Joe Stegmayer - Chairman and Chief Executive Officer Dan Urness - Chief Financial Officer Mark Fusler - Director of Finance Reporting.

Pete Lucas - CJS Securities Brian Hollenden - Sidoti.

Good day, ladies and gentlemen and thank you for your patience. You've joined the Second Quarter Fiscal Year 2018 Cavco Industries' Earnings Call Webcast. At this time all participants are in a listen only mode, later we will conduct a question and answers session and instructions will be given at that time.

[Operator Instructions] As a reminder this conference may be recorded. I would now like to turn the call over to your host, Chairman and CEO, Mr. Joe Stegmayer. Sir, you may begin..

Thank you, Latif. And welcome everyone to the Second Quarter Conference Call. As usual, Dan Urness, our Chief Financial Officer is with me, and Mark Fusler, our Director of Finance Reporting. Dan will open up with our financial report, and I'll make a few comments, we'll take your questions.

Dan?.

Thank you, Joe. Good day, everyone. Before we begin, 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 in 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 or -- 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.

For our quarterly report on the financials, net revenue for the second fiscal quarter was $201 million up 6.5% from $188 million during the second quarter of fiscal year 2017.

Breaking this increase down by business segment factory-built housing net revenue increased $11.9 million from a larger proportion of higher priced homes sold and improved home sales volume including incremental sales from our new Lexington Homes factory in Mississippi.

Financial services segment net revenue increased from more insurance policies in force and higher home loan sales volume compared to the prior year quarter.

This revenue increase was partially offset by $1.4 million of required payments to reinstate catastrophic reinsurance policies for the insurance subsidiary causing a direct adverse impact to the quarterly earnings.

Consolidated gross profit in the second fiscal quarter as a percentage of net revenue was 17.2% down from 20.8% in the same period last year. As described in our earnings release severe hurricane activity this quarter adversely impacted consolidated financial results.

The financial services segment loss was caused by high home owners' insurance claim volume in Texas, although the Company's losses on these claims were limited to $1.5 million through its reinsurance contracts.

In the factory-built housing segment the hurricanes caused substantial new home inventory damage at certain company owned retail stores, as well as a limited number of lost production days and delays of home sales in Texas and Florida.

Selling, general and administrative expenses in the fiscal 2018 second quarter as a percentage of net revenue was 13% compared to 13.5% during the same quarter last year. The improvement was related to fixed cost efficiencies gained from higher net revenue levels.

The effective income tax rate for the quarter was 27.3% compared to 28.7% in the same quarter the prior year.

The current quarter contains a benefit related to the required implementation of new accounting standards requiring the company to record tax benefits from stock option exercises as an income tax expense reduction, whereas these benefits were previously recognized in equity.

The prior year quarter also had a low effective income tax rate that resulted for research and development tax credit that became realizable during that period. Net income for the second quarter of fiscal 2018 was $6.2 million compared to net income of 9.3 million reported in the same quarter of the prior year.

Net income per diluted share for Q2 '18 was $0.67 versus $1.03 in last year's second quarter. Comparing the September 30th 2017 balance sheet to April 1st 2017 the balance sheet Lexington Homes is included in the consolidated balance sheet this quarter. Cash was approximately $137 million compared to $133 million six months earlier.

This increase was primarily for net income and cash provided by operating activities. Accounts receivable increased from sales growth during the period, commercial loans receivable was higher from additional inventory for planned lending during the period. Inventories increased mainly from the Lexington Homes transaction.

Delayed sales of finished goods related to the hurricanes and additional stocking of raw materials to facilitate increased production levels. Prepaid expenses and other current assets increased for reinsurance amounts to be collected. These resulted from higher hurricane related and insurance claim activity at our insurance subsidiary this quarter.

Accrued liabilities grew from similarly high insurance loss reserves as well as increased customer deposits and volume rebate accruals from more home sales. These increases were partially offset by lower salary related accruals at the end of the quarter.

Lastly, stockholders equity grew to approximately $413 million as of September 30th, up approximately $19 million from the April 1st 2017 balance. Joe that completes the financial report..

Thank you, Dan. Hurricanes Harvey and Irma were a major setback to us but highly unlikely to be repeated as Harvey was considered a 500 year event, and Irma was also similarly very unusual and infrequent event in the state of Florida.

As Dan mentioned on our reinsurance contracts were very effective in limiting our claims expense and our insurance operation to our self insurer retention or deductible, if you will, is $1.5 million plus, as Dan indicated, we are required to buyback this reinsurance after the catastrophic event, which cost another $1.4 million.

The sales and delivery of homes that were postponed was particularly impactful to our company-owned retail stores. Fortunately most of our -- none of our team members, we should say, were injured although several of our people in the eastern area were trapped and had to be evacuated by boat, and a couple lost their homes.

For certain of the losses reoccurred at our facilities both retail and manufacturing, we may receive some insurance coverage. That is currently in the adjustment phase. But we had to recognize the losses in Q2 irrespective of very potentially protected via our commercial insurance.

The better news is really expect to experience an increase in business in the future as people begin to replace the damaged homes in the Houston metropolitan market.

While top shareholders in the hurricanes were, we avoided major damage to production facilities, which are all in operation and, in fact, we’re in operation just a couple days after the event. We expected to be back on track for the next two quarters and post an excellent 2018 fiscal year.

Macroeconomic trends in the single family housing market remain favorable. We’re well positioned to capitalize and we expected to be continued steady growth. We have the team, elevated solutions, balance sheet strength and growth strategy to continue to drive improved profitability and increase value for our shareholders.

So with that, we would be happy to take any questions you may have..

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

It's Pete Lucas filling in for Dan.

You touched on it in your prepared remarks, but just wanted if you can provide some more color on the impacts of the hurricane, specifically Harvey, elaborating on first to quantify the impact of financial services profitability? And do you expect to raise rates as a result?.

Well, I'll take the second part first Dan, and I take the first part. Typically after these major claim events, we do apply to the regulatory authorities. In this case, primarily, The State of Texas, Texas Department of Insurance for rate increases based on the losses that we incurred. That takes some time for everyone to get approved.

I think we hesitate to speculate, but one would think there would be an opportunity to increase rates. However, that will take some time to get approved. And then, of course, we have policies that participated one year duration so to get those increases through doesn't have to immediately have those policies renew.

Our policies do not go beyond one year. So within a 12-month cycle we would have offered rates in place in all the policies. We again been passed catastrophic events, we had some serious hailstorms about year and a half ago.

We were able to get rate increases and that was that happened largely in part in our policy, so to answer your question on rate increases, Dan?.

Sure, yes. Just to pick up on the cost of the hurricane for the quarter with respect to our insurance company, the two numbers I mentioned, that was $1.4 million for the buyback of the reinsurance policies or reinstatement of the premium was a direct impact, so $1.4 million there.

And then $1.5 million was our self insurance hedging, so total, that’s $2.9 million related to the hurricanes for the quarter for our insurance company.

Of course then, we had some additional impact that we mentioned related to our homebuilding business from property damage, and then some delayed sales that we discussed in our earnings release as well..

And I would add to that here that in addition to the losses, the direct reinsurance and deductible losses is under cash to our insurance company. We also had increased operating expenses because our claims adjusters had full time travel in these new markets where hotel rates are very high during a situation like this.

So we see increased SG&A expenses during an even like that which are above the normal. So there were some ancillary impacts to our income statement in addition to those two large numbers that we’ve covered..

And then, what was the cost incurred for the factory-built housing in the quarter?.

We haven’t quantified, go ahead..

Yes, so we haven’t outlined -- this is Dan speaking, specifically we wanted to make sure that was understood what it was that if the property damage at the sales centers, our new home inventory that was just caught in the flooding as well as some damage of the factory locations, that’s still going through that insurance review.

So we have reported our worse case scenario as required by GAAP. We may be able to do a little bit better than that. But that will take time to work it-self out. So we’ve got that full impact for the quarter there. We just haven’t outlined the specific number because it’s moving still a little, and then the delays in shipments that occurred as well.

Obviously we had a certain number of homes, trying to quantify exactly what that is, but those homes that were in process of being sold were delayed because of the weather and disruption in the areas and we expected those we’ll be able to be pulled through in soon quarters..

And then staying on that topic, if you can just touch on the longer term implications of the incremental demand from FEMA and more generally from what you expect to see from potential rebuilding efforts?.

Well, it’s -- certainly we’ve already started to see some increased traffic in our stores in Houston market.

Some people can look at replacement homes fairly quickly if they had proper insurance coverage, others might have to wait for some government assistance or once or another loan programs that have historically been done by the Federal Government and in some cases state is involved. So that’s for private replacement of homes.

But FEMA activity and potentially save tenses of activity as well to provide temporary living units for victims of hurricane, that has started and probably will continue some time, by started I mean that the team has ordered some homes from the industry. We are participating somewhat in that effort.

We want to try to help out but frankly with the backlogs we have and our plans and we need of course to fulfill our commitments to existing customers, we couldn't take everything that was available but we did take a number of those homes and we will be building actually not a facilities in Texas, we'll build the facilities that have some additional capacity available..

And then staying on that topic of capacity and then labor with that, labor obviously remains a key constraint. Can you update us on the current capacity there and where you're seeing the bottlenecks obviously it's Texas there, but given that how far can you grow as demand increases given labor constraints..

Labor is a challenge and we find that had to be the case for our peers, our vendors told the same thing and people outside our factory-built housing industry we hear the same thing. I think it's a macro issue for the economy for this country and we're trying to combat it or deal with it in a variety of ways.

It's sometimes wages and we've certainly been increasing wages inclusive of tenant programs, encouraging our employees to refer other people to our facilities and they'll get a bonus for that, so a lot of things we've doing to try to attract and retain people but frankly there's just a dearth of availability of labor in most markets.

And so we try to step up our recruiting efforts, we hired a full time recruiter just to spend time doing that, but it's kind of a moving issue and we're trying to figure out solutions but I don't think there's any easy answer.

The good part about our business is that we can provide good steady employment to people and they can come to one location, work there every day, they'll get employee benefits and paid vacations so forth and that's not often the case if they work in a subcontracting environment for onsite construction activities.

So we do have some advantages we expect and be able to get labor locally and to keep the people. So it's not something we can resolve but we certainly can say we'll handling the medium term but we're making some progress and we're obviously doing the best we can with our existing workforce.

It does constrain us from trying to expand production capacity or in some cases actually open up facilities or expand facilities of existing operations, but it's something we just have to deal with just say it’s a macro issue not something that's just impacting us and we'll do whatever we can to mitigate the effects of the reduced labor force..

And in terms of that your ability to pass through increasing labor cost and protect margins..

Well, I think we generally have an ability in this industry not just us but I think most [indiscernible] industry because of the short build time although backlogs are somewhat longer now we can announce the price increase there's a material cost elevation inflation or labor cost inflation and we generally pass that on and keep in mind of course it's going to be the case with other forms of construction as well, commercial and residential site build, they're all facing the same issue so I think we're in a inflationary environment with respect to materials and labor.

And we generally able to pass that through sometimes not as quickly as we'd like and sometimes with backlogs we can’t get it through as quickly because we don't generally increase pricing retroactively. So sometimes takes it a while, but eventually, we're able to get it through as a pass-through. And Peter we obviously see something else has..

Thank you. Our next question comes from the line of Brian Hollenden of Sidoti. Your line is open..

What's the right way to think about revenue growth over the next few years just given the strong customer demand and labor availability constraints?.

Well we don't make forecast. Internally we feel very positive. I said about the outlook and our ability to serve the growing market. I think we have the combination of ways. We’ll have facilities. We just recently did in Mississippi. We'll look at expanding existing operations.

We have sister plants in a couple of our facilities they are sister buildings to our current operating facilities that are not operating. So we have some brick and mortar if you will that’s certainly unused. We look at expanding into those operations that are contagious to our existing plan.

And then, of course, we’ll continue look another acquisition and or green field de novo plan possibilities to expand production capacity.

So we think doing that in the fact that now these residential -- construction residential home sales expected to do well, we believe that factory construction within that configured of single family residential will grow at a better that has in the past that is there will be more interest in factory go construction because of the affordability the energy efficiency and the shorter lead times eventually for that product.

So we feel -- and the fact that while the new buyers are not looking to put all their money into home and by excess other and our investment ideas. And so we think the market is moving towards more efficient homes and perhaps a more modestly sized homes, which should benefit our industry as we go forward..

And can you talk a little bit about the Lexington acquisition? Has integration been smooth? What's the operating capacity of the plan? Where do you think you can take that? And then also talk about Lexington’s distribution capabilities and what your plans are there?.

So again, we don’t talk about individual capacity by plan for a couple of reasons, one from a public facility standpoint, but also from a competitive standpoint. But the Lexington plant has -- it’s a good facility. We actually have two facilities there. One is operating, the other is idle. So as we increase production and demand.

After that increases there, we have that potential to open up a second plant. But the existing plant has substantial and used capacity. From a distribution standpoint, they had an existing customer base. We are adding to that with some of our relationships and we're helping them to increase their marketing efforts.

We have a broader more robust marketing presence than the private individual company --. And so we can help them there. The biggest issue there is you’re changing the culture somewhat as we’ve done with the acquisition and we’re doing that. We are changing the product, somewhat product design. We have already done that.

And we have introduced new product to our distribution base which has helped us gain new shelve, more shelve space. So I think it’s going fairly well. It’s not a contributor at this point, wasn’t expected to be, but it’s not a contributor. We bought it and we had to turn it around and we’re working fearlessly on doing that.

It’s good work for there with good people and so we’re going to work with that. It’s a good market to be in. But as with any acquisition and/or Greenfield, if we were to Greenfield to plant, it would be fairly long period of time before that would turn profitable.

And so rolls way off, do we Greenfield the plant, do we acquire something that needs to be -- need some attention or do we pay something more, something that doesn’t need to -- may be needs less attention. In this particular case, that’s for the market, this was a very good opportunity we wanted to be in. And so we will take our time.

We will get it right and it will be a contributor down the road, but this way it’s not to that..

Thanks and last question from me.

What’s your current backlog?.

Our current backlog at the end of the quarter is $199 million [Brian] and that compares to $63 million the same time last year..

[Operator Instructions] We have a follow-up question from Dan Moore of CJS Securities. Your line is open..

Yes just one more from me in terms of the balance sheet.

Given that the cash continues to build here, how closer you are to redeploying some of that cash in the form of more aggressive lending to potential MH buyers? And update us on how and when you would consider flexing that balance sheet?.

Yes, it’s a rightly questioned. We are looking at expanding our presence in mortgage financing business. We have a good platform with very good operation CountryPlace mortgage which has been a business quite a number of years, very good people, good team. We really have been originating traditional land home order just for manufactured homes.

And we are now expanding into personal property loans for manufactured homes. So charter loans with home as the only collateral is the land involved. And we are deploying some of our capital and some investor capital into that. We’re going to take it slow and we’re willing to be careful in our underwriting and in expansion of that business.

But we do think it’s an opportunity for us to serve a lot of our retail base more with kind of one-stop operation where they could buy the home and finance the home through our company.

And it’s certainly also a good profit centered business for us because you make money in origination loan and you make money servicing long after the loan is originated. So again we are not prepared to say how much money we will invest in it. It will be [Fannie Mae], it’s not vis-à-vis our cash balance but will be some use of our cash.

We are also again using in household slit third-party investor money. We’re not as successful in attracting some of that. We have more work to do there.

Our progress would be originally seize on to sell them and retain a portion of the equity in that loan portfolio and that’s what we’re excited to do, but it'll still will involve some investment of our funds [indiscernible] portfolio of loans which we then would sell to third party investors, hope that helps..

Thank you. And gentlemen, there appear to be no further questions in queue at this time..

Okay, thank you Latif. And thank everyone for joining we appreciate it and we're happy to talk to any follow up questions and be reporting to you next quarter with better results, thank you very much..

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for your participation and have a wonderful day..