Good day, and thank you for standing by. Welcome to the First Quarter Fiscal Year 2022 Cavco Industries, Inc. Earnings Call. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Mark Fusler, Director of Financial Reporting and Investor Relations. Thank you. Please go ahead..

Good day, and thank you for joining us for Cavco Industries First Quarter Fiscal Year 2022 Earnings Conference Call. During this call, you'll be hearing from Bill Boor, President and Chief Executive Officer; Paul Bigbee, Chief Accounting Officer; and myself.

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, 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 only accurate as of the date of this live broadcast, Friday, August 6, 2021.

Cavco undertakes no obligation to revise or update any forward-looking statement, whether written or oral, to reflect events or circumstances after the date of this conference call, except as required by law. I would like to turn the call over to Bill Boor, President and Chief Executive Officer.

Bill?.

Welcome, and thank you for joining us today to review our results for the first fiscal quarter of 2022. We're very happy to report another record quarter for earnings and revenues. Revenues increased approximately 30% year-over-year, and our diluted EPS was up about 60%.

This was also a quarter in which we executed across the spectrum of our investment priorities. Progress continues on the Glendale, Arizona Park model facility, which will begin production around the end of the calendar year. We announced expansion of our Fort Worth plant.

This investment in improved process flow and work environment will increase the plant's capacity by about 20% and is just one example of similar investments in our existing plants. And last week, we were able to announce the upcoming acquisition of Commodore Homes, which we'll fund by putting $140 million of our cash to work.

Commodore is an ideal fit, expanding our footprint into the northeast and increasing our unit shipments by approximately 25%. Continuing on the topic of capital allocation, we made progress on our share buyback authorization during the quarter by investing $12.8 million at an average price of $209.

When the authorization was announced last October, we said that the buybacks would not limit our focus or ability to make strategic investments, and this quarter demonstrates that point.

So in a very busy and productive quarter, going back to the base business results, our plants continue to do an outstanding job of maintaining margins despite highly volatile costs. Margins grew this quarter as we saw average selling price increase 19% year-over-year and 12% compared to last quarter.

This resulted in a record percent margin in homebuilding of 21.2%. Lumber and OSB came off their recent highs during the period. However, with the lag in hitting cost of goods sold, those decreases were not reflected in margins to any significant degree. Operationally, we continue to deal with persistent labor and supply challenges.

We feel very good about the work to date to improve retention and build skills, and we're confident that this focus, along with the ongoing product rationalization and planned investment, will enable us to improve efficiencies and throughput in our plants. Demand for our products remain strong.

During the quarter, our backlogs continue to grow, and they now stand at $792 million or approximately 40 weeks of production. 80% of the unit backlog growth since the beginning of the pandemic is due to extremely high demand, and about 20% is due to the reduced production we've experienced over the past 5 quarters.

On a year-over-year basis, our manufacturing orders in the first quarter continued at about 50%, above the previous year's level. I feel very good about our operational and strategic execution this quarter, and demand in backlogs provide an ongoing positive outlook.

The pandemic did not cause us to hesitate with regard to our commitment to our customers as we continued safely operating all of our plants, and we remain committed to our capital allocation priorities of investment and growth. All of our strategic priorities remain fully in place.

With that, I'll turn it over to Paul to discuss the quarterly results in more detail..

Thanks, Bill. So I'm going to go through the results of operations, then I'll turn it over to Mark Fusler to do the balance sheet.

Net revenue for the first quarter of 2022 hit another record at $330.4 million, up almost 30% compared to $254.8 million during the prior year's first quarter and up 7.8% over the fourth quarter of 2021, previously the highest quarterly net revenue in the company's history, which included an extra week of production due to the reporting calendar.

Within the factory-built housing segment, net revenue increased 31.2% and to $312.3 million from $238.1 million in the prior year quarter.

Increase was primarily from an 18.7% increase in average revenue for homes sold, primarily from product pricing increases to pass along changes in material costs as well as the product mix shift to slightly more multi-section homes. Homes increased 10.5%.

On a sequential basis, if you adjust for the 14-week period in the fourth quarter of fiscal year 2021, factory-built housing net revenue increased 16.8% and homes sold increased 3.9%.

Financial services segment net revenue increased 8.4% to $18.1 million from $16.7 million, mainly a result of higher loan sales volume and servicing income and more insurance policies in force compared to the prior year.

These increases were partially offset by lower realized and unrealized gains in the current period and a reduction in interest income as a result of loans that continue to amortize. Consolidated gross profit in the first quarter as a percentage of net revenue was 22.4%, up from 21.7% in the same period last year.

The increase is primarily the result of the factory-built housing segment increasing from 21.2% compared to 19.7% in the prior year quarter, primarily due to the same pricing increases we discussed earlier.

In addition, some incremental margin was provided by expensing raw materials purchased at relatively lower market prices during the time of rapid increases given our first in, first out inventory accounting policy. Lastly, factory overhead and service costs benefited from better utilization of costs on higher revenues.

Gross margin as a percentage of revenue and financial services decreased to 42.7% from 49.9% in the prior year quarter as a result of lower unrealized gains on marketable equity securities and higher weather-related events in the current period.

Selling, general and administrative expenses in the fiscal 2022 first quarter were $40.8 million or 12.4% of net revenue compared to $35.3 million or 13.9% of net revenue during the same quarter last year.

Increase is due to higher incentive and commission wages on higher earnings, partially offset by the additional D&O insurance expense of $2.1 million in the first quarter of 2021.

Other income this quarter was $2.5 million compared to $1.9 million in the same quarter last year, driven by more interest income earned on larger cash and commercial loan receivables. The effective income tax rate was 23.8% compared to 23.1% in the same quarter last year.

And finally, net income was up 61.7%, $27 million compared to $16.7 million in the same quarter last year, with net income per diluted share coming at $2.92 versus $1.80 in the first quarter of 2021. So now I'll turn it to Mark to discuss the balance sheet..

Net income, offset by noncash unrealized gains on equity investments and other noncash items, changes in working capital, including greater accrued expenses and other current liability balances and include higher customer deposits received as a result of growing backlogs, principal collection on consumer loans and sales of consumer loans greater than loan originations.

These were offset by higher inventory purchases, repurchases of our common stock and purchases of property, plant and equipment. Inventories increased as raw material costs have increased as well as higher inventory purchases in preparation for increased production.

Prepaid and other assets was lower from the assets recorded in regards to the loan repurchase option for delinquent loans that had been sold to Ginnie Mae. While we are not complicated to repurchase these loans, accounting guidance requires us to record an asset and a liability for the potential of the repurchase.

The balance decreased from a reduction of loans in forbearance. Long-term consumer loans receivables decreased from principal collections on loans held for investment that were previously securitized.

Accrued expenses and other current liabilities increased from deferred payroll tax payments under the CARES Act and higher customer deposits, which have grown with factory backlogs, partially offset by a change in the delinquent loan repurchase option discussed previously.

Lastly, stockholders' equity was approximately $699.1 million as of July 30, 2021, up $15.5 million from $683.6 million as of April 3, 2021. Now I'll turn it back over to Bill..

Thanks, Mark. Before turning it over to questions, I wanted to let everyone know about another important milestone. Earlier this week, we completed Cavco's first corporate responsibility report. This report puts us on a path of accountability and improvement as we evaluate our impact on our various stakeholders.

The report discusses our priorities to reduce any negative impact, but equally as important to maximize the positive impact we're having at Cavco. You can find the report on our website, and we look forward to the conversations to come. Theresa, let's turn it over for questions..

[Operator Instructions]. Your first question comes from Dan Moore with CJS Securities..

This is Brendan Popson on for Dan.

Just wanted to ask real quick on, just on raw material availability and where the biggest pain points are? And when do you expect that to improve which can enable you to expand production faster?.

Yes. The challenges continue, and it continues to be a situation where it's a bit of a moving target. As you know, lumber and OSB have come down in price, which indicates that we're not really having any problems in that regard.

But it still continues that really whether it's an input that's manufactured in the U.S., when those manufacturers have much of the same problems we are with labor and their supply chains, or imports, where logistics disruptions continue.

But we've had everything from doors and windows to electrical boxes to various sealants that we use in the construction process.

So it's really hard to generalize where the challenges come from, but it continues to really be more of an efficiency impact as our folks in the plants need to finish houses out in the yard after they're off the production line before they can ship. So it's a real impact.

It hasn't really led up, and it's very hard to tell when the light at the end of the tunnel is at this point. We kind of expect - we've kind of gotten ourselves in a mindset of expecting it to continue for a few quarters. So I wish I had a clearer view of the future on that..

Yes, it makes sense.

And also kind of piggyback on this, could you provide an update on automation efforts and any incremental capacity you can generate from that? And how long that will take to get there?.

Yes. We've said over time that we're looking at any way to improve our process.

I've made some comments - I guess we've got some increased optimism because I've made comments in the investor call we did just a little over a week ago regarding our Commodore acquisition that I think they've made headway in some manufacturing technology implementations that we're really anxious to look at and consider how we might be able to leverage across the Cavco system.

That transaction is not going to close for a little while. So there's some weight to really be able to work closely with that team on those kinds of opportunities. But I'd mentioned in the call - and it's really just an example, the Fort Worth investment is a great example of really investing in the process.

We added 6 stations to that operation plus really allow - the project really allows them to make a lot more tape and texture product, which is consistent with what the market is looking for. So those are the kind of fundamental investments that I think we're really making headway on.

And as I said, they're not immaterial when you can add approximately 20% to a plant with an investment like that. So that's been going on for some time. We've kind of highlighted Fort Worth this quarter, but we've done similar projects in other plants, and that's the blocking and tackling, and I think it's going to continue to give us more capacity..

And your next question comes from the line of Greg Palm with Craig-Hallum Capital..

Congrats on the really good results here. I guess just kind of starting off thinking about production.

When we think about some of the plants you have or are opening and obviously the pending acquisition at Commodore, how much additional capacity are you gaining? Do you have that estimate?.

With the Commodore deal?.

Yes. I'm not sure if you've commented on where their sort of capacity utilization is, but just kind of curious what kind of capacity you might be gaining when you think about everything going on..

Yes. I know it's not capacity. So let me first kind of reiterate what we're getting from a production perspective. I mean just looking at their unit production, it's pretty significant to our system at 25% increase.

And we've kind of loosely estimated at this point in time that they're running plants in a sense very similar to us as far as the bricks and mortar. So while we haven't pegged a number, I think it's a similar opportunity to continue to look to increase production there..

Okay. Fair enough.

As you look at sort of the go-forward period, what's your comfort level in being able to increase production even with all of these kind of supply chain headwinds still going on?.

Yes. Well, the supply - we got to control the things that we can control directly, not that we haven't done a lot to deal with the supply issues. Our plants have done a great job moving to alternative materials in some cases. So we're managing the supply issues and haven't had any huge amount of downtime, just a little bit of loss in efficiency there.

But as far as production, we need to get more homes out. We recognize that. We haven't yet gotten our capacity utilization back up to where we were before. But I think we're in a time that's kind of confusing for folks to interpret.

If you compare our shipments to last year's quarter, again, that's a little bit confusing because last year's quarter was in a time of incredible disruption. We continued to operate in our plants during that quarter, but our productivity went down pretty significantly, as we were managing safety changes and high absenteeism.

But anyway, I think the point being our - last year, I think we were down 11% year-over-year when we reported last year's quarter. So really, the better point of comparison to get a feel for how we're doing as far as production is to look at the same quarter 2 years ago.

And that was a period when we had relative stability, and we were, again, in a pretty healthy demand environment producing everything we could. So if you compare where we're at today, and I'm looking at this in terms of modules as opposed to units, we produced this quarter about 2.3% less modules than we did 2 years ago.

But our production employees worked about 11.6 fewer hours this quarter than that quarter 2 years ago. So we're close on previous production levels, but we haven't gotten our hours back to where they need to be. And that's the labor challenges that we've talked about.

So I guess the bottom line - I hope I'm not making it too confusing, but I think that's a better base period to look at. And the bottom line is we're pretty optimistic as we keep kind of battling this labor challenge that we should really be able to surpass our previous levels based on that ratio of kind of the hours we put into each module.

I'm not sure if I confuse that or if I help with your question, Greg. So feel free to let me know..

Yes. I mean I guess the question that everybody is trying to figure out is maybe let's just use this recent quarter as a baseline, I mean the 3,700 units.

Do you think that you can - looking out to future quarters, do you think you can expand upon that? Or are there just too many headwinds out there, whether it's labor, whether it's supply chain, where you think that, at least in the next couple of quarters, it might be a challenge?.

No, I mean I'm optimistic. I don't think there's any reason we shouldn't be able to expand. We've got an opportunity just as I said, to get back to where we were pre-pandemic. And I'm relatively optimistic that over the next couple of quarters, we should see some easing in the supply issues.

And we've been working real hard, and I think we're getting traction on the labor challenges with some of the investments and the things we're doing there. So no lack of optimism, and we need to get it up to and then past where we were before, and we should be able to do that..

Yes. Okay. Good. And then ASPs were really, really strong in the quarter, and I think mix was a little bit of a tailwind.

But just kind of curious, can you quantify the impact of that? Or was the ASP increase mostly just pricing to cover the higher input costs?.

Yes. It was primarily the ASP increase. The mix impact was really slight compared to the ASP piece. So I would say, yes, it was primarily that..

Okay.

And then I guess going forward, I mean do you see further price increases? I mean I guess, if you can even just maintain this level, I'm assuming you'll start to see a nice bump in gross margins at some point as certain materials like lumber and OSB have come down recently, right? Is that kind of the way to think about it?.

Yes, I think that's right. I mean we're all speculating on where material costs go from here, and we got actually a considerable amount of relief in the last month or so on lumber and OSB.

So yes, if we kind of stay in the same pricing mode in the near term and that downturn in lumber and OSB flows through cost of goods sales as it will, then that's good for margins. Those are very significant input cost for us. As you know, I mean that's a big part of the materials cost for our product, just about everything else is still escalating.

So it's a little bit muted. It's not that - well, two things. The other inputs, including labor, continue to escalate. But lumber and OSB coming down is a big help..

And your next question comes from Jay McCanless with Wedbush Securities..

The first question I had is around the FIFO benefit you talked about the gross margin.

Could you - is there any way you can break that out numerically for us? And is that benefit going to continue over the next couple quarters? Or is it going to turn the other way as the higher costs flow through and maybe depressed gross margins relative to what you saw in the first quarter?.

Yes. I think the thing that we've tried to explain over the last couple quarters is so people understand the timing of input costs is that there's typically about a 30- to 60-day lag between what you see in spot prices.

So if you're watching lumber, for example, and you see the spot price today, that change will be reflected in our cost of goods sales a month to 2 months later. So this quarter, for example, the prices started dropping late in the fiscal quarter. Those drops will start to hit our cost of goods in the quarter we're in now.

So then after that, it's up to all of us to speculate on whether the prices continue to go down or whether the volatility continues. I don't know.

Does that help, Jay? Or was there more to the question?.

No, no. That was it. That's all I had on that one..

Okay..

The other question I had, just if you don't mind, remind us on the timing for closing the Commodore deal and you are going to give us an update at that point on where their backlog stands, et cetera, so we can backfill the model for bringing them on board..

Yes. Well, what we've said is that we expect to close in the fiscal quarter last calendar quarter, and I think that's we're right at this point. And the biggest driver for that, and I don't know if we've said this in the past, is we've had to do a Hart-Scott-Rodino filing and that just takes time.

We don't think that there should be any issue with that. So it's not trying to warn anyone of any concern, but it just takes time. So depending on the timing of that, that will help us kind of dial in a better estimate when the close will occur..

[Operator Instructions]. Your next question comes from DeForest Hinman with Walthausen & Co..

A little bit more detail on the backlog as it relates to the movement in lumber prices. We're in an incredibly dynamic demand environment. At the same time, we had a historic high in lumber with a rapid deterioration in the price. But when we look at the backlog mathematically, it looks to be in excess of 2 quarters of revenue.

So I mean is there any color you can give us in terms of what is the weighted average assumption for lumber prices inside of that backlog? I mean is it 1,000? Is it 900? I mean can you give us any color there?.

Yes, I think what you're getting at is the pricing of the backlog kind of stratifying the pricing of the backlog, if I interpret the question right, DeForest.

And maybe we can simplify the thought process a little bit because in this - during the last, I guess, 5 quarters or so when we've had these rapid increases in our price and our surcharges to deal with some of these cost escalations, we have not protected the customers' price in the backlog.

So even if they ordered before, we've had to go back and change the pricing on those orders. So really, we're not in a situation - if I interpret your question right, we're not in a situation where we're trying to work off low price product in the backlog.

Is that - am I getting what you're trying to think through...?.

No, I'm trying to understand if there's a potential for really abnormally high margins for the next 2 quarters as it relates to the function of the pricing because we're looking at - I was talking out loud at this point. We're looking at the future curve, it's really high, then we price the business with the customers, they sign on the dotted line.

And then as it relates to what's happening in the spot market, if it comes in way lower, it doesn't sound like we're giving that back to the dealer or the customer and this potential - and you just said it, COGS are meaningfully influenced by the price of lumber, and we've had a historic drop in pricing..

Yes. No, you're on it. I mean in a period of time like this where we have not protected the pricing in the backlog, so we've adjusted them up to our current prices and surcharges. When the input costs drop, we'll get margin expansion.

And we've seen that drop, I think, basically since late May, it started to really come off its very high levels on the wood products side. And so those lower spot prices will start to flow through kind of around where we are now, I guess, from a timing perspective. So you're right on it.

I mean the price is there and inputs appear to be dropping pretty rapidly as they stay on that path, and we should have some margin expansion..

Okay. That was helpful. And then as it relates to the labor availability, you're not the first CEO I've heard talk about this, obviously, not the first company to be lamenting how hard it is to find people. But can you just give us any color in terms of real time, what you're seeing? Anecdotally, the unemployment levels are falling.

We're getting some states rolling back on unemployment benefits. We have the federal unemployment benefits potentially tailing off as well. Any color in terms of we're having job fairs and there's more people showing up. We're getting more people filling out resumes in the locations. We're getting more pings online.

Anything you can give us to help us understand your thoughts about the labor availability improving? And what gives you that confidence to say that?.

Yes. Yes. One, I appreciate your recognition that we're not alone in this problem, and I wish that we didn't have to keep having the same message for people that it's been such a challenge. But at a high level, just as you've asked anecdotally, we do have some optimism. I mean we're doing a ton. We are doing a lot of things as far as job fairs.

And probably more importantly, we've been pretty aggressively looking at things like wages and incentives and benefits. We've made some significant benefits. So I think we've set up the conditions.

And I think if I had to generalize, even though I'm very cautious about calling something a trend too early, I think we're starting to get a little bit of a sense that hiring might improve here.

It's hard to give you much more than that because even though we're watching it very quickly when we - I'm trying not to complicate the answer by saying it's spotty. It is 1 plant might be still struggling every bit as much as they were before. But in other locations, we're seeing a little bit of optimism.

So back to, I think it was Greg's question about production going forward, we expect to be able to increase production. And the way to do that in this market is to not only get people into the plants to work but then stabilize it and start building skills. I think we're on the right track with all of that..

Okay. Maybe just more specifically, is - and you have some insight into where the backlog is.

Is a number like 4,000 homes sold in predating the Commodore transaction? Is that a realistic goal or a benchmark that we could be looking at?.

You're asking how many units are in the backlog?.

No, how many units per quarter is like a number like 4,000, is that realistic?.

Mark's looking something up here real quick..

Yes. I mean back - again, kind of referencing that period that Bill mentioned, 2 years ago, kind of pre-pandemic. We're about the 3,800 range, some quarters up to 3,900. So with some of that production efficiencies that we're hoping for, we could expand beyond that..

Good comment about the length of the backlog earlier, and we have said it's across our system, it's 40 weeks. So I think you had said half a year or more, we're - or a couple of quarters or even beyond that. I mean this is a huge backlog right now for us..

Okay. And then on the capital deployment front, share repurchase is interesting.

How is the Board looking at that going forward? And can you just give us an update on the remaining authorization that's out there?.

Yes. We have $1 million - or $100 million authorization from last October. And off the top of my head, we've used about $14 million of it. So quite a bit of run room there.

And we're - as you would understand, we're always kind of trying to be very conservative about when we can be in the market with various things like the acquisition, which kept us on the sideline for a period of time and other things that we've got to be careful about.

So I think it's going to be differential how much we're able to go into the market in a given quarter, but this quarter demonstrates that we really do want to execute against that authorization. So we're just - we're only about 15% into it at this point..

Okay. Very helpful. And then last question on the mix, just so I understand how you guys are talking about that. You said mix benefit in the quarter.

Do you guys define mix as like the unit as it relates to single versus double unit or floor plans? Or is it amenities and the units? Can you just help us understand what's going on there? Are we seeing people upscaling the units that are actually making the purchases?.

Yes. At a high level, for the most part, it's really the first thing you said there. It's the multi-section units as opposed to single section or single module units. That's generally what we're talking about with mix. And I think people that have been close will notice this quarter, we're starting to provide both our units and our modules.

And we are hoping that, that will give you a little bit better picture into that mix change over time. Mark might have something to add to the question..

Yes. No, I think that's a good point, like Bill said. And then maybe one thing I can add too is that generally, multi-section homes do have higher amenities as well..

We have no further questions at this time. I will turn the call back to Bill..

Okay. Thank you. Again, we're very happy to report what we felt were very good strong results this quarter as well as being able to make the announcements about our investments. And we definitely look forward to updating you, and we thank you all again for your interest in Cavco..

This concludes today's conference call. Thank you for participating. You may now disconnect..