Good day, and thank you for standing by. Welcome to the Cavco Industries announces planned acquisition of manufactured home builder and retailer Solitaire Homes. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Mark Fusler, Corporate Controller and Investor Relations. Please go ahead.
Good day, and thank you for joining us for Cavco Industries' announcement of the planned acquisition of Solitaire Homes. Today on the call we have Bill Boor, President and Chief Executive Officer, Allison Aden, Executive Vice President and Chief Financial Officer, Steven Like, Senior Vice President, Corporate Development, and Paul Bigbee, Chief Accounting Officer. The slide deck accompanying this presentation is available via this webcast portal or on our website at investor.cavco.com. Before we begin, we'd like to remind you that 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 the expected benefits of the acquisition of Solitaire Homes, Cavco's financial and operational performance, cost savings, operational efficiencies, or future market conditions.
All forward-looking statements involve risks and uncertainties which could affect Cavco's actual results and could cause its actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of Cavco. I encourage you to review Cavco's filings with the Securities and Exchange Commission, including, without limitation, the company's most recent Forms 10-K and 10-Q, which identify specific factors that may cause actual results or events to differ materially from those described in the forward-looking statements. This conference call also contains time-sensitive information that is accurate only as of the date of this live broadcast, Friday, October 28, 2022. Cavco undertakes no obligation to revise or update any forward-looking statements, whether written or oral, to reflect events or circumstances after the date of this conference call, except as required by law.
Now I'd like to turn the call over to Bill Boor, President and Chief Executive Officer. Bill?
Thank you, Mark. Good morning. Even though we'll be talking again in about a week on the earnings call, we thought it was important to take a few minutes this morning to give people a little bit of information on the acquisition we announced yesterday of Solitaire Homes. We'll run through some slides. As Mark said, they're available on the website. High-level overview, Solitaire has been continually owned since its founding in 1965 by the Elliott family, so this is certainly a big moment in the history of that company. The Elliotts have built, along with Pete Hogstad, a really strong company that we're thrilled to be joining with. They're headquartered in Duncan, Oklahoma.
There are four manufacturing facilities, but to just be clear about it, two of those are lines that are in the Ojinaga, Mexico plant system. Really three manufacturing locations, four production lines. In 2021, they sold 1,577 homes. That excludes the Duncan, Oklahoma facility, which was started up earlier this year. That's a facility that was actually restarted. Solitaire also has 22 retail stores and a total of 950 employees. Finally, they have a dedicated transportation operation, which we think is a real strength in the market today, where logistics has been such a challenge. Digging in a little bit on the manufacturing facilities, Deming, New Mexico, is really focused on multi-section models.
Well, let me skip over to the Mexico operation that's been operating. Mexico is where they have two production lines, and they focus on single-section models there. There's a dedicated warehouse across the border in Presidio, Texas, so they house raw materials there, transport them over to Mexico production lines, and then the finished product is brought back to the US. As I mentioned, the Duncan, Oklahoma facility was restarted this year, and it's focusing on multi-section models. Something somewhat unique, I guess, is the distribution channel. They're pretty much fully or completely integrated. Most of their product that's sold through retail is sold through their company-owned stores, you know, a small amount going to independent retail, and then the balance through communities. On the flip side, their company-owned retail stores sell exclusively Solitaire product in their new home sales.
Turning the page, this just gives you a sense of the geography, with the plants I described and the 22 retail stores. One thing of note, just because it's to avoid complication, 10 of the 22 stores that Solitaire has owned were owned in a joint venture. However, with this transaction, we will basically own 100% of all 22 stores. You'll see some comments in the financial information we give you about unconsolidated joint ventures. That's just to clarify that transition. Turning the page again, talking a little bit about the transaction rationale. First, this will be an accretive transaction on an earnings and cash flow basis. We think that it's a very good price for both parties.
Second, it provides Cavco with a unique cross-border manufacturing complex that I described. This is really kind of something we're interested in. This is a new capability. Pete and the team have made this work for a number of years. They're able to achieve low cost, allowing them to be very competitive, and it effectively can extend the reach of that plant from a geographic perspective because of low manufacturing costs. It's worth also commenting that they've been smart and smartly generous, I would say, in the Mexico operations in that market. They've done a great job of developing a loyal employee base by not just trying to be, I guess, cheap about their labor practices down there. I think they really are viewed as a strong and very good employer. They've got great access to workers down there and good retention.
We really think they've been smart about how they've gone about the Mexico operation, and it's paid off very well for them. The transaction also expands our manufacturing footprint in the Southwest region, and we really think there's a very complementary fit to our product mix. I spoke earlier about their stores selling exclusively Solitaire products, so I wanted to talk just about some of the benefits we see in the transaction on the retail side. We now have the opportunity to sell a broader spectrum in both the previous Cavco or Palm Harbor Village stores as well as the Solitaire stores. Going a little deeper, the best example we can give is that Solitaire and their single section production is they make tape and texture product. That's actually something we don't have in our system in that region.
If you think about their stores, they've kind of had a product mix in their stores that's been limited to what Solitaire produces. As we combine retail, we'll be able to round out the product mix in their stores. If you think about our previously owned stores, we're gonna get a product that we haven't had in the past. It's really gonna give our sales teams a broader product mix to sell through their retail. We think that's really gonna be a good benefit of the transaction. I'll comment as well that we've talked for a long time about our capital allocation strategy.
We've done share buybacks, we've done acquisitions, and this purchase will use a good portion of cash, but we'll still be in a very strong cash position post-acquisition, so we'll be retaining the financial and strategic flexibility. Next page gives you a little bit of the numbers. The purchase price is $93 million. That'll be subject to, you know, closing adjustments. We don't have a firm number at this point about the actual cash usage, but it'll be in that range. Looking at the lower left of the slide five, you can see their pro forma net revenue and pro forma EBITDA for the assets that we'll be purchasing.
Looking at this on a multiple of revenue or a multiple of EBITDA, you can see on the right, it's approximately 0.6x net revenue and about a 5.6x EBITDA purchase price. Then finally, we just have the additional map kind of showing the geographic fit, where this fits into our system. I've commented about the fact that we really think it gives us added scale in the Texas and Southwest region, and I've commented on the product fit. I really wanna thank the Elliott family and Pete Hogstad for the confidence they've shown. I know this is obviously a huge decision for a company like theirs that's been in business for so long. You know, I think we're thankful they've decided to join forces with us.
I think it's gonna be a great acquisition for us. With that, I think we'll turn it over to any questions.
Certainly. As a reminder, to ask a question, you will need to press star one one on your telephone. Please stand by while we compile the Q&A roster. Our first question will come from Greg Palm of Craig-Hallum. Your line is open, Greg.
Yeah, thanks. Good morning to everybody, and thanks for taking the time here for some questions.
Good morning.
I guess starting off with the valuation multiple, so, you know, it's a couple turns lower than what you paid for Commodore a little over a year ago. That, you know, I guess excludes, you know, whatever contribution there is from the Duncan facility. I guess, you know, first question is: What would the financials look like, assuming full contribution from Duncan and, you know, the associated multiple, and then anything just to read into the fact that the multiple is, you know, so much lower than what you paid for Commodore?
Yeah, on that last part, I think the comment I'd make is, think about the mix of those businesses. They're pretty different. Commodore was, you know, largely essentially completely a manufacturing plant acquisition. You know, six plants, but very low on the owned retail. Whereas, this transaction has a very, significantly higher level of retail sales. And the way I certainly think about M&A in this business is the, you know, a retail acquisition would trade at a lower multiple than a manufacturing acquisition. On a mixed basis, I say that these transactions in my mind are valued probably pretty similarly. That's just to clarify that difference you're seeing. You're asking for some comments about the impact that the new facility or this restarted facility in Duncan will have.
They're coming up the production curve. We're not at a point of giving any plant-specific volume forecast. Certainly, I think I made this clear, the 1,600 or so units that they sold last year was before that start up. You know, I guess I'd comment that Duncan, as it comes up the curve, will be kind of a good pro rata contribution. It'll increase on a module basis. It would certainly increase the production from three to four in ratio, if that helps.
Yeah, I mean, I guess, is it, you know, from a size of the plan or capacity, is it, you know, similar size as the others? I'm just trying to get a sense for.
Yeah
you know, how it compares and maybe even the, you know, the potential, you know, margin EBITDA profile, maybe not as, you know, high as what you're seeing down in Mexico from a low cost region, but just a little bit more color.
Yeah
on maybe how that compares would be good.
Yeah, it'll be very similar in kind of production level to the other lines that they already have. Yeah, Mexico's a bit lower cost, obviously for the reasons we explained. I would think of Duncan as kind of the typical plant along the same lines as what they have at Deming.
Makes sense. Okay. You know, so two decent sized acquisitions now in the last, I don't know, year or so. You know, maybe give us a little bit of update on the status of the pipeline. What's your appetite for additional M&A? Just, you know, I'm just kind of curious, as it relates, you know, to Solitaire and maybe some others that are in the pipeline, are you seeing any sort of change in appetite to sell, just, you know, given, you know, a little bit of a slowdown and just obviously a much more uneven or challenging macro out there?
Yeah, it's an interesting question. I'm gonna tell you at a high level, and then I'll comment a little bit. I'd say I don't see a significant change. You know, our industry has been interesting over time because, while some industries you see more M&A cycles, you know, I characterize ours more as the opportunities come when the sellers are ready to sell, and it's not always driven by, market factors. You know, this is just a feel, and I think that's what you're asking for, Greg. My feel is that, the M&A activity and discussions around M&A and deals has been pretty steady over time. This deal, just like the Commodore deal, took a long time for us to, get to this point.
I think that's because, you know, the Solitaire and Cavco both were patient to put together the right deal. These things aren't all of a sudden popping because of any change in the market. Does that answer your question?
Yeah, I guess.
I guess I'd add that, you know, there still are opportunities out there, in my opinion.
Yeah. No, that's perfect. All right, I'll leave it there. Thanks for the time again.
Thanks a lot.
Thank you. One moment. Our next question will come from Jay McCanless of Wedbush. Jay, your line is open.
Great. Good morning, everyone. Thanks for taking the time. Again, apologies if you guys referenced this already, but is CountryPlace gonna have an opportunity to go into these new stores as well and be able to increase the amount of loans, et cetera, that they're generating?
Yeah, I think all those kind of business synergies are on the table, and I'd even, you know, I'd ask him, but I'd even add that the insurance business will have opportunities with this additional retail. I think it's a great fit and a good example of how those businesses make sense.
I guess is the obvious question, you know, with what Greg was talking about before with sales for everybody, I think being a little bit softer, higher rates, I guess, how have Solitaire sales been trending through October or really, you know, call it September, October, and same thing for Cavco, just given some of the pushback that we've been seeing on rates?
Yeah. Jay, I'm gonna be a little careful 'cause we're gonna be talking about kind of the market conditions in a week, so I don't wanna get too much into that. What I can tell you is, you know, when we look at Solitaire's backlog and how their order rates are holding up, I don't know if this is helpful or not, but I'd say it's right in line with what we're seeing in our business in that area. So really not meaningfully different. We'll be happy to talk more about kind of more current market situation next week.
Okay. The only other question I had, I guess just to kind of build on the previous question, but, you know, right now this does seem like we're maybe peak housing and we're headed for some type of downturn. I guess, what was from a capital allocation perspective, why do this deal now rather than buy back more stock or enhance some of the other plans? I guess maybe walk me through why do this now.
Yeah. No, I think that's a really fair question. Regarding stock buybacks, we've said since the original $100 million was authorized now, what was that? About a year and a half or more ago, that, we felt like with our cash from operations and our balance sheet. We would be able to do buybacks and be able to make strategic investments like this. I think we've shown that we've, as was mentioned earlier, in the last little over a year, we've done two pretty large acquisitions and we've bought back stocks. So it's a little bit that it's not an either/or. We're using stock buybacks to manage the balance sheet, and we're making strategic investments when they're available to us. I think we've been able to do that really successfully.
The question about the market, I also think is a really fair one. I've commented in the past that when we look at capital investments, including acquisitions, we take an analytical approach of running out a business model over time. While we're seeing an interesting transition in the marketplace right now, our strategy is very firmly founded on a belief that there is a complete deficit of affordable housing that is a huge opportunity and a huge need from the manufactured housing industry. We're not making these investments short term. I don't think we're making them without our eyes open about the current market, but we really believe that the long-term value is there, and we'll do investments like this when they're available to us.
That's the benefit of having the strong balance sheet we've had, is that we don't have to kind of move in and out of that strategy. We can stay strategically consistent even when the market's moving around us. Really feel very comfortable about the, you know, the fit and that when we're making these investments we're adding value over time, looking beyond the near-term cycle.
Okay. Thanks again. Appreciate it.
Yeah, thank you.
One moment. Your next question will come from Ian Lapey of Gabelli Funds. Your line's open.
Hi. Good morning. Bill, congratulations on the transaction. Sounds good.
Thank you.
Couple questions. For the two plants in Mexico, are their shipments HUD-certified and are they all going to the U.S. or do some go to Mexico?
Yeah, they are HUD, and they're all coming to the U.S. Basically they collect raw materials on the U.S. site at the Presidio location. It's a very short distance across the border to the Mexican operations where it's assembled, and then the homes are brought back to the U.S.
Okay. For the Oklahoma plant, what is the history? Was that open before and then closed before, you know, during the housing bust or what's the history? Do you expect to have to incur losses during the startup?
Yeah. That basically is the history. I'm looking at Steven Like, who's been really involved in this deal. I can't remember when they shut it down, but I think-
In 2008. I think it was 2008 they closed it.
Yeah. You're exactly right. It was the last kind of real serious down cycle that they closed it. That's right there at their company headquarters, so it's been something they obviously know well and knew how to bring back up. The team there has been working through the startup curve. I think we're getting it at a good time.
Okay. Last one, on the transportation business, do they have capacity there to help, you know, other Cavco operations? Is that part of the rationale or no?
It's a yes and no answer, I think. They're kind of sized to work it within the Solitaire business, but it's something we're gonna be looking really closely at the ability to leverage that and potentially grow it to help us out with our, you know, our legacy system I guess as well. We think it's an asset or an element of this deal that really has some additional potential for us. Right now it's right size for their system. Good operation. People do a good job there making full use and really reducing their dependence on independent haulers.
Okay. Well, great. Thanks. Steve, great to hear your voice. Hope you're doing well.
Yeah. Good to hear yours too, Ian.
Give him a chance to chime in there.
Okay, thanks. Have a good weekend.
Thank you.
I'm showing no further questions. I would now like to turn the conference to Bill Boor, President and CEO, for closing remarks.
Thank you. This I only am throwing this remark in because Ian's question kind of made me think about it. The other thing I'd really like to say, and this is maybe just a compliment to Pete and the team that have been running the organization, they have really maintained very good plants, very good assets. They've invested in them. What made me think about it was Ian's question about Duncan where we're feeling really good about the way they've invested and gotten that plant ready to come back up. Just, it's an impressive operation top to bottom. With that, I don't think I have anything else. I hope it was helpful to take a little bit of time to explain this deal to you, and I know we'll be talking again in a week about a lot of broader discussions.
Thanks for making the time for us this morning. With that, I think we're all set, Latonya.
Okay. This concludes today's conference. Thank you for participating. You may now disconnect.
Thank you.
You're welcome.