Cavco Industries, Inc. (NASDAQ:CVCO) Q2 2024 Earnings Call Transcript
Cavco Industries, Inc. (NASDAQ:CVCO) Q2 2024 Earnings Call Transcript November 3, 2023
Operator: Good day. And welcome to the Cavco Industries Second Quarter Fiscal Year 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today Mark Fusler, Corporate Controller and Investor Relations. Please go ahead.
Mark Fusler: Good day. And thank you for joining us for Cavco’s -- Cavco Industries second quarter fiscal year 2024 earnings conference call. During the call, you will be hearing from Bill Boor, President and Chief Executive Officer; Allison Aden, Executive Vice President and Chief Financial Officer; and Paul Bigbee, Chief Accounting Officer. Before we begin, we would like to remind you that comments made during this conference call by management may contain forward-looking statements, 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 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. This conference call also contains time-sensitive information that is accurate only as of the date of this live broadcast, Friday, November 3, 2023. Cavco undertakes no obligation to revise or update any forward-looking statements, 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 Boor, President and Chief Executive Officer. Bill?
Bill Boor: Welcome and thank you for joining us today to review our second quarter results. I thought, I’d jump right in with some perspective on what we are seeing in the market. As we previously reported, the dealer inventories that created a big drag on wholesale orders through the first half of the year are now generally under control and our company-owned stores and broadly throughout our independent dealer network, homebuyer interest as reflected in online leads and store traffic is healthy. However, as everyone knows the macroeconomic environment is not providing any relief for those prospective buyers. Having said that, we continue to see quarter-to-quarter order improvement, that trend is largely coming from street dealers with community still lagging as expected and discussed last quarter.
Looking forward, as those community operators work through their inventories, that would be another positive for wholesale manufactured housing orders. Against that backdrop, we continue to operate at a reduced level. Production was down from last quarter as certain plants dealt with the lack of orders and continued to slow production. In line with production capacity utilization was down slightly, but still in the range of 60%, with the already mentioned order improvement, we hit a balanced point at the current overall production rate. As a result, our backlogs were consistent with last quarter. We ended the period at $170 million, which equates to five weeks to seven weeks of production. Clearly, we are anxious and prepared to move plants back to full schedules, as soon as the market supports.
In the meantime, our plants have done an outstanding job in maintaining healthy profitability and cash flow through the market challenges. In the second quarter, our housing gross margin was 23.2%, down 1.6% from last quarter and 3.6% from a year ago, when we were running full schedules and 80% utilization. Allison will go into the gross margin shifts, but the point here is that reducing shipments about 17% year-over-year to match lower demand and still maintaining margin to that extent only happens through discipline and operational excellence. Our retail business has performed exceptionally well. They adjusted quickly to the changing market conditions last year and stayed committed to their winning processes. On a same-store basis, excluding the added volume from Solitaire retail, homes sold through our company-owned stores were up slightly from the previous period.
More importantly, the manufacturing and retail teams are working cohesively on product decisions and selling strategies to produce optimal results across the operations. This teamwork has demonstrated itself as we brought the Solitaire stores into the retail operation and filled out product offerings to improve inventory turns. Overall, our revenues were down sequentially from $476 million to $452 million and pretax income was $52 million, compared to $61 million last quarter. We generated strong cash flow, returned $47 million through share repurchases and added $25 million to our cash balance. We remain convinced of the dire need for our homes over time and our strong balance sheet enables us to pursue investments in organic and external opportunities, despite the near-term conditions.
With that, I’d like to turn it over to Allison to discuss the financial results in more detail.
Allison Aden: Thank you, Bill. Net revenue for the second fiscal quarter of 2024 was $452 million, down $125.4 million or 21.7%, compared to $577.4 million during the prior year. Within the factory-built housing segment, net revenue was $434.1 million, down $125.5 million or 22.4% from $559.6 million in the prior year quarter. The decrease was primarily due to a decline in base business homes sold and a decrease in average revenue per home sold, partially offset by the Solitaire Homes acquisition, which contributed $35.6 million in the quarter. The decrease in average revenue per home was primarily due to more single-wides in the mix and to a lesser extent product pricing decreases. Factory utilization for Q2 of 2024 was approximately 60%, when considering all available production days, that was nearly 70% excluding scheduled downtime for market or weather, consistent with our last two quarters.
Financial Services segment net revenue increased 1.1% to $18 million from $17.8 million, primarily due to more insurance policies in force and higher insurance premium rates, partially offset by fewer loan sales. Consolidated gross profit in the second fiscal quarter as a percentage of net revenue was 23.7%, down 360 basis points from the 27.3% in the same period last year. In the factory-build housing segment, the gross profit decreased 350 basis points to 23.2% in Q2 of 2024 versus 26.7% in Q2 of 2023, driven by lower average selling prices, partially offset by lower material cost per floor primarily due to lower lumber prices. Gross margin as a percentage of revenue in Financial Services decreased to 35.9% in Q2 of 2024 from 44.6% in Q2 of 2023 from multiple severe storms in Texas and in Arizona.
Selling, general and administrative expenses were $61.5 million, compared to $66.9 million during the same quarter last year. The decrease in these expenses was primarily due to lower third-party support costs, and lower incentive compensation costs, partially offset by the addition of Solitaire Homes SG&A costs. Interest income for the second quarter was $5.8 million, up 214% in the prior year quarter. This increase is primarily due to higher interest rates and greater invested cash balances. Net other income this quarter was $0.7 million, compared to $0.5 million in the prior year quarter. Pretax profit was down 44.3% this quarter at $51.7 million from $92.8 million for the prior year period. Net income to Cavco stockholders was $41.5 million, compared to net income of $74.1 million in the same quarter of the prior year and diluted earnings per share this quarter was $4.76 per share versus $8.25 per share in last year’s second quarter.
Now I will turn it over to Paul to discuss the balance sheet.
Paul Bigbee: Thanks, Allison. I will cover the balance sheet changes from September 30, 2023, compared to April 1, 2023. The cash balance was $377.3 million, up $105.9 million from $271.4 million at the end of the prior fiscal year. The increase is primarily due to a few factors; first, net income adjusted for non-cash items such as depreciation and common -- and stock compensation expense; and secondly, working capital changes related to inventory decreases of $19.7 million from lower raw materials at our manufacturing facilities and less finished goods at our retail locations, decrease in prepaid and other assets of $17.8 million, increase in accounts payable and accrued liabilities of $9.9 million, and decreases in consumer and commercial loans.
These cash inflows were partially offset by common stock repurchases of $47.2 million. Restricted cash increased from cash collected on serviced loans in our Financial Services segment in excess of what was distributed. Consumer and commercial loans decreased from loan sales and the pay down of associated loans and fewer new loan originations. Prepaid and other assets decreased from lower prepaid income taxes and a reduction in delinquent Ginnie Mae loans, as well as the normal amortization of prepaid expenses. Property, plant, and equipment net is down from the sale of unutilized equipment acquired with the Solitaire Homes acquisition we completed last January. Accrued expenses and other current liabilities were up slightly from higher insurance losses in warranty reserves, partially offset by lower customer deposits.
Lastly, stockholders’ equity exceeded $1 billion, up $43 million from $976.3 million as of April 1st, 2023. With that, I will pass it back to Bill.
Bill Boor: Our results this quarter highlight the ability of our organization to manage costs and generate cash even when conditions are challenging. Everyone at Cavco is ready for the inevitable return of demand, so we can help more families get the homes they need. Abigail, can we please open the line for questions?
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