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Cavco Industries Inc (NASDAQ:CVCO)
Q1 2020 Earnings Call
Jul 30, 2019, 1:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello, and welcome to Cavco Industries First Quarter Fiscal Year 2020. [Operator Instructions]

I would now like to introduce your host for today's call, Mark Fusler. You may begin.

Mark Fusler -- Director of Financial Reporting

Good afternoon, and thank you for joining us for Cavco Industries' first quarter fiscal year 2020 earnings and conference call. During the call, you'll be hearing from Bill Boor, President and Chief Executive Officer; Dan Urness, Executive Vice President and Chief Financial Officer; and Josh Barsetti, 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 and operational efficiencies. 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.

Some factors that may affect the company's results include, but are not limited to, the risk of litigation or regulatory action arising from the subpoenas we received from the SEC, potential reputational damage that result as -- on these matters under inquiry; adverse industry conditions; our involvement in vertically integrated lines of business, including manufactured housing consumer finance, commercial finance and insurance; market forces and housing demand fluctuations; our business and operations being concentrated in certain geographic regions; loss of any of our executive officers; federal government shutdowns; and extensive regulation affecting manufactured housing.

This conference call also contains time sensitive information that is only accurate as of the date of this broadcast, Tuesday, July 30th, 2019. Cavco undertakes no obligation to revise or update any forward-looking statements 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?

William C. Boor -- President and Chief Executive Officer

Thanks, Mark, and welcome, everyone. The purpose of the call today is obviously to cover the quarterly results. However, we've had some interesting timing with the acquisition that was just communicated through a press release late yesterday. The acquisition is of Destiny Homes, the one plant manufacturer in Moultrie, Georgia, and we expected to close this Friday. We're really excited to welcome the employees to Cavco, and we're very positive about how their products and their independent dealer network fit with our existing plant.

Destiny produces a complementary moderate to high price point product relative to the existing Cavco plants in that region. And the timing and signing of the definitive documents right here at the earnings release has been coincidental. It does give us the opportunity to comment here about, and the Destiny Homes plant will be a great addition to our system manufacturing plants. I'd say that if the good work, good teamwork on both sides to get to this point in the process is an indication, it's going to work out really well for both sides. And again, we couldn't be happier about the deal.

Just turning to the quarter, starting with the big picture, we remain in a period of solid demand and the fundamentals that drive manufactured housing are very encouraging. First, the economy is strong, and you can see this by indications such as consumer confidence and employment. Mortgage interest rates remain very attractive, which obviously supports home buying ability. Finally, there's no doubt that long-term demographics are driving household formations and demand for manufactured homes.

We're continually encouraged by the GSE efforts to increase liquidity for both land-home and home-only financing. As expected, these programs will take time to become meaningful in size, but they represent an important recognition of the quality and the value of manufactured homes, and the role our industry should be unable to play in improving access to affordable housing.

There's a real need for our industry's products, the affordable housing situation is concerned, manufactured housing has historically been a big part of the solution in rural areas with attention being focused by the GSE, HUD and others, outdated perspectives are changing, and we'll have opportunities to expand manufactured housing's impact.

I wanted to briefly comment on the regulatory environment. We recognize and very much appreciate the efforts by HUD to modernize policies and processes, so they're more cost effective and efficient, but has also been actively shining a light on the manufactured housing industry as a solution. Along with others in the industry, we were able to display a home on the Mall in Washington DC during HUD's Innovative Housing Showcase in June. It's a really good event, and gave legislators and others a firsthand understanding of the quality products being produced, much more efficiently than by other means. Again, outdated and incorrect mindsets about our nature are changing as they do zoning restrictions should ease to appropriately accommodate our products, and that's really about opening up market opportunities that have been closed to date.

Turning to the quarter, I'd summarize it by saying this has been one of stability with continued healthy demand. As we've discussed on previous calls, there have been short-term supply chain dynamics that had made it difficult for folks to get a clear handle on underlying demand. We continue to believe that demand is strong for the reasons already cited.

In recent quarters, it's been clear that the market has been concerned about falling backlogs, even though those backlogs have been large compared to what we'd consider optimal. This quarter, our sequential backlog stabilized essentially the same overall level as last approximately seven weeks. If we could dial in a constant backlog level, we pick three to four weeks. However, there's no such thing as a constant backlog level through time, and we're very happy to know that the orders are there, and we can continue producing to meet the robust customer demand. By definition, the stable backlog this quarter means we're matching production to demand, which remains strong for our products.

Supply chain inventory situation is improving as expected. We view these as near-term fluctuations, and expect continued de-stocking where retail, placements and inventories are still correcting. As Dan will discuss, our plants are doing a very good job of managing price and margin given input cost fluctuations and uncertainty. Most importantly, they continue the ongoing work of making sure our products are updated, and what the retailers and home buyers are looking for, because in the end, this is a local business and I really applaud the people around our company to stay focused on the fundamentals which drive results like those we're proud to report on this quarter.

With that, I'll turn it over to Dan Urness to discuss the financial results.

Daniel L. Urness -- Executive Vice President, Chief Financial Officer and Treasurer

Thank you, Bill. Net revenue for the first fiscal quarter of 2020 was $264 million, up 7% compared to $246.4 million during the prior year's first fiscal quarter.

To provide a little more clarity, I'll explain this increase by operating segment. Factory-built Housing is our largest segment, and its net revenue increased approximately 7% as well to $249 million from $233 million in the prior year. This is a result of higher home selling prices combined with a more favorable product mix of larger, more amenitized homes. The increase was partially offset by a 2.1% reduction in the number of homes sold given their larger size and added complexity.

Financial Services segment net revenue increased 12%, and that's from higher home sales volume, more insurance policies in force and increased interest income on commercial loans outstanding compared to the prior year. These increases were modestly offset by declines in interest income from securitized loan portfolios that continue to amortize.

Consolidated gross profit in the first fiscal quarter as a percentage of net revenue was 22.8%, up from 20.9% in the same period last year. Factory-built Housing gross profit improved from the effective home pricing strategies while continuing to benefit from generally lower commodity prices. But we're partially offset by lower financial services gross margins as a percentage of net revenue. This because there was more Texas storm activity that resulted in higher claims expense of the insurance subsidiary compared to the prior year period.

Selling, general and administrative expenses in the fiscal 2020 first quarter as a percentage of net revenue was 13.4% compared to 11.9% during the same quarter last year. The increase was primarily from $2.1 million in amortization of premiums related to additional director and officer insurance that was purchased last fiscal year, as well as $800,000 of expenses related to the SEC inquiry.

In addition, the company realized higher incentive compensation costs related to the improved financial results. The effective income tax rate was 22.2% for the first fiscal quarter, compared to 18.4% in the same quarter of the prior year. The lower effective tax rate in the prior year primarily relates to the greater tax benefits from stock option exercises.

Net income for the first quarter of fiscal 2020 was $21.3 million compared to net income of $19.7 million reported in the same quarter of the prior year, an 8% increase. Net income per diluted share this quarter was $2.31 versus $2.12 in last year's first quarter.

Josh Barsetti, our Chief Accounting Officer, will now discuss the June 29, 2019 balance sheet compared to March 30, 2019.

Joshua J. Barsetti -- Chief Accounting Officer

Thank you, Dan. The cash balance at the end of the quarter was nearly $200 million, up from $187.4 million, three months earlier. The increase is mainly from net income, offset by changes in working capital. Total commercial loans receivable increased from continued expansion and utilization of commercial loan programs offered.

Several balance sheet line items were affected by the new lease accounting standard, which was implemented this quarter. This accounting standard requires that all leases are recorded on the balance sheet, including an asset representing the right to use the specified lease item and liability in the amount of the required payments during the lease term.

The following balance sheet line items were affected. A new operating lease right of use asset in the amount of $12.2 million is now recorded in the operating lease line item in the asset section. The liability section of the balance sheet now includes $3.6 million in accrued liabilities and $9.3 million in operating lease liabilities for the current and non-current portions respectively of the liabilities resulting from normal operating leases. The standard also affects the current and non-current portions of securitized financings and other which now include $1.1 million for property leases where the company will obtain the leased assets at the end of the lease term. These liabilities were previously recorded in accrued liabilities.

Lastly, stockholders' equity was approximately $550 million as of June 29, 2019, up over $20.7 million from the March 30, 2019 balance. Bill, that completes the financial report.

William C. Boor -- President and Chief Executive Officer

Thank you, Josh. Well, there's a lot of attention on the MH side, I do want to emphasize a strong contribution by our Financial Services segment. Our insurance company delivered positive results again this quarter, as did our mortgage lending business, which further increased consumer loan sales. Both are very strategic parts of the company, and they've done an outstanding job of being disciplined in their approach to risk of delivering steady growth.

With that, I think it's time to turn over for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Daniel Moore with CJS Securities. Your line is open.

Daniel Moore -- CJS Securities. -- Analyst

Good afternoon, or I should say, good morning, Bill, Dan and Josh, forgive the background noise, I'm out of the office here. I want to start with the macro, Bill. A lot's been made about HUD code shipments being down year-to-date with the weather breaking, comps getting easier. What are your expectations for industry shipments for the back half of the year? And what does that imply for the full year in terms of calendar '19?

William C. Boor -- President and Chief Executive Officer

Yes, the thought of getting in that prediction mode kind of scares me a little bit. But one reference we'd have inside the company is looking at our -- what we see through our retail business. And generally, I'd tell you that we've continued to see very good traffic and really good conversion rates for the folks coming to our stores. I think our stores do a really good job, so I'm not sure I can generalize too much from what we see there. But when we look year-over-year, the underlying consumer demand that we're all interested in understanding isn't always that easy to get our hands on directly. It just seems to be pretty good year-over-year from what we can see, and I think our sales are showing that too.

So you get these short-term disruptions, but -- and also acknowledge that our retail business is just in certain geographies. But what -- from what we can see this year is pretty comparable to last year's underlying demand. And we're hopeful that that will continue. We don't really see anything in the macro picture that suggests that we would expect it to turn down at this point.

Daniel Moore -- CJS Securities. -- Analyst

Helpful. And then switching gears to gross margins, 23% range for the last two quarters is the highest level in five years, with factory-built margins hitting new highs. In year-over-year terms, gross margin is up to 200 basis points. How much would you attribute to improved pricing and higher ASPs and efficiency, and how much of it relates to the recent declines in raw materials and input costs? Just trying to get a sense of the sustainability of margins at these levels?

Daniel L. Urness -- Executive Vice President, Chief Financial Officer and Treasurer

Yes. Thanks, Dan. This is Dan. And really a combination of both. It's a function of effective pricing strategies the factories in their various local markets being able to manage and work through the appropriate products at the appropriate price. But we are getting the benefit of material price declines in the last two quarters prominently. So that's an important part, and one that sometimes is difficult to predict.

So we're getting that benefit. We're going to continue to monitor and make sure that we're pricing appropriately and accordingly based on market and based on cost. But we certainly wouldn't count on those benefits continuing either -- well mainly because of price uncertainties. The tariff situation, demand for materials throughout the back half of 2019, they'll all come into play here. But we'll continue to watch it closely and make sure that we're maximizing our margin by both cost, and then also efficiency in production.

Daniel Moore -- CJS Securities. -- Analyst

Great. And last for me, Destiny Industries. How much -- according to stat surveys, it looks like they are shipping a couple of hundred homes and have grown nicely over the past year or so? Bill, can you tell us more about purchase price? What type of shipment levels they are at today versus capacity to continue to grow? What product profile looks like? Anymore detail on that would be very helpful.

Joshua J. Barsetti -- Chief Accounting Officer

I can cover part of that, and just to kind of get that topic started, if you want to cover a couple of things there. But specific to their production, we look at them as a very solid producer. It's a good factory, a good sized factory that is producing a good capacity utilization rates currently. But there is room for more. They have the opportunity to build more based on the footprint that they have, and we think that there is going to be opportunity in kind of like build referred to with our independent distribution makeup in that area combined with theirs.

There should be some good dual brand penetration opportunities. They primarily served Florida, Georgia and surrounding states, and we feel real good about how things marry up there, but they're mainly producing mid-to-higher price points. A good fit in a modern facility. We just don't have numbers to breakout for you, just yes, but they're going to be good accretive contributors to the bottom line as well as good contributors to the unit production of the company going forward, we expect.

William C. Boor -- President and Chief Executive Officer

Yes, this might be a little bit repetitive, but sometimes you look at a deal and you know that -- you believe and you think you can get them up to a higher level of performance, you know, there are projects, and this is not that kind of deal, this is a plant that performs very well. The reason we're so excited about it is because it just seems to fit like a hand and glove in our system. Dan has already said this, but their product tends to be mid to higher price point. That's something that complements us in that region. We think that we might be able to get that plants from distribution with people that we work with, and we might get some distribution from some of the folks they work with.

So, Dan, I know you're looking for, -- you know, you'd like to get a lot of numbers. We're not going to be able to disclose a lot on the numbers side, but I can give you a character of the transaction. This is buying something that's already a good performer, and we think we can help each other out.

Daniel Moore -- CJS Securities. -- Analyst

All right. That's helpful. I'll jump back in queue with any follow up. Thank you.

William C. Boor -- President and Chief Executive Officer

Thanks, Dan.

Operator

[Operator Instructions] Our next question comes from the line of Greg Palm with Craig-Hallum Capital. Your line is open.

Greg Palm -- Craig-Hallum Capital -- Analyst

Thanks. Thanks for taking the questions today. I guess just kind of following up on some of the macro commentary and the demand environment, in general. Can you provide any commentary around, you know, order rates by geography? I'm just kind of curious as it relates to kind of the cadence of orders throughout the quarter, you know, sort of how did they build, April, May, June? I don't know if there's any qualified commentary you can provide, and maybe what you're seeing so far in July as well would be helpful?

William C. Boor -- President and Chief Executive Officer

I want to make a general comment about it that we obviously looked at it. I've been personally digging into it just in my early time in the company, at probably a pretty granular level, and trying to understand the quarter by quarter movements. We've made -- we've focused a little bit of attention on the Southeast and Texas and locations like that where backlogs had dropped a bit with -- without rehashing it all with what I call the supply chain dynamics that were at play last several quarters.

I think if we keep focusing on those regions and calling them out, we're probably overemphasizing something because, you know, the Southeast seems to be steadying, and I think that inventory backlog has started to work its way through, as we predicted. We thought it would take well into the summer, and here we are -- we feel like it's progressed. When we look at it on a granular basis, our order rates are good and backlogs are stabilizing. And I'd say the same across Texas as well. So, we've been part of pointing those areas out. But as I'm sitting here today looking at the information, I think we will be misleading people to kind of keep pointing them out as problem areas, in my opinion. So order rates, as we've tried to give a feel for, I mean, we look at both traffic and our retail environment, and we also look at order rates in our factories to refill that pipeline. And we're feeling good about both, and we feel like things are very stable out there right now.

Daniel L. Urness -- Executive Vice President, Chief Financial Officer and Treasurer

And Greg, I would just add. This is Dan. The order rates in our higher price point products in any region around the country are relatively strong right now. We're seeing that specifically in factories that focus on those higher price point products that continues to be remain strong. And we were getting good demand in the mid to higher price point product, and that's been a constant even through the turbulence over the last year.

William C. Boor -- President and Chief Executive Officer

I think that's a great point, Dan is adding there, and it's interesting because all the focus -- and I focus on it as much as anyone. All the focus about affordable housing in this country. It's kind of interesting that the mix is shifting up right now. And if there are places where inventory and order rates are behind relatively, it's in the lower end product. So that's something we'll be keeping an eye on. It might be interesting to watch as we go forward.

Greg Palm -- Craig-Hallum Capital -- Analyst

That's helpful commentary. What about from a geographical standpoint? What are the areas that you're seeing the strongest demand? Or maybe backlogs are still stretched out farther than what you'd want?

Joshua J. Barsetti -- Chief Accounting Officer

So, we've got factories and we think the key geographic markets across the country. With the exception of the Northeast, we don't have a strong presence. So we really maybe couldn't speak to that too much. But generally the demand in the areas we're getting a good portion of that. There's areas where we have stronger presence than others. But, for instance, if we were to call one out, the Southwest, in particular, continues to be strong.

Our factories here continue to have good order rates from these higher -- these higher price points. Florida continues to be very strong and has been again, it's an area where we sell a mix of products, but the higher price points included. So, really don't have too much to add to what we've already said. Just reiterate some of those points.

William C. Boor -- President and Chief Executive Officer

Southwest still has pretty high backlogs relative to the rest of what we see in the country. And I think we'd say both Florida and the Southwest, a portion of why that is because the community business is so strong. So if we diced it that way as well, and looked at community business versus retail stores, we're noticing that in the areas that community business is really driving, we've got pretty long backlogs.

Greg Palm -- Craig-Hallum Capital -- Analyst

Yes, makes sense. It kind of dovetails into my next question. Curious, you know, sort of how much focus you're putting in on? You made an acquisition, but emphasis on putting on sort of increasing efficiencies in throughput at the existing plants. So, I mean, basically producing more units on the existing footprint rather than greenfield and urge additional M&A. So is that a bigger focus area for you, given labor and everything out there that seems to be a challenge industrywide?

Daniel L. Urness -- Executive Vice President, Chief Financial Officer and Treasurer

Yes, absolutely, I mean, we worked in -- internally I just had meeting with our manufacturing guys last week, kind of leaders for that organization, and we're very much rolling up our sleeves. Not that it wasn't being done before. I think it's been ongoing focus. But we think there is opportunity to continue to push ourselves to improve in our existing framework. And I'm really encouraged by the discussions I've been part of since I joined the company on that. So no taking the eye off the ball, and we got to be good operators first and foremost. And that's a big emphasis here.

Joshua J. Barsetti -- Chief Accounting Officer

And we have the capacity to do it.

Daniel Moore -- CJS Securities. -- Analyst

Yes, we've got opportunities. I mean, there's no doubt. Greg, I'll speak for myself. I'm proud of the way these guys perform in the good operations that are people are running. But I think we all agree inside the company that we can even do better. So, that's what we're focused on.

Greg Palm -- Craig-Hallum Capital -- Analyst

And you know, Bill, now that you've had some more time at running the day-to-day operations, just kind of curious, what you view as some of the biggest opportunities for the company both in the near and long term?

William C. Boor -- President and Chief Executive Officer

Yes. There's going to be some consistency in this answer. You've seen a couple of them even in this quarter. I mean, acquisitions are of interest to us. We've been able to put one over the finish line. And I've already said we're very excited about, and we'll continue to look at doing that to strengthen our system.

You've asked the question about kind of opportunities within our system to continue to push forward and do better. I think we can become more efficient. The labor challenges remain. And I think trying to work on retention, which is a complicated discussion, it would take more time than we have, is critical and also trying to be as efficient as we can in our plants, and that gives your affordable housing and then not be very efficient on what we do. So those are all priorities.

I've talked in the past about we're going to continue, I don't have a lot of answers on this yet, but we're going to continue looking at the lending business to see what opportunities we have there as well, particularly in the home-only side and we may increase the use of our balance sheet in that area and resolved on anything yet. But I think there could be a strategic opportunity for us. So those are kind of things that are top of mind at this point.

Greg Palm -- Craig-Hallum Capital -- Analyst

Great. Last one, should we expect anything new, any update on the SEC investigation when the Q comes out?

Daniel L. Urness -- Executive Vice President, Chief Financial Officer and Treasurer

I don't think it will be -- I don't expect any, when the Q comes out, we will be the first ones to let everyone know when there's an update there. But right now, we're just going to continue -- we said we'll do which is focused on supporting the SEC's work. So, yes, nothing really new to report there.

Greg Palm -- Craig-Hallum Capital -- Analyst

Okay, fair enough. Nice, really nice results here. Good luck going forward.

William C. Boor -- President and Chief Executive Officer

Thanks, Greg. I appreciate it.

Operator

Thank you. We have a follow-up question from Daniel Moore with CJS Securities. Your line is open.

Daniel Moore -- CJS Securities. -- Analyst

Thank you. You're just dovetailing on that. I think you called that $800,000 expense related to SEC investigation this quarter. What would be the expectation for fiscal Q2 and beyond the stage?

Daniel L. Urness -- Executive Vice President, Chief Financial Officer and Treasurer

Well, we don't have a number to put out there. It's still ongoing, as Bill mentioned. So we'll have some continued expense. But, as we work through it, we're getting through some things that were hurdles initially, but there is ongoing expense. I guess, I'm not sure exactly how to characterize that other than that we'll continue to report the number as long as it's meaningful.

Daniel Moore -- CJS Securities. -- Analyst

Got it. And then lastly, it's been over a year since FEMA has taken any shipments, given the ongoing weather related volatility across a lot of regions in the last 12 months. Any sense of where they are in terms of inventory levels and when the agency might start ordering again? Thanks.

William C. Boor -- President and Chief Executive Officer

I don't have any sense. I'm looking around a room here. I don't really have anything to tell you on that, Dan. I don't have [Indecipherable] for you.

Daniel L. Urness -- Executive Vice President, Chief Financial Officer and Treasurer

Yes, we don't have a lot of insight on that certainly as it relates to any kind of pending orders or things like that. The inventory levels are a little tough to track. It depends on how you look at things. But I know that they have been active in assessing options and opportunities in the MH world. And we've been part of some discussions there and trying to help where we can, so that they're aware of our resources, what we can do, and what made to bring to the table. We certainly would like to help out if any needs occur, but what look at those on a case by case basis. There's no reason to think that there won't be any potential opportunity in the future to help for natural disaster relief, but no real current information to provide at this time.

Daniel Moore -- CJS Securities. -- Analyst

Understood. Thank you. Nice results in the quarter. And I appreciate the color.

William C. Boor -- President and Chief Executive Officer

Thanks, Dan.

Daniel L. Urness -- Executive Vice President, Chief Financial Officer and Treasurer

Thank you, Dan.

Operator

At this time, I'm showing no further questions. I would now like to turn the call back over to Bill Boor, President and Chief Executive Officer for closing remarks.

William C. Boor -- President and Chief Executive Officer

Okay. And I would like to close here with -- we feel good about things and we appreciate the ongoing dialogue with you all. So, let us know if there are additional questions, and thanks for being on the call today.

Operator

[Operator Closing Remarks]

Duration: 32 minutes

Call participants:

Mark Fusler -- Director of Financial Reporting

William C. Boor -- President and Chief Executive Officer

Daniel L. Urness -- Executive Vice President, Chief Financial Officer and Treasurer

Joshua J. Barsetti -- Chief Accounting Officer

Daniel Moore -- CJS Securities. -- Analyst

Greg Palm -- Craig-Hallum Capital -- Analyst

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