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Cavco Industries Inc (NASDAQ:CVCO)
Q3 2020 Earnings Call
Jan 31, 2020, 1:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Cavco Industries, Incorporated Third Quarter Fiscal Year 2020 Earnings Webcast Conference Call. [Operator Instructions]

I would now like to hand the conference to your speaker today, Mark Fusler, Director of Financial Reporting and Investor Relations. Please go ahead, sir.

Mark Fusler -- Director of Financial Reporting and Investor Relations

Good afternoon and thank you for joining us for Cavco Industries' third quarter fiscal year 2020 earnings conference call. During the call, you will 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 would 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 materially differ 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 cause the Company's results -- 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 Cavco may suffer as a result of 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 specific 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 accurate only as of the date of this live broadcast, Friday, January 31st, 2020. 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 would like to turn the call over to Bill Boor, President and Chief Executive Officer. Bill?

William C. Boor -- President and Chief Executive Officer

Thank you and welcome, everyone. The message this quarter is one of continuing consumer demand and strong results from our operations. We're doing a great job focusing on quality, service and profitability. Very good demand stemming from the strong economy and well-documented demographic drivers continue to leave us optimistic about the industry as a whole and our prospects going forward. The big picture for the industry will continue to be driven by over eight years of under-building, particularly under-supply of affordable units as well as by pent-up household formation demand. The long-term need for affordable housing is real and growing and our efforts are aimed at being part of the solution.

December's industry MH shipment data is not yet in, but looking at the second half of the calendar 2019, basically July through November, industry shipments were up nearly 4%. So while the full year shipments will be deceiving because of the first half retail inventory reduction, the year-over-year comparisons are starting to clear up and show growth and demand. We have seen that in our wholesale sales and we have seen that in our retail operations where traffic is up year-over-year. In last quarter's call, we commented that we are expecting backlogs and demand to carry us through the winter, end of the spring selling season. Three months later, our backlog has held up well at six weeks and it's enabled us to grow shipments.

Turning to financial services, our teams had another outstanding quarter. In insurance, there weren't any major weather events impacting our policy areas. However, this shouldn't overshadow how well our team at Standard Casualty is balancing growth and risk diversification. To consider the results are solely driven by weather doesn't do justice to the great job they have been doing through time. Similarly, the lending operation is contributing strong results, not solely due to interest rates and home buying demand, but in large part due to the steady and smart approach to growth and risk management. Paying attention to details is everything in these financial services operations and our teams are simply doing an outstanding job.

Regarding the broader lending environment, I don't have much to add to what I expect the participants on the call are already following. The GSEs remain constructive through their duty to serve commitments. Having said that, it shouldn't be surprising that it takes time for programs like ChoiceHome and MH Advantage to gain momentum. These are very good programs that are making a difference and we certainly appreciate the level of commitment by the GSEs. Similarly, investor appetite in the prospect for more robust secondary market for MH loans is building. All of these developments continue to move in the right direction.

And finally, I would simply like to add a comment that recognizes the improving regulatory environment. Fed continues to make positive strides on behalf of the industry to reduce regulatory barriers as well as a streamlined process for code updates and these are important changes. These changes reduce cost and they result in a much more efficient process to get deserving families into quality homes.

So with that, I will turn it over to Dan Urness to review the financial results.

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

Happy to do so. Thanks, Bill. Good day, everyone. Net revenue for the third fiscal quarter of 2020 was $273.7 million, up 17.1% compared to $233.7 million during the prior year's third fiscal quarter. The majority of the increase was within the factory-built housing segment where net revenue grew approximately 17% to $257 million from $220 million in the prior year quarter. The improvement was from organic sales growth and the inclusion of a full quarter of Destiny Homes operations as the acquisition occurred in August of 2019.

Housing unit sales volume increased approximately 12% overall while approximately 5% of the improvement was from home price increases, which included a modest product mix shift toward multi-section home sales. Financial services segment net revenue increased 24% to $16.6 million from greater unrealized gains on investments in insurance subsidiary's portfolio, higher home sales loan volume and more insurance policies in force compared to the prior year. These increases were partially offset by declines in interest income from the continued loan portfolio runoff.

Consolidated gross profit as a percentage of net revenue was 21.9%, up 90 basis points from the same period last year. The higher gross margin percent was mainly from improved earnings in our financial services segment as the prior year period included a large hailstorm event in Phoenix. While smaller storms did occur this quarter in Dallas and Phoenix, there were no significant weather-related events. The factory-built housing gross margin percentage was 19%, up slightly from 18.9% during the same quarter last year.

Selling, general and administrative expenses in the fiscal 2020 third quarter as a percentage of net revenue was 13.5% compared to 13.2% during the same quarter last year. The increase was primarily from $2.1 million in amortization of premiums related to D&O insurance as the policies were purchased in December 2018 requiring only one month of amortization in the prior year quarter. We also recorded more sales commissions and incentive compensation from higher sales volumes and profits.

Expenses related to the SEC inquiry were $900,000 this quarter compared to $1.3 million during last year's third fiscal quarter. Other income net this quarter was $2.2 million compared to $318,000 in last year's comparable quarter. The Company realized $300,000 in unrealized gains on corporate investments versus an unrealized loss of $2.1 million in the prior year quarter amounting to $2.4 million positive change by comparison. The current period also includes greater interest income from larger cash and commercial loan balances offset partially by lower market interest rates.

The effective income tax rate was 15.5% for the third fiscal quarter compared to 21% in the same period last year. The current quarter included a $1.7 million benefit for the recognition of certain tax credits from the 2020 Appropriations Bill, most notably Energy Star credits. The effective income tax rate decline from the prior year is partially offset by lower benefits from the exercise of stock options.

Net income was $20.9 million, up 56% compared to net income of $13.4 million in the same quarter of the prior year. Net income per diluted share this quarter was $2.25 versus $1.44 in last year's third quarter.

Next, Josh will discuss the balance sheet. Josh?

Joshua J. Barsetti -- Chief Accounting Officer

Thanks, Dan. Comparing the December 28, 2019 balance sheet to March 30th, 2019. The cash balance was nearly $217 million, up from $187.4 million nine months earlier. The increase is from net income and changes in working capital, repurchase of securitized debt and cash paid for the Destiny Homes acquisition. Prepaid and other assets increased mainly from a land exchange that occurred last quarter. Property, plant and equipment, goodwill and other intangible balances increased from the Destiny Homes purchase.

Certain balance sheet line items were affected by the new lease accounting standard, which was implemented at the beginning of this fiscal year. As a reminder, this accounting standard requires that all leases be recorded on the balance sheet. The current portion of securitized financings and others declined from the repurchase of securitized debt that occurred in August of 2019. Lastly, stockholders' equity was approximately $596 million as of December 28th, 2019, up approximately $66 million from the March 30th, 2019 balance.

Bill, that completes the financial report.

William C. Boor -- President and Chief Executive Officer

Thank you, Josh. Jewel, I think we'll just go ahead and turn it right over for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Dan Moore with CJS Securities. Your line is now open.

Stefanos Crist -- CJS Securities -- Analyst

Hi. This is Stefanos Crist, calling for Dan. So first, can we maybe just talk about the underlying demand trends, the traffic at the dealer level and your expectations for backlog going into Q4?

William C. Boor -- President and Chief Executive Officer

Yeah. I can talk generally about what we see. I mean, we have talked in the past that the big question, everyone's trying to always keep up here on the pulse of is the end consumer, the end homebuyer demand. And we don't talk about specific numbers, but we do look pretty closely at our Palm Harbor villages operation for an indication. Now they not national, but they cover a pretty big and important region and as I mentioned in my opening comments, when we watch those year-over-year trends, traffic is up and deposits are strong and conversions are strong. So it kind of just supports the whole thesis that while wholesale shipments are something we all track as well, when you are really trying to keep a finger on the pulse of consumer demand, all the indications we have are pretty positive.

Stefanos Crist -- CJS Securities -- Analyst

Thanks, guys. And that's it for me. I will jump back in queue.

William C. Boor -- President and Chief Executive Officer

Okay. Thanks.

Operator

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

Greg Palm -- Craig-Hallum Capital -- Analyst

Great. Thanks for taking the questions and congrats on the good results there.

William C. Boor -- President and Chief Executive Officer

Thanks, Greg.

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

Thank you.

Greg Palm -- Craig-Hallum Capital -- Analyst

I guess, maybe just start with the house keeping item. Can you break out what your organic growth rate was in the quarter? And maybe your overall unit contribution from Destiny, if you have that handy?

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

We don't break it out separately, Greg. But I can -- we had pretty growth this quarter as we mentioned in our opening statements. And I would break it down roughly that a third was related to Destiny and then another third related to organic shipment growth and then the final third related to the higher prices.

Greg Palm -- Craig-Hallum Capital -- Analyst

Okay. So you are talking about a third of the revenue increase in the quarter, that's what you are talking about? A third, a third, a third.

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

Yes. That's right. We had a 17% increase and I am just breaking it down roughly a third, a third, a third. That's right.

Greg Palm -- Craig-Hallum Capital -- Analyst

Perfect. That's helpful. In terms of the uptick in financial services revenue growth this year and it really accelerated this past quarter, Dan, you talked a little bit about it. But anything to note there in terms of a change of strategy? It's really been interesting to see how that's accelerated through the year.

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

Yeah. You bet. I will just mention one thing there and it's actually in our press release. But we have, part of the increase is a pretty big spread in just how we have to record unrealized gains and losses on equity investments. So we had a $300,000 unrealized gain in the equity investments in the portfolio in that insurance company. While this quarter last year, it was $900,000 loss. So that's $1.2 million of the increase. And then in addition to that, of course, we had the growth in loans that are being made, loan activity is up. And then we also have a larger portfolio, larger book of business in our insurance business and revenue growth from that area as well.

Greg Palm -- Craig-Hallum Capital -- Analyst

Okay. That makes sense. And then just sticking on the financing side of things here, it sounds like a few of your competitors to [Indecipherable] CountryPlace have announced some new programs really aiming at lower FICO scores. So I wanted to get your opinion on how that might improve overall accessibility to financing industrywide? And whether that's something that you expect to follow suit with CountryPlace as well?

William C. Boor -- President and Chief Executive Officer

Lyle, you want to take a shot?

Lyle D. Zeller -- President of CountryPlace Mortgage

Yeah. We definitely have noted some of those programs that are coming out and we are encouraged by it. I think lending has been a constraint. It's pretty well discussed in the industry. So no one wants to see the industry get over its skis on anything like that, but I think we are far from that at this point. So we think it's a good development. And as far as CountryPlace Mortgage, I guess all I can really say is, we are constantly kind of evaluating and looking at where we should focus our origination efforts. That's an ongoing process in the Company. And we see some opportunities there. So we are going to kind of continue doing what we always do, look for opportunities in our origination strategy and pursue them. So the loosening up, if you want to say that, of lending programs, I think is, right now at very healthy pace. It's not something to be concerned of, it's good.

Greg Palm -- Craig-Hallum Capital -- Analyst

Got it. Okay. Do you have an opinion or maybe, I don't want to say a target, but just sort of an own assumption of maybe what the industry growth rate might be calendar year '20 versus calendar year '19 wholesale shipments? You gave a lot of color on sort of first half '19, second half and related growth rates. So I am just curious if you have assumptions sort of built-in or not?

William C. Boor -- President and Chief Executive Officer

We don't really have a pin down projection or function. We kind of tend to shy away from doing that and getting too obsessed about trying to predict it. But I do think that, without diving too much in the weeds, I think about this a lot and maybe it's time to just let it go into history. But 2019 might be looked at as kind of a flat type year. But you got to always remember that there are a lot of sales that were pulled from 2019 forward into '18. So that was really what I was trying to get out in my comments that, once the dust has cleared on that inventory, the retail inventory situation which we are all tired of talking about, but once that dust is cleared and you really looking year-over-year on more comparable months and quarters, there is a lot of reason to see that right now the industry is growing in kind of low to mid-single digits and we don't see that changing.

Greg Palm -- Craig-Hallum Capital -- Analyst

And how do you view the inventory situation out there? I mean, has it cleared entirely? Has it cleared in most regions? I mean, how is sort of the level of inventory either at your own stores or from the independents, in your opinion?

William C. Boor -- President and Chief Executive Officer

I would venture to say, it's largely cleared. I think that issue is behind us.

Greg Palm -- Craig-Hallum Capital -- Analyst

Perfect. All right. I'll leave it there. Thanks for the time.

William C. Boor -- President and Chief Executive Officer

Thanks, Greg.

Operator

Thank you. I am not showing any further questions at this time. I would now like to turn the call back over to Bill Boor for any closing remarks.

William C. Boor -- President and Chief Executive Officer

Okay. It's not a lie. I really appreciate people's interests. We are always available to continue the discussion. Thanks a lot for joining us today and have a great day.

Operator

[Operator Closing Remarks]

Duration: 20 minutes

Call participants:

Mark Fusler -- Director of Financial Reporting and Investor Relations

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

Lyle D. Zeller -- President of CountryPlace Mortgage

Stefanos Crist -- CJS Securities -- Analyst

Greg Palm -- Craig-Hallum Capital -- Analyst

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