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INTRODUCTION/SAFE HARBOR DISCLAIMER
(Jeff Tryka)
Thank you Katie and welcome to this
Coachmen conference call to review the Company’s results for the third
quarter ended September 30, 2007, which were released yesterday
afternoon.
Before we start, let me offer the cautionary note that
comments made during this conference call that are not historical facts,
including those regarding future growth, corporate performance or
products are forward-looking statements within the context of the Safe
Harbor Provisions of the Private Securities Litigation Reform Act of
1995. Many factors could cause actual results to differ materially from
those expressed in the forward-looking statements. Information on the
risks that could affect Coachmen’s results may be found in the Company’s
recent filings with the SEC. Comments made today represent management's
views on October 30, 2007, and these views may change based on
subsequent events and the risk factors detailed in the Company's public
filings. Although these comments may be available for a period of time
through the Company's website, the Company undertakes no obligation to
update these comments during that period. With that stated, I’ll turn
the call over to Rick Lavers, our President and Chief Executive Officer.
BUSINESS OVERVIEW (Rick Lavers)
Thank you Jeff, and welcome everyone. With me today are
Colleen Zuhl, our Chief Financial Officer, Mike Terlep, President of the
RV Group, Rick Bedell, President of our Housing Group and Todd Woelfer
our General Counsel.
I have stated that that our single mission is to return
this Company to respectable levels of profitability. We have released
the quarterly results. Colleen will expand on them, and I will not
dwell on them. While I am beginning to get sick and tired of saying
this, we have not yet achieved that mission – but we are much, much
closer than we were only a short time ago.
I commented on the deplorable conditions in the
recreational vehicle and housing markets in our release, so I will not
dwell on them, either. The conditions are truly awful, but they are
exactly that – conditions, not excuses. Nevertheless, I must point out
that our performance has steadily improved in the face these conditions.
Sometimes we have felt like we have been chasing a whirlpool, but I
believe that this Company is now on the cusp of achieving that long
elusive profitability even in these conditions, and by year’s end, we
shall be very well positioned to participate robustly in any market
improvement.
Why do I say this? Restructuring is a process, not an
event. It doesn’t happen today and everything suddenly changes.
Rather, an event may take place, such as a plant consolidation, but we
do not witness the full effect of that event for several months, or even
longer. And during the past year, many things were taking place all at
once and at various times. We have not yet realized all the
improvements from the actions that we have taken, but we can see the
many threads of all those actions start to come together. If I can use
a sports analogy, defense keeps you close, it keeps you in the game, and
we have been playing a lot of defense. In so doing, we have changed the
momentum of the game we are playing. Today, virtually all our
performance trends are positive – and as importantly, have now been
trending positive over an extended period of time. So while I can’t
announce “today we are profitable,” or even “today we are done playing
defense,” it is time to play more offense. Going forward, we will be
pressing some of the advantages we have gained from the initiatives that
have already been launched in the past nine months, and using the
foundation that we have been built over the past year to launch several
new initiatives that have been in development behind the scenes. We
have put stakes in the ground, and when performance has not measured up,
we have made the difficult decisions to change course and redeploy as
reality dictates. Going forward, we will continue to manage in this
fashion.
Sales are a key performance indicator. Unfortunately,
the housing and recreational vehicle markets have not been trending
positive, just the opposite. In these markets, we have not been
able to increase top line revenues. However, our sales in the Housing
segment have declined significantly less than the market
indicators, and while our sales in the RV segment have declined our
market shares in many critical sectors have increased, as
have our margins. Increasing both market share and margins in a
down market is an accomplishment worthy of emphasis.
Colleen will give you the precise details, but for the
quarter, Coachmen’s sales fell just over 5%, but gross margins increased
over 6%. Gross profit improved by almost $2 million. And SG&A has been
reduced – again.
For the past nine months, net cash flow from operations
almost tripled, and capital expenditures were almost halved. Total
inventories – including finished goods inventories – decreased, again.
Our long term debt remains low, and our short term borrowings
decreased.
It is not that we are bragging about either the top line,
or the bottom line – we can’t. But what’s in between clearly shows the
impact of the actions we have taken, and provides validation that the
actions were correct, and that they are working. It gives us confidence
in our future, despite current market conditions.
This is the anniversary of this management team.
Actually, not quite, as we did not reconstitute our senior management
team in the housing group until the first quarter of this year, and we
have yet to complete our intended complement at middle management.
Nonetheless, a year ago I said we would hit the decks running, with a
sense of urgency – so it seems an appropriate as well as traditional
time to look back and judge whether we did. I believe the answer is a
clear and resounding, yes!
As I have said, profits are not yet on the list – but I
will remind you that $28.4 million of the booked losses in the past year
have been accounting entries due to historical performance, such as
goodwill impairment.
We have dramatically reduced our costs of operation
through a combination of reductions in force, strategic sourcing, and
product and process simplification. During the first part of 2007, we
organized and planned an entirely new strategic sourcing effort. So far
in 2007, we have realized $2.8 million in reductions from that effort,
with more to come. On the RV side, we have reduced our number of
suppliers by 7.3%, our active SKUs by 29%, and our models by 26%, while
increasing the commonality of components. This reduction in complexity
reduces inventory and handling costs, acquisition costs, defects and
warranty, and administrative costs. All of this combined has improved
our net sales margins. We closed a plant in Georgia, changed our plant
manufacturing charters to emphasize manufacturing flexibility, are
scaling back in Chino, are selling our paint facility and moving it to
the main manufacturing complex in Middlebury, and have consolidated both
motorized and towable production facilities in Indiana to dramatically
increase our capacity utilization.
As a result of all these actions, we are approaching our
stated goal of achieving profitability at $400 million sales levels in
the RV Group. We have achieved meaningful market share improvements in
nearly all product categories. We have achieved significant and
demonstrable improvements in the quality of our recreational vehicle
offerings, in terms of both design and fewer production defects. We
recently announced the best results on Ford TQVM and RVIA Compliance
Audits in Company history. From numerous anecdotal reports from dealers
and users alike, we are now being recognized in the market for the
quality leadership position we have seized. In so doing we rescued our
somewhat tarnished reputation, and can now claim quality that is best in
class. This is also beginning to reduce our warranty costs, put
pressure on our entire industry as we raise the bar, and we are
confident will ultimately be reflected in increased customer
satisfaction – and sales.
On the Housing side, recently, we closed the All American
Homes plant in Ohio, and consolidated its production into the Indiana
facility to increase its capacity utilization and improve its
efficiency. We significantly increased the production capacity and
efficiency of our Mod-U-Kraf operation. We are also simplifying the
housing operations. For example, we revamped our delivery and set
practices based on best practices, and we are in the process of reducing
an inventory of nearly 300 housing plans to under 100, without
sacrificing any sales. We articulated a new housing group strategy
which emphasizes major projects, enhanced our personnel resources to do
so, and successfully attacked an entirely new market segment, military
construction. We believe that business will now triple, year over year.
We have refined the profile of what is needed in an All American
Builder, and we have launched a major builder recruitment program to
fill empty territories and upgrade our builder body.
Perhaps most importantly, we have cultivated a whole new attitude at
Coachmen. We are creating a dynamic culture of innovation and
empowerment, characterized by fun and excitement with individual
responsibility and consequences. At Coachmen we don’t just ask
why, or why not – we ask how, and when? We have markedly increased the
quantity and quality of our training programs. We are guided by new
vision statements for both the RV Group and the Housing Group. We
redefined what our RV products stand for with tight, disciplined brand
charters. These are not just words on paper. They were developed with
our people, they are easily understood, and they are providing clear
direction that has been enthusiastically embraced. For example, in
2006, we had very small presence in the growing sport utility trailer
market. Today we have an entire division dedicated to this product,
offering three model lines that to date have generated 1,125 unit sales,
or an increase of 686% over 2006. We revamped our new product
development process, and created an advance design team to improve and
encourage practical innovation. The RV Group introduced 17 new models
at last year’s Louisville Show, has introduced 14 since then, and will
introduce 12 at next month’s show. These are significant innovations,
not changes in tapes and drapes and nearly all of these new models
replaced existing offerings.
I can also tell you that over the next months we will be
introducing new programs to enhance the value of our dealerships
in both segments of our business, bold new product offerings –
not new models of existing product – and, if things continue to progress
as we hope, entry into several new markets.
I believe we have followed through and done everything
that we have told you that we would do. We have been frank and
forthright about our problems, without excuses, as well as our
prospects, without bravado. We intend to continue in that vein.
At the last conference call, I told you that the 2nd
half of 2007 would be much better than the 1st half. So far,
it definitely is. Colleen, Mike and Rick will now report on their
segments and to our recent restructuring actions. Colleen will also
address some of the questions many of you have raised about our life
insurance asset.
Then I will finish with some comments on the overall
health of the Company, and the outlook for the next quarter. Colleen…
CORPORATE/FINANCIAL REVIEW (Colleen Zuhl)
Thanks, Rick.
Turning to our performance in the third quarter, as
mentioned in our release, the weakness in both of our industry segments
continued, but the actions we’ve taken over the last year are showing
positive results, even in the face of such weakness.
For the third quarter of 2007:
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Sales fell 5.2% to $123.9 million versus $130.7
million last year.
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Consolidated gross margin was 6.2% compared to 4.6%
for the same period a year ago.
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The $1.8 million improvement in gross profit is
attributable to material cost savings, reductions in discounts and
promotions, our continued efforts to reduce warranty costs through
improved product quality, increased labor efficiencies, primarily in
reduced salary costs, more efficient delivery operations and
production consolidation efforts that are still ongoing.
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Selling, general and administrative expenses were
reduced by $0.6 million compared with the third quarter of 2006 due
primarily to reductions in employee expenses and the timing of the
RV Group’s annual dealer seminar, partially offset by increased
professional services and legal costs relating to our efforts to
recover damages caused by the sidewall lamination and lift system
issues of 2005.
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Combined, these factors resulted in a pre-tax loss of
$4.3 million for the third quarter, a 32% improvement over the $6.4
million pre-tax loss reported in the third quarter of 2006.
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At the bottom line, the net loss for the quarter was
$4.3 million, or $0.28 per share in 2007 compared with a net loss of
$3.5 million, or $0.22 per share in the year ago quarter.
For the quarter, we continued to control our balance
sheet, cash flows and the utilization of our assets. For the first nine
months, net cash flow from operations was $5.7 million, which is a
significant improvement from the $1.7 million cash flow from operations
for the first nine months of 2006. We have also held a tight line on
capital expenditures, expending only $2.2 million through September 30,
2007 versus the $4.1 million expended during the first nine months of
2006.
On the balance sheet:
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Cash decreased from the second quarter by $146,000 to
$3.1 million at September 30, 2007.
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Total inventories decreased by $4.4 million from the
end of the second quarter to $70.4 million. We reduced finished
goods inventory by $1.5 million from $33.7 million to $32.2 million,
with a $300,000 increase in RV finished goods offset by a $1.8
million reduction in finished goods at the Housing Group. In terms
of days supply, finished goods increased to 26.4 days from 21.1 days
at the end of the second quarter due mainly to the lower revenue
levels in the quarter.
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Long-term debt remains very low at $3.6 million.
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Short term borrowings were reduced from the end of
the second quarter by $6.1 million to $8.3 million as of September
30, 2007.
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Shareholders’ Equity stands at $134.9 million
resulting in a book value per share of $8.57.
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We are currently in discussions with potential buyers
for the Elkhart paint facility and our Ohio plant and do not
anticipate any impairment charges related to these facilities at
this time.
Given our results and recent difficulties in the overall
credit markets, many investors may be concerned about Coachmen’s
financial condition. Let me assure you that despite the challenges we
face, we have a solid financial position from which to pursue our
ultimate goals of bottom line profit. Certainly since the outbreak of
the credit crunch spawned by the subprime mortgage problems this past
summer, we have heard a lot about difficulty accessing credit and we’ve
received many questions lately from shareholders regarding our Company’s
access to cash. Clearly, in the current challenging market environment,
this is something we continually monitor to ensure that we have ample
cash available to fund our current operations, R&D and other
initiatives, and at this point we stand on solid ground.
Certainly we fully expect our operations to provide us
with the cash flow we need to adequately fund our activities, which is
why we have been so single-minded in our efforts to reduce inventory
levels and avoid any build up of finished goods inventory.
Unfortunately, in difficult markets we cannot always count on operating
cash flow to be adequate to fund our needs. In those cases, we turn
first to our primary $55 million secured credit facility which was
established in 2006. This credit line is secured by certain assets,
particularly inventory, accounts receivable and real estate among others
and does not include operational or financial covenants so long as we
maintain an available balance of $15 million on the line. Since
establishing this credit line, the highest balance we’ve had outstanding
has been just under $23.3 million in December 2006. This line of credit
is in place until August 2011.
If we ever faced a situation where our cash needs
exceeded our available credit facility, we have ready access to another
source of low-rate funds through the cash surrender value of life
insurance policies. This is a line item on our balance sheet which is
not well understood by investors and analysts, so let me try to clear up
some of the questions. The life insurance policies were purchased to
fund our deferred compensation programs for executives. The Company is
the beneficiary of the policies and although they were purchased to fund
the deferred compensation obligations, they are not specifically
restricted for that purpose and are available to fund our general
operations. Right now, the cash surrender value of the life insurance
is approximately $51.8 million, and we have borrowed approximately $17.7
million against these policies resulting in a cash surrender value net
of loans of $34.1 million. Our liability at September 30th,
2007 under the post-retirement deferred compensation benefit programs is
$7.8 million. Should we have a need for cash, we could borrow up to
approximately 95% of the cash surrender value of the policies, though we
would likely not borrow in excess of what would be required to fund the
benefit obligations.
We have often been asked why we have these life insurance
policies, and why we don’t just sell them. There are in fact several
very good reasons for us to maintain the life insurance policies. These
policies were utilized in part due to the tax advantaged treatment
associated with them. As a result, if we were to liquidate the
policies, we would incur a sizable tax penalty. A second very practical
reason for maintaining the policies is that the face value of the
policies is significantly higher than the cash surrender value,
currently about $100 million compared with the cash surrender value of
approximately half that amount. Given that some of these policies have
been in place for more than 20 years, the face value of the policies
will become increasingly important. So as you can see, the life
insurance represents a valuable asset on our balance sheet and a
potential source of cash should we need it.
Finally, we have a number of non-producing assets which
we intend to sell which will generate proceeds that will be available
for operations. We have the assets associated with the recent
consolidation efforts such as the CLI Paint Facility in Elkhart, and the
Ohio housing plant and several other properties currently listed for
sale. These properties include a building in Decatur, IN, the remaining
pieces of the Georgie Boy facilities in Edwardsburg, MI, some vacant
land in Tennessee and our corporate office building. Combined, these
properties have an estimated value in the range of $10-12 million.
In summary, during the quarter, we managed our assets and
cash flows in the face of particularly difficult market conditions for
both business segments. We continued to maintain tight control over
inventory levels and were disciplined in our approach to product
pricing, discounts and incentives. We saw the early results from our
efforts at reducing material costs through our strategic sourcing
efforts and those should continue into 2008. We began to see meaningful
improvements in warranty costs resulting from our focus on quality, in
addition to the recognition of that quality from our industry and
suppliers. The improvements in quality should continue to positively
impact warranty costs and margins moving forward. Our plant
consolidations are well underway, and while we expect most of the effort
to be completed by the end of 2007, we will likely see minimal effect of
the improved capacity utilization and production efficiencies until next
year. All of these efforts will move us closer to our ultimate goals at
the bottom line.
Mike, I’ll turn it to you …
RECREATIONAL VEHICLE SEGMENT/OPERATIONAL REVIEW (Mike
Terlep)
Thank you Colleen.
As we stated in our Release, the Recreational Vehicle
Group reported sales of $91.8 million during the third quarter of 2007,
up slightly from the same period last year. This compares favorably
with an overall industry decline of more than 11% in total wholesale
unit shipments through September.
The detailed market information by product category
regarding the Industry, as well as for the RV Group is as follows:
The RV market remained soft in the third quarter,
especially in towables. For the industry, all towable product
categories are down at wholesale through September by 13%.
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Travel Trailers were down by 14%,
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Fifth Wheels were down by 10.4% and
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Camping trailers were down 13.5%.
Motorized fared a little better.
Through September, industry wholesale unit shipments were
down only 1% … with
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Class A’s up 3.6% and
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Class C’s down 7.2%.
In the third quarter, Coachmen wholesale unit shipments
of all product types fell by 3.3%, versus the third quarter one year
ago, while industry shipments of all units were down 6.7%.
At retail, Industry numbers are available only through
August. Year to date, towables retail registrations for the industry
are up 1.3%,
Year to date retail registrations through August, total
motorized products are down 4.9%,
As to the RV Group performance and direction, there is
good and there is bad to report.
First the bad: The RV Group lost $4.2 million. However,
gross profit for the third quarter was $3.5 million, or 3.8% of sales,
versus 0.6% of sales in the third quarter of 2006, marking the best
quarterly gross margin performance since the first quarter of 2005.
Total operating expenses were reduced by $0.1 million compared to a
year ago. As a percent of sales, operating expenses were reduced
slightly to 8.5% from 8.7% in last year’s third quarter.
Although the RV Group booked a pre-tax loss of $4.2
million, this compares favorably to the pre-tax loss of $7.3 million in
the third quarter of 2006.
Now the GOOD:
Our retail market shares are up in most of our product
categories, demonstrating consumer acceptance of our redesigned
products.
In motorized, our retail market share as reported by
Statistical Surveys, Inc. has improved in Class A diesel motorhomes and
Class C motorhomes. Our retail share of diesels improved 2.3% through
August, while our share of Class C motorhomes increased 13.8% over the
same period.
On the towable side, we experienced retail market share
gains in travel trailers and fifth-wheels. Our retail shares of travel
trailers improved 22.3% through August, while our share of the
fifth-wheel market improved 4.8%.
The continued positive trends in retail market share show
that our products are hitting the mark with end consumers.
The RV Group total finished goods now stands at $24.1
million, which is a reduction of 48% from the $46.2 million in finished
goods one year ago.
The quality of our product continues to improve. Our
quality metrics have improved by 41.6% since the implementation of our
new quality program last February. In addition, we recently received
fantastic product feedback from a couple of independent sources.
As part of our RVIA membership requirement, we are
subject to several random audits (up to 7 or more) in a year’s time.
RVIA inspectors show up unannounced with a checklist of over 850
specific code requirements, and any code requirement not met by the
recreational vehicle manufacturer receives a deviation listing ranging
from A=most severe, to C = least severe. The results for our most
recent audit of all the Coachmen Indiana facilities reflects a perfect
score with the exception of a single class C (least severe) deviation in
just one plant. To date, our average points per audit have improved by
71% when compared to the 2006 average points. September proved to be
the best RVIA audit in memory for our Company.
Ford conducts an annual audit to ensure manufacturers are
meeting the minimum requirements of the Ford Quality Program and
qualifications set forth by FMVSS, RVIA and CSA. For this year’s audit,
Coachmen easily surpassed Ford’s minimum qualifying score of 89.3
points. We have gone well beyond the minimum with 104 out of 105 total
points (over 99 percent of the maximum possible). This is our highest
Ford QVM score ever! As reported in the overall assessment from the
Inspection Leader, “It is clear that Coachmen’s approach to Ford’s QVM
program, and quality in general, is positive, dynamic and it is getting
results.”
The improvements in our products’ quality and designs are
a direct result of our focus that puts quality as our #1 priority. Add
to this the laser focus of our specific product teams, a direct flow of
information from our dealers, and you can see why our products are
winning in the market place.
One of the key drivers to our operating losses are the
unfavorable operating leverage due to sales and production volumes. To
address this, we have recently executed a large scale consolidation of
our assembly and support plants … consolidating all Class A production
into one plant and all Travel Trailer production for our IN facilities
into one plant. This resulted in the closure of two assembly plants
that have been moth balled for future growth. We anticipate this move
will result in better margins through lower overhead and better capacity
utilization rates. In addition, we have consolidated two of our support
plants on our north Middlebury complex to our primary Middlebury complex
and are in the process of moving our paint operation in Elkhart to
Middlebury. The Elkhart paint facility is being sold. In fact, we have
already accepted an offer for that property. And finally, we are in the
process of significantly down sizing our West Coast service center and
have vacated the 65,000 square foot plant we were operating service from
and we have a suitable sub lease for this facility pending.
These actions will improve our overall capacity utilization to
approximately 75% from the current utilization of less than 50% and will
have a meaningful impact in the reduction of our overhead costs …
estimated at more than $7 million annually.
As we mentioned in our last call, in the second half of
2007 we shifted our focus to margins, and our results for the quarter
reflect that focus. Our 2008 model year products garnered meaningful
improvements in our net sales margins and have positioned us to
accomplish more suitable gross profit margins as we improve our
operating leverage through the actions just reviewed.
So what is to come for the RV Group …
You can expect continued improvements in margins coming
from improved operating leverage and our Strategic Sourcing efforts that
have focused on standardization, SKU reduction, supplier consolidation
and better leveraging our spend. We are confident in our ability to
return the RV Group Gross Profit margins and pre-tax profit performance
to peer group levels and historic performance averages in the course of
2008, baring further deterioration of our markets.
You can expect continued improvement in the quality of
our products. We intend to keep raising the quality bar in our
industry.
You can expect continued leadership in the innovation and creativity of
our products. At the upcoming RVIA Trade Show in Louisville we will be
debuting a significant enhancement in one of our primary travel trailer
lines that will establish a new standard for entry level trailers in the
Industry. We will also be introducing an all new Class C product line
built on Daimler’s Sprinter chassis, as well as numerous innovative new
product offerings in our entry level Class A products, Leprechaun Class
C product, Sport Utility towables and fifth wheels.
On the horizon beyond Louisville, you can expect some
innovative products that are currently in development in Class As and
towables … some of which incorporate patented new designs and
technologies that we believe could be game changers for our company.
However, we know this will not be enough in the current
market environment. Accordingly, we are launching an aggressive
marketing program to leverage our brand equity. This program is focused
on growing our distribution base by offering an enhanced value package
for our dealers and re-inventing our owners club in order to improve our
customer retention and attract more prospective customers to our family
of products.
We will also be rolling out an incentive program to our dealers to
assist them in meeting their needs in the current market, with a focus
on inventory turns and pulling product through the supply chain.
Over the last three weeks I have personally been out on
the road visiting key dealerships in various regions of the U.S. There
were a number of objectives tied to these key dealer visits, one of
which was to listen first hand to dealer impressions of our Company’s
progress. The feedback and input I collected from these dealers was
very positive: each dealer clearly conveyed noticeable and significant
improvement in our products’ quality, our products’ positions and the
overall direction of our Company. As a matter of fact, the general
sentiment was a 180-degree turn around from feedback and input I was
hearing from our dealers one year ago. This further supports that our
direction is upward and that our actions are the right actions in the
eyes of our customers.
The RV Ship has turned, but we still have a lot of work
to do! We are optimistic, energized and passionate about our direction
and our future.
Now, for details about Housing segment, I’ll turn the
call over to Rick Bedell, President of our Housing Group. Rick…
(PAUSE)
HOUSING GROUP/OPERATIONAL REVIEW (Rick Bedell)
Thank you Mike…
In the third quarter, the Housing Group faced some of the
weakest market conditions since 1991. According to the U.S. Census
Bureau, in September single-family housing starts fell 30.8% from a year
ago. In the Midwest region, single-family starts fell 28.0% while in
the South single-family starts fell 32.4% compared with September 2006.
For the first nine months of 2007, total single-family housing starts
in the Midwest fell 28.3% while single-family starts in the South fell
27.8% year to date.
For the third quarter:
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The Housing Group reported a 20.3% decrease in
revenues, to $32.1 million from $40.2 million last year, but this
compares very favorably to the statistics I just cited.
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In the face of these reduced revenues, the Group
generated a pre-tax loss of $0.7 million compared with a $0.3
million pre-tax profit for the year-ago quarter.
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As a percentage of revenues, gross profit remained
essentially flat at 13.3% of sales.
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Total operating expenses were reduced $0.2 million to
$4.9 million, primarily due to reduced selling expenses associated
with lower revenue levels.
Let me now turn to what we are now doing and plan to do
over the next few quarters to bolster our performance and set in place
the ground work for the Housing Group’s performance in 2008 and beyond.
On September 21st, we announced that we would
be closing our All American Homes production facility in Zanesville,
Ohio. Given the continued softness in the Midwest housing market and
the proximity of the Ohio facility to our plant in Decatur, Indiana we
determined that the best course of action was to close the plant and
consolidate production into our Indiana operation. We anticipate the
closure to be completed in the fourth quarter. We will eventually
sell the facility, and have already had discussions with several
interested parties.
To provide a little background on the Ohio facility, it
was opened in 1998 as a satellite plant to the Indiana facility to
service the markets in Ohio and east. The closure of the Ohio facility
will enable us to bring the Indiana Division back into profitability
while eliminating the fixed overhead associated with the continued
operation of the Ohio plant.
Military construction remains a top priority. In addition to the recent
manufacturing completion of the Ft Bliss project, we anticipate that
production will begin on the Ft. Carson barracks project in November.
This project will provide our Colorado and Iowa plants with steady
backlog through May of 2008. This project will be the largest
single project constructed by the Housing Group with a contract value to
the Housing Group of more than $40 million. Beyond these projects,
we expect to be providing proposals, within the next two quarters for
several new military projects of similar scope. Construction of
these projects could begin as early as the 3rd quarter of 2008 and
should continue over the next 5 years.
We are also working to improve our traditional housing
business as we recognize it is the foundation for the Housing Group’s
business. Our efforts to simplify our product offerings continue. For
2008, we will have streamlined our portfolio of home collections from
nearly 300 floor plans to approximately 80. Eliminating slow moving
floor plans and adding new up to date designs, simplifies the decision
making process for our end customers. Further simplifying the buying
process is the establishment of All American Choice Mortgage—our new
home construction and home mortgage financing arm. Customers will
now enjoy one stop shopping from any of our authorized builders from
selecting and purchasing their new home to obtaining construction loan
and mortgage financing in one visit.
In August, we launched the All American Home Store at our
Decatur, Indiana facility. The Home Store is selling our All American
Homes directly to the consumer from our existing model center. The Home
Store serves approximately a fifty mile radius from our Decatur
manufacturing plant. In addition to the retail center at our Mod U Kraf
Division in Rocky Mount, Virginia, the new Home Store will serve as a
test and launching point for additional retail sales centers in areas
that are under served by our independent builders.
Last April, we launched a major effort to improve our independent
builder representation. This includes new builder training programs as
well as new internet tools. We have also been upgrading our builder
body, dismissing underperforming builders while adding almost 70 new
builders to our roster. We will continue selectively adding new
builders to our family and we will soon launch a focused builder
marketing campaign. Over the past six months, we have been working with
outside firms to offer our current and future builders a means to obtain
competitively priced health insurance. We reached agreement with our
partners in October and we will immediately offer this service to our
builders for the 2008 policy year. This is a first in our industry, and
we expect that it will provide even more reason for high quality
builders to choose to represent our Housing Divisions.
Historically, the Housing Group has done little in the
way of marketing to home buyers. We are breaking that paradigm in
several ways. We have retained the services of an advertising agency to
develop ad campaigns utilizing television, billboards and print media
aimed directly at the consumer. We will be testing this campaign in a
selected market early in the 1st quarter in order to measure its success
before introducing it in the remainder of the regions we serve.
The same marketing firm is assisting us in the development of a “builder
blitz” campaign designed to attract high quality home builders to
promote and sell the Housing Group’s products. Rather than a mass
marketing effort, this will involve a tightly focused effort aimed at
pre-selected builders. The marketing plan is complete and training of
our internal sales staff is underway. We will begin testing this
campaign in one selected market in November.
As you can see, we have been extraordinarily busy at the
Housing Group. We are not content to stand still as we see the housing
market continue to deteriorate. Instead we are acting decisively and
aggressively to improve our market position and diversify our revenue
streams to make our future more secure.
Let me now turn the call back over to Rick Lavers…
CONCLUSION AND OUTLOOK (Rick Lavers)
Thank you, Rick.
We are all aware that our stock is selling at a discount
to book value. The trading level may be reflective of some concerns I
have heard expressed of late about the financial health and prospects of
our Company. Given our string of losing quarters dating back into 2006,
the condition of the housing and recreational vehicle markets, and
current uncertainties about the direction of our nation’s economy,
expressions of concern are certainly understandable. Let’s address
these concerns head on. We believe that the current level at which our
stock is trading reflects accurately neither the asset value nor the
prospects of this company. Our price is below book value, which is less
than realizable asset value, so it is trading at a “double discount.”
Dismal as our markets may be, our prospects are good.
I doubt that it was a pure coincidence that our stock
price tumbled after we suspended the payment of our dividend last
quarter. It’s funny - private equity often suspends dividends, feeling
quite simply that cash can better be used within the business. Cut the
dividend in private equity, and it’s said you are signaling growth.
However, cut the dividend in a public company, and the market assumes
you are in trouble. On the other hand, one of our major shareholders
recently told me they did not invest in Coachmen for its dividend, but
for its growth potential. Given our performance and the condition of
our markets, I felt it was prudent to retain cash within the company to
fund our growth initiatives rather than to pay out dividends, and the
Board of Directors agreed with me. I still feel that way, and do not
intend to recommend a resumption of dividends until we generate profits
to pay for them.
But that does not mean that we are in dire financial
straits. To the contrary, as Colleen’s remarks indicated, the Company
is in sound financial condition, and is performing markedly better than
it was a year ago. Going forward we may have less patience with
underperforming operations, but we do not need an infusion of capital in
order to pay our bills. Sure, every one in management would feel more
comfortable, and we could fund some of our growth initiatives more
quickly, with more cash. But after extensive review over the last
month, we believe we have sufficient capital resources to continue to
fund our highest priority initiatives even if the markets don’t
immediately improve, and even if our sales decline – which we do not
intend to happen! As I hope Colleen made clear, through a combination
of debt, insurance cash values, disposable assets, equity in other
assets, possible litigation recoveries, and inventory, the Company
should have access to substantially more capital than may be apparent
from our balance sheet. Of course, that doesn’t mean that more capital
might not help us make investments to more aggressively pursue our
growth initiatives, sooner, or engage in more extensive market stimulus,
or take advantage of opportunistic acquisitions that these markets might
present, or even weather the storm in case of a truly severe economic
downturn. We will be reviewing these questions further with the Board
of Directors at our upcoming meeting.
As I said, our prospects are good. Yes, we are in the
housing business, but our customer base is not the sub-prime borrower.
We are being indirectly affected by the fallout of the sub-prime
mortgage crisis, as are many other companies, but only indirectly. I do
not put much faith in the recently reported “September surprise” of a
rebound in housing sales, and believe the companion statistic that
housing markets are still down more than 30% year over year as much more
instructive. However, we had the foresight to diversify our product
offerings into the military construction area, which is burgeoning. We
also expect the next several months to continue to be very tough in the
RV markets. The recent R. W. Baird dealer report was particularly
troublesome with its industry-wide reports of slowing traffic and too
high day’s inventory on dealers’ lots as the summer selling season
closed. We too, have seen some evidence of credit tightening for RV
buyers. However, we have launched an aggressive interest buy-down
program to create demand pull to help our dealers clear some of the
aging inventory off their lots. For a variety of reasons, we hope to
improve our performance in the Class A segment, and in the meantime, we
have been successfully defending and improving our already strong
position in C’s, as well as increasing our market share in the major
towables segments. As of this Fall, Dr. Curtin is still predicting the
2008 RV market to be up over 3%. We intend to account for a larger
share of it! And, it’s worth a reminder that when we do regain
profitability, we have available to us nearly $38 million in deferred
tax assets that aren’t reflected as assets on our books.
I apologize that our formal comments were so long, but I
felt we had many things to tell you. Operator, we will now be glad to
entertain any questions.
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