
spk08: Yeah, just in terms of geographies, whether you're seeing any differences out there.
spk05: Yeah, thank you. You know, I'm kind of I generally would say no. We're talking to our folks across the country, and I think the dynamics are pretty similar. If there is any area that I think we're cued in a little bit more, it's probably the southeast. But I wouldn't describe that in a way that we're seeing markedly different dynamics. It just seems like there's a little more of that swirl going on in the southeast potentially.
spk08: Fair enough. What about the mix of your backlog? I'm curious if that's changed at all in recent quarters, whether that's shifting to more single-wise versus multis or maybe just homes with less options. I'm just curious what you're seeing a difference in the order book in the last few months or year-to-date.
spk05: Yeah, I don't think so. I mean, we've been seeing for quite a while in the product mix just a little bit of a steady shift toward multi-section. And I think there's logic behind that and all the dynamics we've talked about because And this is a little bit feel, I guess, Greg, but, you know, as affordability becomes more difficult, we know that buyers at the lower price points that are just, you know, were barely able to afford are now not able to afford. And we also, you know, know that there are people that are transitioning from thinking they're site-built buyers to becoming manufactured housing buyers at the higher price points. So there's some logic behind this kind of continual shift toward multi-section. But I don't think in recent quarters we've really noted any dramatic change in what's in the backlog. And as far as options, that's a little bit of a tough question, too, because our product simplification includes reducing options. So if we really dissected the backlog, we'd probably be seeing more driven by our offering than by any indication of what people are interested in buying.
spk08: That maybe leads me to my next question. which is on product simplification. Can you just talk about what or how much of that's already been done, how much is left to go? I'm just trying to get a sense of whether this is a longer-term journey that maybe suggests that these production efficiencies, as you talk about, can continue to increase for a while.
spk05: Yeah, we're getting a lot of it. My comment earlier was that with the backlogs that we have, if you decide today on new offerings, you're not going to have as many floor plans or as many options, you're still going to have to make what's in your backlog for a while. So you kind of take a while to get to it. But I think, you know, we're well into that. I don't know how to separate how far we are into the benefit from how far is yet to come. But it's a major factor. And, you know, and I think our plants have been pretty aggressive about it, but they've done it in a way that, you know, we believe that working with our Our dealer customers, for example, we're still providing products that are really matched to the market. So I think there's more to go as I answered the earlier question. And, you know, it's not only us increasing our utilization is not only going to come from simplification. It's going to come from continuing to get our staffing up and our retention up and building the skills of the team. We're kind of, you know, in the middle of all that. So more to come.
spk08: Great. All right. Well, I appreciate the insights and best of luck going forward.
spk07: Thank you.
spk08: Thank you.
spk07: Our next question comes from Ian Lappy with Gabelli Funds.
spk04: Hi, Bill. Congrats to you and the team on the 12th year of revenue and earnings growth. That's tremendous.
spk05: Thanks, Ian.
spk04: A couple of questions. What is the outlook for industry capacity increases? If I look at The MHI data, it looks like there were 141 plants in March, and I know you've got two more coming online. What are you hearing about from competitors in that regard?
spk05: You know, I think there's some of that going on. You know, you hear about a few plants here and there. It's not huge. And I think the limiting factors really have been, you know, I feel like I'm on an absolute broken record, which I apologize for. But right now, bringing capacity on, you really have to be thoughtful about your ability to staff and supply the new production. So I think that's been a bit of a governor. Historically, the issue was, can you get market space? Can you get distributors? That hasn't been the problem or the concern the last couple of years. It's been more about inputs. So I think that's created a governor, but obviously we're adding a couple. And I know of others that are adding here and there as well. I don't think it's coming a big wave, though.
spk04: Okay. And then last question. In terms of the credit, are you seeing any pickup in consumer delinquencies? And then what are chattel mortgage rates roughly now? How much have they increased compared to, say, site-built mortgage rates?
spk05: Right. Yeah. First part, I don't think we've seen really any pickup in delinquencies. People or buyers throughout, while some of them have gotten priced out by the time they get to the time they would have gotten their homes, the people that are qualified and are getting those homes, the performance has been pretty good because I think the lending industry has been pretty disciplined about credit. So I haven't seen any issue there. Your question about rates, were you asking specifically about home only or land home?
spk04: Home only.
spk05: Yeah, that's where it's gotten interesting recently. We've been saying for a while that at the beginning, and I always relate everything to the pandemic because that's when it seems like everything got a little crazy, but the interesting thing at the beginning that we've talked about in the past is that home only rates that were in maybe the 7.5% range actually dropped down to the, in some cases, below 5%. Let's say five to five and a half range. And they've been incredibly stable there until the last, call it, month or so. And now they've really started to move up. And now there's a bit of a range in the data that we have, but I'd say it's running anywhere from the low sixes to the mid to upper sevens. So it really has increased quite a bit recently.
spk04: Okay, that makes sense. Thanks, and congrats again.
spk05: Thanks, Ian.
spk07: And I'm not showing any further questions at this time. I'd like to turn the call back over to Bill Bohr, President and CEO, for any closing remarks.
spk05: Okay. Yeah, I do want to take just a quick moment to recognize our Martinsville, Virginia plant. Excuse me. A little over a year ago, our plant leadership participated in a workshop with local, state, federal, and nonprofit groups to address the affordability issue there in that area. And this led to a multi-entity partnership to redevelop an area within the city. This past month, there was a ribbon-cutting ceremony, and people are currently moving into their new homes. And this is why I wanted to bring it up here. This development is targeted for income levels in the $17 to $20 per hour range. And these are homes these folks will own, not rent. CAVCO is recognized with our industry association's Community Impact Award this year due to the Martinsville plant's outstanding work on the project. And I bring it up partly because I think they deserve some recognition, but it's also everything we're talking about, about affordability and the impact of pricing and rate shifts. This is a shining example that with the right ingredients and leadership, we can truly impact affordability and help deserving families achieve homeownership. So it's important work. I think the business results have been outstanding, but we're still really connected to this cause of trying to have an impact like the Martinsville plant has had recently. All areas of our company contributed to a truly outstanding year. I really want to thank everyone throughout CAFCO. And with that, we appreciate your time today. We look forward to keeping you updated. Thanks a lot, everyone.
spk07: Ladies and gentlemen, this concludes today's presentation. You may now disconnect and have a wonderful day.
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