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spk02: fiscal year 2023 casco industries inc earnings call webcast at this time all participants are in 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 will need to press star 1 1 on your telephone please be advised that today's conference is being recorded i would now like to hand the conference over to mark fusler director of financial reporting and investor relations Please go ahead.
spk04: Good day, and thank you for joining us for Capco Industries' first quarter fiscal year 2020 earnings conference call. During this call, you'll be hearing from Bill Bohr, President and Chief Executive Officer, Allison Aden, Executive Vice President and Chief Financial Officer, and Paul Digby, 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 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 CAFCO. I encourage you to review CAFCO's filings with the Securities and Exchange Commission, including without limitation the company's most recent forms 10-A 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, say August 5th, 2022. CAFCO undertakes no obligation to revise or update any forward-looking statement, 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 Bohr, President and Chief Executive Officer. Bill?
spk09: Welcome, everyone, and thank you for joining us today to review our results for the first quarter of 2023. CAFCO is happy to report another very strong quarter with record revenue and net income. Net income was up 121% year-over-year and 12% compared to the fourth quarter. For many quarters, we've been asked about our ability to exceed pre-pandemic levels of productivity, and this quarter we reached over 85% capacity utilization. More tangibly, we shipped a record 5,346 homes this quarter, 44.5% more than a year ago. I really want to congratulate our manufacturing organization, which has set and exceeded aggressive production targets. We pride ourselves on operating excellence, and it's great to see it showing up so clearly in our results. We are very well positioned for and confident in the demand drivers for our products, despite the affordability impact of high prices and increasing rates. While near-term market dynamics are shifting, some of those dynamics actually play in favor of manufactured housing. Affordability is extremely stretched for our prospective buyers, but this doesn't eliminate the fundamental need for more housing units, particularly at low price ranges. Certainly, some would-be buyers are getting priced out of ownership in the near term. However, they still need homes. Community operators who continue to have aggressive growth plans are providing a solution with single-family manufactured housing rental homes. Also, first-time buyers are increasingly turning to manufactured housing as an alternative to site-built homes, given the rapid escalation in starter home costs. Manufactured housing is an option those buyers might not have considered in the past, however, now they are, and they're finding attractive, energy efficient, and high quality homes that meet their needs. Looking at total housing market indicators risk missing the point that the needs are far greater where we provide solutions. For example, recent listing data show that while overall new listings are up about 20%, which indicates a shift to a buyer's market, Listings for homes below $250,000 continued to decline 10% to 20% in June. I recognize that while you're interested in these bigger picture dynamics, you're probably particularly interested in what's going on right now. In the near term, order rates are down, and production is running faster than the pace of setting new homes in the field. As a result, our backlog ended the quarter at 25 to 27 weeks compared to four weeks last quarter. Keep in mind that 25 plus week backlogs are pretty healthy. The backlog dropped approximately 10% from $1.1 billion to $1 billion. That drop was comprised of approximately 15% fewer units and 5% higher average selling prices. Prospective buyers are feeling the effects of economic uncertainty and inflation. They see that previously anticipated rate increases have already occurred and delivery times are shortening. So the urgency we've seen from a buyer to quickly get an order in has abated to some degree. While retail traffic is still strong, reflecting the underlying need, buyers have become more patient, resulting in lower deposit ratios. Retail inventories are up compared to recent periods due to a combination of difficulties getting homes set and accelerated deliveries as production rates have improved. We're anticipating a near-term reset of retail inventories, which means orders may drop below true buyer demand for what I expect to be a short time frame. Just to reiterate, prices and interest rates are high, so the monthly payment impact is clearly a downward pressure on near-term demand. This is offset by lack of supply of lower-priced homes, market share gains for manufactured housing at price point site builders simply can't hit anymore, and aggressive community growth plans, which are less sensitive to the recent rate changes. To provide a project update, our new Glendale, Arizona factory is nearing completion. The plant looks great, and we've been recruiting and training people at our nearby Goodyear factory, so we're ready for a successful startup. The new plant at Hamlet, North Carolina, is also coming along very well. We expect a smooth transition as the previous owner wraps up their production and we complete plant modifications to begin ours. The goal from the beginning for both VBC, who's the previous owner of Hamlet, and Capco has been to minimize any break in employment for the people at Hamlet, and we're confident that we're on track to do that. Both projects will be state-of-the-art facilities and equally important, I'm very excited that they will both have model work systems and cultures. Great work has been done to ready these operations for startup, and both plants will begin production in the coming months. With that, I'll turn it over to Alison to discuss the quarterly results in more detail.
spk01: Thank you, Bill. Net revenue for the period was $588.3 million, 78.1% compared to $330.4 million during the past fiscal year's first quarter. The common homes acquisition contributed $100.8 million of this year-over-year increase. Sequentially, from the fourth quarter of fiscal 2022, revenues increased 16.4%, primarily driven by an increase in unit shift resulting from higher factory utilization. Within the factory housing segment, net revenue increased 83.4% to $572.6 million from $312.3 million in the prior year first quarter. This increase was driven by both the addition of Commodore operations and a 26.9% increase in average revenue per home sold. The increase in average revenue per home sold was due to product pricing increases. As Bill mentioned, Factory utilization exceeded 85% during the quarter, which is a record level during the last 10-year period. Utilization has benefited from product simplification, sustained increased production headcount, and other process efficiencies. Financial services segment net revenue decreased 13.2% to $15.7 million from $18.1 million. This year-over-year decrease was due to unrealized losses on marketable equity securities versus gains in the prior period, decreased loan sales volume, and lower service. These declines were partially offset by a higher number of insurance policies in force. Consolidated gross profit in the first fiscal quarter as a percentage of net revenue was 24.6%, up from 22.4% in the same period last year. The increase is mainly the result of the factory housing segment, which climbed to 24.4% in Q1 of 2023 versus 21.2% in Q1 of 2022. This increase was driven by pricing, partially offset by increased material cost per module. Q1 2023 factory built gross margins of 24.4% with 10 basis points lower than the Q4 2022 level of 24.5% driven by higher material cost per module. As discussed previously, the acquired Commodore backlog was price protected and therefore now yielding lower gross margins. As a result, this downwardly impacted the Q1 consolidated gross margin. We expect this impact to continue for the next couple of quarters as we work off the remaining backlog. Gross margin as a percentage of revenue in fiscal services declined 32.6% in Q1 of 2023 from 42.7% in Q1 of 2022 by unrealized losses on marketable equity securities and the financial impact of greater weather-related events upon our insurance business. Selling, general, and administrative expense in the first quarter of fiscal 2023 with $66.1 million, or 11.2% of net revenue, compared to $40.8 million, or 12.4% of net revenue during the same quarter last year. The SG&A dollar increase is due to the addition of lower greater incentive wages on improved earnings and costs of third-party consultants assisting with the energy tax credit project. Net other income this quarter was $900,000 compared to $2.5 million of income in the prior year quarter. This decrease is primarily driven by unrealized losses on marketability securities compared to gains in the prior year period, partially offset by interest income earned on higher commercial balances. Pre-tax profit was up 123.4% this quarter to $79.3 million $35.5 million for the prior year. The effective tax rate was 24.7% for the first fiscal quarter of 2023 compared to 23.8% in the same period last year. Net income attributable to CAFCO shareholders was up 120.7% to $59.6 million compared to net income of $27 million in the same quarter prior year. that income attributed to CAVCO common stockholders per diluted share order was $6.63 per share, $2.92 per share in Q1 of fiscal 2022. Before we discuss the balance sheet, I would like to take a minute to highlight that this quarter, we executed nearly $39 million of stock repurchases, completing the $100 million originally authorized in October of 2020. In May, the Board authorized an additional $100 million for future share repurchases. It is important to note that we've continued to successfully execute against our capital allocation strategy. As Bill mentioned, in addition to share repurchases, we've also deployed capital purchase of a manufacturing facility in Hamlet, North Carolina. And we're also nearing the completion of the development of our Glendale, Arizona park model facility. which should begin operations in the next few months. Now, I'll turn it over to Paul to discuss the balance sheet.
spk06: Thanks, Allison. I'll be covering the changes in the balance sheet from July 2, 2022, compared to April 2, 2022. The cash balance was $238.1 million, down $2.1 million from $244.2 million at the end of the prior fiscal year. The decrease is primarily related to cash used for repurchases of common stock and purchasing property, plant, and equipment, including our new manufacturing plant in North Carolina, partially offset by net cash provided by operating entities. Investments decreased from unrealized losses on equity securities held at the end of the period. Inventories increased due to higher levels of stock inventory at our retail locations, as well as higher inventory purchases in preparation for increased production. Prepaid and other assets decreased from lower income tax receivables and lower assets related to the loan repurchase option on delinquent loans that were sold to Ginnie Mae. While we are not obligated to repurchase these loans, accounting guidance requires us to record an asset and liability for the potential of a repurchase. This amount was lower than the normal second 2022 amount due to a reduction of loans in forbearance. Accrued expenses and other current liability balances increased due to a higher volume rate, warranty accruals, and setup accruals on higher sales, partially offset by lower customer deposits. Lastly, stockholders' equity was approximately $851.6 million from July 2, 2022, up $21.1 million from April 2, 2022. With that, I'll turn it back to Bill.
spk09: Thank you, Paul. Before we turn it over to questions, I'd like to touch on the updated provided and earnings release regarding the SEC matter. I'm happy to report that we've reached an agreement in principle with the SEC to settle the litigation. Yesterday, a step was taken in that process when the SEC and CAFCO informed the court that we've reached this agreement, and it's pending final sign-off by the Commission. At this point, I'm unable to provide more details except that the settlement terms are not material to the financial results or position of the company. We will provide more details when that final approval is complete, which we anticipate will be within 60 days. This has been a long process, and we all look forward to the resolution and putting this behind us. With that, Carmen, let's turn it over for questions.
spk02: Thank you. And as a reminder, to ask a question, simply press star 11 on your telephone. One moment while we compile the Q&A roster. Our first question comes from Daniel Moore with CJS Securities. Please proceed.
spk05: Thank you. Good afternoon. Good morning to you, Bill and Allison. Thanks for taking the questions. Start by saying congrats. That's been a long road. I'm sure you'll miss all of those SEC-related questions, but I'm happy to have that put behind you or close to it at least. Just start with the remarkable growth rate in shipments. I pencil out organic growth in the number of homes sold in the mid-teens maybe high teens excluding Commodore. Is that the right ballpark, Allison?
spk01: Yes, that is.
spk05: Okay. And then maybe, Bill, just elaborate on the home order rates moderating. To what degree have they moderated? If you had to sort of quote a current book to Bill, what would that look like? And what's your best guess of what annualized current demand is? kind of on a run rate basis looks like for MH?
spk09: Yeah. Tough question. It's been important to get the tone of this right. I mean, they really get a good feel for it because there's certainly a transition, but it's far from dire, I guess is what I would say. You know, you can see the industry shipments have been very robust. I think the numbers are still in the 125,000 rate range. for HUD shipments on a seasonally adjusted basis. So, you know, shipments are strong. There are still some constraints in retail and placing homes, and that's kind of caused a continuation of the inventory back up at retail. So, man, it's hard to give you a great feel for the numbers. I would say that orders are certainly off the highs that we've been experiencing. but they're probably more on a par with kind of pre-pandemic levels with appropriate seasonality. So we feel pretty good about it. The one thing I mentioned in my comments that I think is an important point to get as people are trying to gauge the health of the market, I view that the strong retail traffic is still a positive, even if we're going through a little bit of an adjustment with the retail inventories. So you asked a specific question. I'm not sure I was able to give you a very specific answer, Dan, but happy to continue if you can follow up and ask me what I'm leaving out.
spk05: No, that's great. That's helpful. But maybe pulling on the same string, the community builder market and opportunity set is massive relative to the current size of the overall MH market. Are they maybe waiting for backlogs to come down a little bit more? You know, gauging true demand is very difficult. So what is it that sort of gets them off their hands and maybe accelerates that part of, you know, your demand profile a little bit more?
spk09: Yeah, that's – I mean, communities are a real source of strength right now. I haven't seen any sitting on their hands with regard to the communities. They're still looking to get more homes. We've talked this in the past, just a little bit of the history, because I think it's important. Before the pandemic, for a number of years, communities, while they're maybe about 30% of the market, they were providing most of the growth. And for the last bit, after a short pause at the beginning of the pandemic, for the last bit, both retail and communities were going very strong, couldn't get enough houses. The communities still have very aggressive growth plans. They've got capital behind them. They're not as sensitive in their purchasing to the interest rate changes that we've seen. I tried to make this point in my comments as well. They're really a solution to what is going on for the buyer. As mortgage rates and the monthly cost of buying have really gone up and made it very difficult for some people to purchase the communities are very heavily into the rental business. And so they're buying manufactured homes, placing them in the communities for rent. And that's a solution for that family that can't purchase but still needs a home. So I really expect communities to be a source of strength for the business going forward. And they're not showing any signs of slowing down that I see.
spk05: Perfect. Maybe one or two more on the margin front and I'll jump out. But Still very healthy gross margins in the quarter despite the drag from lower profitability in financial services as well as Commodore. Allison, can you maybe just quantify those a little bit? How much of a drag was the lower financial services profitability as well as the lingering impact of price protection at the Commodore backlog? Thanks.
spk01: Sure, Dan. Let's take a step back here and talk about the key elements that really dropped the margin outcomes. So the last several weeks, you know, what we've seen are lower commodity prices for lumber products, and that'll work its way through our material cost as a positive margin for the quarter. And specifically with your question on Commodore, what we saw this quarter as an impact was pretty similar to what we saw last, which is a little north of 200 basis points. And, you know, it is an important point to note that we're working through these backlog homes that were previously price-protected, And that we expect commerce pricing and margins to come into line with the rest of our system. And that will produce a positive uplift in future quarters. So, you know, good news on the labor pricing will come through. One element it's difficult to predict is what the commodity prices will do. And then also there could be in the future partial offsets to higher labor costs and other material pricing. Those are the main elements.
spk05: Perfect. I will jump back with any follow-ups. Thank you very much.
spk02: One moment for our next question, please. Comes from the line of Greg Palm with Craig Hallam. Please proceed.
spk03: Awesome. Thanks. And congrats on the results here. Starting maybe as a piggyback off the last question, Allison, I think you used that same language for a couple quarters now in terms of the impact from Commodore lasting a few more quarters. Can you get a little bit more specific in terms of, you know, will it get less of an impact this current quarter? When will it completely be, you know, run off at, you know, at least in your opinion at this point?
spk01: Sure, sure. You know, consistent with our comments last quarter is we expected the range as it dragged this quarter. There will probably be more quarter at this level. And then we'll see during the next two to three quarters an uplift. Those price-protected backlogs gradually then turn into revenue and uplift. You know, we're still very, very... very happy with the outcome of our Commodore acquisition. You know, this is a known issue. It's a temporary issue. And, you know, the deal is, you know, very rewarding. We've already did our integration effort, and the unit production is exactly what we would have expected. So all in all, you know, the production is in line with what we expected, and the profitability won't be too long-term.
spk03: Okay. Fair enough. what about ASPs? I think what I heard was ASP increased due to pricing. Was any of it mixed related or was it almost entirely just pricing? And then, you know, I guess the next question is, is sustain this, you know, level in wake of, you know, recent, you know, commodity input cost deflation, at least for, for several items. Any thoughts there?
spk09: Yeah, I can jump in on that. The, um, It's really all price. The mix has not shifted that significantly. You know, we looked at that, and it's been pretty stable recently. In fact, when we compared mix to this time last year, this quarter last year, it was almost identical. So, you can pretty much attribute the ASP change to pricing. And I think your other question was, given some of the larger commodities in particular, I assume lumber and OSB, coming off their highs recently, do we expect that we could hold the price? Is that right, Craig?
spk03: Yeah, just the sustainability of that going forward.
spk09: Being consistent in our view, industry backlogs on average are pretty good. I do think there's still the ability to maintain margins. If we have spots where backlog start to drop rapidly, then I guess you could see some price competition, but so far we've seen very little of that.
spk03: Yeah. Okay. Understood. And I guess just kind of last one from more of a big picture standpoint, I wanted to dig into this, you know, channel comment a little bit more in terms of strength that community you know, a little bit more moderation at retail. I mean, do you view the community strength as something that's just more cyclical in that, you know, there's pent up demand because that channel shut off for so long during and post COVID? Do you think that there's something more structural or secular going on there? And if that's the case, you know, how do you sort of view your own capacity footprint in light of that, knowing that, you know, at least in the community channels, there's obviously certain states and areas where there's outsized exposure there.
spk09: Yeah, I don't know. I mean, I think it's not temporary. I think they've got, when I talk to particularly the larger REITs, they've got very aggressive long-term growth plans, and they're not, they don't, aren't tempering those based on anything that's going on right now in the market that I can see. Those discussions are kind of, pretty much up to date. So, you know, again, I think they're a source of strength. I think they're a little bit counter cyclical to interest rates because of the, for the reasons that I talked earlier. So we think that they're going to be pretty solid. We've got exposure across the country to communities. You know, when I think about our whole system geographically and our customer relationships, I feel like we're pretty balanced right along the lines of the industry. Historically, they've represented about 30%, and I think we get our share of that. In some areas, Florida, we have a little extra exposure to communities, and Florida is an area that for us is very strong right now. So that's kind of the point I was trying to make, that in these kind of shifting times with interest rates and everything, there are some aspects to the MH dynamics that buffer the demand exposure to those kind of drivers. And I think communities are a real source of strength.
spk03: Yeah, understood. All right, I'll hop back into the queue. Good luck going forward. Thanks for taking the questions.
spk09: Thanks, Greg. Thank you.
spk02: Thank you. And as a reminder, to ask a question, simply press star 1-1 on your telephone. One moment for our next question, please. Our next question comes from Jay McCandless with the Whitbush. Please go ahead.
spk08: Hey, thanks for taking my questions, and congrats on getting almost to the finish line of the SEC issue. Glad to see it's going to be in the rear view mirror soon. The first question I had was on the stock, the new stock repurchase plan. Is there an expiration date on that?
spk01: Does not have an expiration date on it, Jay.
spk08: Okay. And then also had some questions about price, but you've answered most of those. I guess my question is, once you get through these price protected contracts, what type of step up in a percentage or dollar basis do you think we're going to see on the average price?
spk07: I'm trying to figure out how to dimension that for you.
spk09: I mean, we've kind of talked about the drag that we're seeing on our consolidated gross margins, but it sounds like you're asking a different question.
spk08: Well, just if these are price protected, I guess, what's the differential right now between the legacy CAVCO and the price protected contracts that you're selling from Commodore? Maybe that's the way to ask it.
spk09: Yeah, so how much on a percentage basis is the pricing lower on that backlog? Yeah.
spk07: Mark or Allison, do you have a view on that?
spk09: We've kind of tended to look at it in a margin sense since the products are even different, right?
spk01: Yeah, I mean, I think it's, you know, to... It's important to kind of think about the context of it, right? So I think that it's not one particular range of prices, but it's the pricing that's coming from the different models of their pricing and also at a different rate in their various facilities. I think it's important to just know that tracking to the uplift in the margin would represent a gradual movement to the overarching pricing. which tends to be just a little bit under the total company ASP, simply because of some of the mix of the modules that they're actually bringing to market.
spk09: Jay, I might not be hitting the mark on this. I'm just thinking about your question. I mean, if we've got a couple percent drag on our consolidated margins, you know, and the gross margins are in the range that they're in, right, then, you could kind of do the algebra to figure out how much of a drag it is on our average selling price on a weighted average basis. But again, given that they're 25% of our production now, you know, the discounted price is pretty significant in that backlog at this point. And that's what we're struggling to get through.
spk08: And did you, and I apologize, I think you said two more quarters, Allison, until that potentially could happen.
spk01: Yeah, I think next quarter we'll look about the same range of the impact that we saw this quarter. And then the next two quarters would basically be a ramp up toward something that's more akin to the consolidated for the base business.
spk08: And then I guess with lumber having come down and now trying to, it seems like it's trying to stabilize, maybe go up slightly. Is that giving you the ability to not take that next price increase, or is everything else besides lumber moving up enough to where you have to keep still trying to push price where you can?
spk01: Go ahead, Bill.
spk09: I was going to say, certainly, it's a good point that every other input, including labor, has continued to have some significant inflation. So it's important that we kind of stay ahead of that.
spk08: Okay, great. Thanks again for taking my questions. Thanks, Jay.
spk02: One moment for our next question, please. It comes from the line of Daniel Moore with CJS Securities. Please proceed.
spk05: Yes. Just from a production standpoint, you produced comfortably over 5,000 units this quarter, citing the efficiency gains that you've made plus Commodore. Just thinking about supply chain, labor, et cetera, is that a number that's sustainable for you in the near term? Are you seeing any incremental challenges that might make that a little bit more difficult as we think about modeling the next couple quarters?
spk09: Yeah, I think there's probably generally good news in that front. Staffing, we've worked pretty hard to get our staffing up. I'm not saying that we're where we want to be in all of our plants. We've still got some numbers to get. But we've made a lot of headway, which has really enabled the volume increases we reported. And now, you know, I still think there's more benefit to be had because once you get the numbers right, you've got to do a good job of keeping them, keeping those individuals. And then they develop skills as a team that provides more benefits in manufacturing. So I feel like we've still got progress to take. in that regard. And this will be the first time I've said this, and I hope I'm not jinxing ourselves. Supply generally feels better. It's not that we don't have issues. When you're putting together a house, one thing that's not available to you can stop everything. But there's certainly a feel that the supply issues are better than they have been. Now, logistics is still a concern. I talked about the difficulties getting home set in the field, that continues to be an issue. Logistics are as much of that as the setup crews, but both are a factor. But generally, the materials needed to build the house we're feeling slightly better on.
spk05: That's great. Great to hear. And no, you know, one-week shutdowns or anything like that in the quarter that we should be, you know, upcoming quarter that we should be aware of?
spk09: Not that I can foresee.
spk05: Perfect. Thanks again.
spk09: Thanks, Dan.
spk02: Thank you. And I'm not showing any further questions. In the queue, I will pass it back to management for any final comments.
spk09: Okay. Thank you. The increasing need for affordable housing is certainly being exacerbated by supply limitations and the rates. But as I said earlier, rising homebuyer costs don't erase the serious need for our homes. There are opportunities in markets like this. as the basic need to provide affordable solutions grows our product and market opportunities. After watching our leaders anticipate and proactively adjust to various challenges over the last few years, I'm very confident in our ability to stay on top of the market dynamics and to adjust as needed. So we look forward to keeping you updated, and we thank you for your interest in CAVCO.
spk02: With that, ladies and gentlemen, we thank you for participating in today's conference. You may now disconnect.
spk07: The conference will begin shortly.
spk02: To raise your hand during Q&A, you can dial star 11.
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