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Good day, ladies and gentlemen and welcome to the Fourth Quarter and Fiscal Year 2018 Cavco Industries' Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions].
I would now like to turn the conference over to your host, Mr. Joe Stegmayer, Chairman and CEO. Sir, you may begin.
Thank you, Shelby and welcome everyone to our fourth quarter conference call. We’ll begin as usual by asking Dan Urness, our Chief Financial Officer and Executive Vice President to read our declaimer and cautionary statement and then begin with the financial report and then I’ll come back and make a few comments, and we'll happy to take your questions. Dan?
Good day, everyone. We respectfully remind you that certain statements made on this call either in our remarks or in our responses to questions may not be historical in nature, and therefore, are considered forward-looking. All statements and comments today are made within the context of Safe Harbor rules. All forward-looking statements are subject to risks and uncertainties, many of which are beyond our control.
Our actual results or performance may differ materially from anticipated results or performance. Cavco disclaims any obligation to update any forward-looking statements made on this call and investors should not place any reliance on them. More complete information on this subject is included as part of our earnings release filed yesterday and is available on our website and from other sources.
Now for our financial report, net revenue for the fourth quarter and fiscal year 2018 was $243 million, up 23% compared to $198 million last year. Nearly all of this increase was from the factory-built housing segment, where net revenue grew over $43 million including $14.8 million of sales from early commercial loan pay-offs previously deferred under Cavco’s wholesale lending programs.
Factory-built housing net revenue also grew from a larger proportion of higher priced homes sold and additional sales volume. Financial services segment net revenue increased 7% from higher home loan sales volume and more insurance policies enforced compared to the prior year. Consolidated gross profit in the fourth fiscal quarter as a percentage of net revenue was 22.4% up from 21.3% in the same period last year. The improvement was mainly from home product price increases in the recent quarters.
The gross margin benefit of these increases has been delayed by large production backlogs. The price of homes sold this quarter kept better pace with rapid raw material cost inflation and higher labor and labor related costs, which adversely affected gross profits for more than a year. Our distribution base has generally been able to absorb product price changes although competitive and mortgage appraisal limitations continue to be worked through. The factories have also gained some additional operating leverage from increased production levels.
Selling, general and administrative expenses in the fiscal 2018 fourth quarter as a percentage of net revenue was 11.7% compared to 12.7% during the same quarter last year. The improvement was related to fixed cost efficiencies gained from higher net revenues.
Income from operations was directly benefited in the amount of $1.8 million from the early commercial loan payoffs previously discussed. Additionally, other income increased primarily from $4.5 million in gains realized on the sale of corporate investments. The effective income tax rate was 27.9% for the fourth fiscal quarter compared to a higher 33.9% rate in the same quarter of the prior year.
The lower tax rate is the result of the U.S. government enacting comprehensive tax legislation commonly referred to as the tax act. An annual blended rate was used this quarter, since the company had only its final fiscal quarter within the effective period of the new law. The effective tax rate is anticipated to be in the low 20s starting in fiscal year 2019 when the company should benefit fully from the recent tax reform.
Net income for the fourth quarter of fiscal 2018 was $22.1 million compared to net income of $10.9 million reported in the same quarter of the prior year. Net income per diluted share this quarter was $2.40 versus $1.19 than last years’ fourth quarter.
Now I’d like to review our balance sheet presentation. The cash balance was approximately $187 million at March 31, 2018 compared to $133 million one year earlier. The increase was mainly from net income and net cash provided by operating activities including the early commercial loan payoffs and also the sale of corporate investments. Total commercial loan receivable decreased from the early loan payoffs as discussed.
Inventories increased mainly from more home sales in process by company-owned retail stores and higher raw material levels for increase production rates. Property, plant and equipment grew from the purchase of an operating production facility which was previously leased as well as various planned improved projects.
Accrued liabilities increased from customer deposits, higher volume rebates, accrued wages and accrued warranty, all incidents to home sales growth.
Lastly, stock holders equity grew to approximately $457 million as of March 31, 2018 up nearly $63 million from April 1, 2017 balance.
Joe that completes our financial report.
Thank you, Dan. We are very pleased with the results of the quarter and the full year. Reducing our distribution base and the stated channels through which our homes are sold, consists of home display centers, land/lease community operators, developers and homebuilders, resort operators and others. After many challenging years, it is gratifying to experience the optimism of these wholesale customers. Business is good for the majority of them, they report steady traffic to their retail sales locations and more importantly indicate that increasing percentage of the people who are shopping for new homes are ready to make a buy decision and can qualify for mortgage.
This is most likely because employment levels are high, consumers are more confident about the economic outlook and there’s a certain pent up demand that may be starting to surface. The 20-City Composite S&P CoreLogic Case-Shiller Home Price Index showed a 6.8% year-over-year gain in home prices in March.
On a three month moving average basis, median home prices rose 5% year-over-year to $325,000. These increases we’re trying to pace above the general rate of inflation, can favorably impact the value proposition for factory built homes such as Cavco’s. We believe that a relatively small portion of the population recognize this that they can buy a high quality home for less because it is built more efficiently.
Our company and the manufactured - also known as the factory builder or pre-fabricated home industry, in total, we all are working to generate greater awareness of the inherent benefits of our homes. Meanwhile from a macro perspective, nationally April new home sales grew 1.5% sequentially to 662,000 US. So while the housing market is not robust on a year-over-year basis April new home sales rose 11.6%, while in March there’s was 5.3% rise and February 7.2% rise.
New home inventories [5.4] months of supply flat with last year and at modest levels historically. The supply has been in this range for about the past three years and is down 48% from peak levels. Spike among slight sequential sales decline, we continue to do housing when demand is healthy, as not only due in part to year-over-year rise but also April single-family housing start being up 7% year-over-year, and the May National Association Homebuilders survey being up 2%, two points that is sequentially.
Looking forward, we continue to believe the housing market recovery will continue to unfold over the next 12 to 18 months at a moderate pace, led by fairly positive fundamentals as we expect demand to improve driven by job growth and modestly easing credit conditions. We expect actually the next three years to be very good for our industry. By looking out for this, near-term, we do expect the market to improve in the year ahead.
We have very motivated of talented people who build and market our homes and who provide finance and insurance services as well. We have the capital to support growth, innovation and expansion. In short we feel well positioned to take full advantage of the opportunities that lie ahead in the housing market.
With that we’ll be glad to take your questions. Shelby, please begin.
[Operator Instructions] And our first question comes from Daniel Moore from CJS Securities. Your line is now open.
Congratulations on a great finish to the fiscal year. Wanted to start out, it seems your ability to pass through rising input costs is clearly improving. Given the rising backlog in demands, are you seeing more flexibility in the types of homes that you can build, ASPs just to help us understand. And I think you mentioned and alluded to a catch up, help us understand what’s changing in the dynamics there as ASPs are rising faster?
The story on price increases is that we’ve been gradually catching up. We saw a fairly inflationary environment for materials last year and we got behind the curve somewhat because of our backlogs and growing backlogs, and in our industry we really don’t have the opportunity to retroactively increase pricing. So we have to work through the backlog and we’ve done a lot of that, although as most are well aware inflation still is with us and we expect continued price increases in commodities and purchase parts.
So that will continue to be somewhat of an issue for us to keep up with inflationary pressure both in materials and for that matter labor as well. But we think we’re finally doing so, it will be a continuing issue though because income and order rate is strong and our backlogs remain fairly lengthy. So I don’t think we are out of the woods yet in terms of keeping up with inflationary environment, but I think we’ve made good progress.
Very helpful. And switching gears, where are we now in terms of capacity utilization, how quickly can you grow units given the current labor and capacity constraints, and are you considering restarting shuttered facilities adding capacity, are you seeing others in the industry do that as well?
The bigger question there of course is how is the labor environment and we’d love to increase capacity or increase production utilization, I should say, at a faster rate though we are able to do it currently, but certainly a lot of constraints which I’ll get to in a moment. Yes we are seeing some increases in production capacity. We have opened up a shuttered plant that we have in Austin, Texas, our second plant adjoining our operating operation.
We’re also looking and have expanded certain facilities, added more additional square footage. We’ll continue to look at that. We’re exploring as we speak opening up another idle facility that’s a sister plan to an existing operation. So we’re trying to do those sorts of things. We’re looking at a larger facility to replace an existing facility in one location.
So we’re looking at to kind of more expansion, we’re looking at ways we can attract and retain people, and as we mentioned we’re trying a lot of different ways to do exactly that. It’s certainly a challenging environment with virtually full employment. And as I have said before in some of these calls, it’s unfortunate that a lot of secondary school systems have eliminated trade related curriculum. And so we’re finding that the graduates coming out of high school and people looking for production oriented jobs are not familiar with the process of building things. So that’s an issue.
So we have more training in-house than ever, which obviously creates more challenges and time constraints. But I think we’re making some progress. I feel our competitors are doing the same thing, we talk to them our peer group, we talk to vendors, everybody is having the same issue. So we’re kind of trying all kinds of means to find the right people and keep them motivated and interest in the opportunities they have in our company which are substantial, because we do (inaudible) from within, we can offer good career opportunities for people in production management as they get skilled.
And Dan I would just add that our capacity utilization is currently at 80%. That’s brick and mortar so that doesn’t include some of the things Joe mentioned in considering opening another sister plant that we have and also replacement of larger facility for a location that we have currently. So it’s as we exist right now at 80%.
Very helpful. And one more and I’ll jump back. Maybe talk a little bit about what you’re seeing both in terms of legislation and access to financing. You mentioned folks that are best positioned to qualify for a loan. I know Dodd-Frank they received some regulations rollback, anything specific that could be meaningful or impactful or any other changes in the landscape that you’re seeing?
That was a good win for the industry I might say and that the President recently signed a reform bill adjusting some of the Dodd-Frank provisions. And one of them that particularly impacted our industry was restrictions on sales people at various distribution points being restricted from according to estimated payments and that’s very important because many of our buyers come in and there is then how much they can budget for a home. So is the home going to be $300 a month, $400 a month, 450, 500 and here before since Dodd-Frank was implemented, sales people in our industry could not give an estimate what the payment might be.
That really hampered them, other industries can do it through the car stores, owing to (inaudible) they can always quote payments. We could not advertise or quote payments in our industry and that’s now fixed and that should not be a problem and that should help quite a bit in our people’s understanding, because there was understanding of the value proposition of our product and how potentially affordable it is for them. We expect other bills are currently in consideration in Congress to help us as well, but that was the most recent one.
Personally, we are finding that how it is from a regulatory standpoint, how it is taking a look at our industry closer than it has in many years and trying to determine if some of the regulations that are in place are not productive, not efficient and they have a common period that they hear comments from all sorts of constituencies and I think the work the new secretary is doing could be very helpful in providing more affordable homes to those who need and that’s a tremendous need in this country.
[Operator Instructions] And it does look like we have a question from Brian Hollenden from Sidoti. Your line is now open.
How many of the homes sold in the quarter were FEMA orders and how much did the FEMA orders add to the operating margin this quarter?
The FEMA orders that we build this quarter and the most recent December quarter as well. We didn’t break out the number of those homes, it wasn’t large enough, but it was helpful during the winter months. So both last quarter and this quarter we had them. So I would just note that the margin contribution if you will is fairly similar on a home-for-home basis, but it’s helpful during the winter months. So, when we slowdown and some of our factories that are by winter slowdown periods in their region it’s helpful to add in some of this consistent business. So it did help our margins overall from utilization standpoint.
And Brian, we certainly wanted to help FEMA and the victims of the hurricanes, and so we didn’t participate. But we also had the challenge that our existing backlogs were lengthy and we had to serve our long term customers as well and consumers waiting for their homes to be built. So we did not take as many FEMA orders as we might have otherwise, and we produced those orders as Dan says in areas where there was capacity in those winter months.
So at this point, have all the FEMA orders been delivered?
They have. Yes. And when I say by this point, it’s actually all contained within the fourth quarter ended March 31. So we’re not expecting to build any currently anywhere.
And then of the homes sold in the quarter, can you provide some color as to what percent were sold to millennials and what percent were sold to baby boomers? Are you seeing similar demand from both demographics?
We really don’t have a very accurate data on that because again Brian our part is sold to – we are wholesaler basically, we don’t sell direct to consumers other than through our company-owned stores which are fairly small portion of our sales overall. So we don’t have a very solid statistics. Historically, the age 55 plus, the empty nesters, retirees, season livers, people go to Sun Belt in the winter season, probably accounts for in the mid-20% of our business, but that’s not a hard and fast number, it’s more of a guestimate.
As far as millennials go the same thing applies. We are not exactly sure the ages of all our buyers, of course, and again once they come on the store and they’re getting financing from a third entity, we are not involved in it. Application process is such that we don’t see all their data. But again we are seeing – but from an anecdotal standpoint we’re seeing more millennial age group of visiting sales centers and communities.
And just on the demand part, are you seeing pockets of strength regionally or is this sort of strong demand nationwide.
Well we’re fortunate that demand is pretty strong across the country. There are some pockets that are stronger and those are of course Florida and Texas, California, the Northwest have been very strong in particular. But most of the country is doing quite well, the Midwest, the east, southeast, the deep south are doing well, perhaps not quite as strong as the first group I mentioned, but very strong indication of interest and support orders.
And then last one from me, I think you touched on it, but since Fannie and Freddie announced their pilot program, have you noticed any improvement in financing availability? If we get to and sustain a 100,000 units is that the catalyst that brings the GSEs back in to the market? Any sort of color there would be helpful.
Well the GSE have not really started their program, they are still just in the rollout stage. So I don’t know if it has any impact yet. And their pilot programs, we are not sure how much buying that will create, but they will create new volume. What’s the issue here is that the GSEs were looking at enabling financing through their entities pay and (inaudible) with site-built homes, (inaudible) manufacturing homes or pre-fabricated homes as going to be appraised, comparable to other such homes and they were not allowed to use site-built homes as comps, which provided some challenges in some markets where maybe there weren’t other manufacturing homes to compare to. So it created a number of issues with appraisals, not being able to get sufficiently accurate appraisals and high enough appraisals to allow the consumer to get a mortgage.
That will be addressed by these new programs, because both the GSEs are looking at allowing their homes to be comped from an appraisal standpoint to all homes including site build in the area, which will allow just more comparables and more opportunity to do a fair comparison. We know our homes will compare very favorably at site-built from an appraisal standpoint if they are allowed to be in. These new products will enable that, but again they are very new and no indications yet of their impact.
But it is a step in the right direction; we salute the GSEs for moving on this. I think they are really trying to address their duty to serve obligation and I think it’s finally being recognized by a number of entities, governmental and quasi-governmental entities that manufacture housing not the only, but certainly a major source to address the critical need for affordable homes in this country. And it’s one that’s been around for a long time proven and regulated for over 50 years, homes that are safe and high quality, and I think it’s largely not known and anything you could do to increase that awareness will help our industry.
And we have one last question from Daniel Moore of CJS Securities. Your line is now open.
Just touching on the last point Joe that you mentioned it in your prepared remarks, anything specific you can point to that the industry is doing in terms of incremental awareness.
Yes, we are trying to more of an effort to get the similar press, especially magazine that specialize in housing and home decorating and that sort of thing to feature our product, our industries product for in publications. We’ve long talked about and kind of affiliated to national ad campaign. We haven’t gotten full support for that from all the industry members.
But at some point I think that maybe a possibility. Meanwhile some individual companies or one company in particular has been running some TV ads nationally which have been I think very good and very well produced and show the benefits of living in a factory built home, and I think we’ll see some benefit from those ads.
The industry is trying to again make our elected officials more aware of this product and both at the state and federal level. So, really just stepped up our efforts to create a greater awareness. So this is the product that is very well accepted in areas where its’ been used for many years, but just not a great awareness in areas where it could be used. And so that’s something that we’ll continue to push for.
I wish we can tell you that we’re going to start a major multi-million dollar ad campaign such as some other institutions have done like the Got Milk campaign and the GoRVing campaign. But I don’t think we’re quite there yet, and I don’t anticipate we'll be there in the next 12 months.
Fair enough. Last one from me and I know I ask it every quarter, so I apologize. But with cash now up say over $20 a share on the balance sheet and maybe just look at our capital allocation opportunities whether you’ll take more loans on the balance sheet, other potential uses of cash as that continues to build?
Our capital expenditures will step up somewhat, but still fairly biased with relation to our cash flow generation. So we’ll be spending more as we talked to you earlier on this call about trying to expand production capacity of existing plants, upgrading facilities, adding new systems and capabilities to hopefully move production through faster. So our investment will step up in our core business, we will probably invest some money in our and in fact we have and will continue to invest some of that capital in our CountryPlace mortgage operation, as we try to develop securitization sources for loans that we originate in that entity, and we’ll continue to look for opportunities to roll the business geographically either from De novo building our own facilities or from an acquisition standpoint.
Thank you. And I’m showing no further questions at this time. I would now like to turn the conference back over to Joe Stegmayer.
Okay. Thank you, Shelby. Thank you all for joining us. We look forward to continuing to talk with you in the quarter ahead, and we look forward to reporting excellent forms for you as we move in to the future. Thank you very much.
Thank you. Ladies and gentlemen, this does conclude today’s program, you may all disconnect. Everyone have a great day.