Cavco Industries, Inc.

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Good day, and thank you for standing by. Welcome to the second quarter fiscal year. 2023 CAFCO Industries Earnings Call Webcast. 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 11 on your telephone, and you will then hear an automated message advising your hand is raised. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mark Fusler, Corporate Controller and Investor Relations. Please go ahead.

Good day, and thank you for joining us for Capco Industries' second quarter fiscal year 2023 earnings conference call. During this call, you'll be hearing from Bill Bohr, President and Chief Executive Officer, Allison Aden, Executive Vice President and Chief Financial Officer, and Paul Bigby, Chief Accounting Officer. Before we begin, we'd like to remind you that the comments made during this conference call by management may contain forward-looking statements, including statements of expectations or assumptions about Capco'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 Capco's actual results, and could cause its actual results to differ materially from those expressed in any forward-looking statement made by or on behalf of CADCO. I encourage you to review CADCO'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 these forward-looking statements. This conference call also contains time-sensitive information That is accurate only as of the day of this live broadcast, Friday, November 4th, 2022. CAFCO 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 Bohr, our President and Chief Executive Officer. Bill?

Welcome and thank you for joining us today to review our results for the second quarter of 2023. I want to start off by saying that we were fortunate that our employees who were close to the areas hit by Hurricane Ian were all safe. Damage to our manufacturing and retail locations was minimal, and the entire team did a great job preparing and then responding to the situation. Most impressive was the way they shifted their attention to providing relief and supplies to the more heavily impacted areas following the storm. Our thoughts go out to those who have been more severely affected Thanks go out to our folks who rose to the occasion so impressively and reached out to help others in such meaningful ways. There's no easy transition here, but let's turn our attention to another quarter with outstanding results. Teams across our businesses are doing a great job of managing in a changing market. Revenues were up over 60% year over year to $577 million, and net income nearly doubled to $74 million. Gross margin in factory-built housing grew another 230 basis points compared to the second quarter, driven primarily by higher average selling price, along with a lesser impact from reduced costs as lumber and OSB prices flowed through the P&L. Our manufacturing plants have continued at the higher level of throughput and efficiency they established in recent quarters. As reported in our release, capacity utilization was 80%. We calculate this using all potential operating days. Adjusted for some days lost to Hurricane Ian and downtime taken to match order rates, utilization remained consistent with last quarter at approximately 85%. The industry is clearly in transition from a period with historically high orders to one with rapidly increasing interest rates and declining consumer confidence. While the plants are producing at a higher rate, retailers are continuing the process started several months ago to manage their inventories and their turn rates. Buyer interest remains healthy as evidenced by retail traffic, online leads, and quotes, which have not dropped off in recent months. However, interest rates, inflation, and shorter lead times have made prospective homebuyers more patient and, frankly, more cautious. So wholesale orders' net of cancellations are down, resulting in the declining backlog. Our backlog is down 35% sequentially to $651 million, equating to approximately 17 to 19 weeks at current production levels. While a clear picture of near-term demand is clouded by ongoing setup challenges and retail inventory adjustments, we're very confident about mid- and long-term demand. The industry is cyclical in the near term for all the reasons I've touched on. However, the need for our products is undeniable. We're fortunate to have the financial flexibility to stay focused on our capital allocation and growth strategy while we manage the near-term dynamics. In that regard, production has commenced at both our new plants. Glendale, Arizona is focused on park model production, and Hamlet, North Carolina will be producing HUD code homes. Both facilities are state-of-the-art and equally important. They're both starting with model work systems and cultures as we continue our focus on employees in the workplace. Continuing the theme of investing for the future, last week we reached agreement to acquire Solitaire Homes, a strong manufacturer and retailer of high-quality homes sold in Texas, New Mexico, Oklahoma, and surrounding states. We have a lot of respect for what Pete Hogstad and his team at Build It Solitaire and we're very appreciative that they chose to join CAFCO. Their operations complement our plant and retail system and will significantly improve our capacity to provide quality homes. The addition of Solitaire's three locations and four production lines adds roughly 10% to our manufacturing capacity, and the addition of their 22 retail stores creates value as we fill out product offerings in stores across the combined company. As we previously reported, we expect to close this transaction early in the fourth fiscal quarter. I recognize the greatest interest today is about trying to understand near-term demand. However, the bigger story is how manufactured housing is differentiating itself from the broader home building segment in this market environment. While our industry is certainly subject to the impacts of inflation, higher prices for homes, higher interest rates, and other drivers of near-term demand, We're also a solution for families in need of affordable options. At the same time that retailers are adjusting inventories, communities are continuing with their high-growth plans. The community operator demand for build-to-rent units is very strong. Rental homes provide a needed solution at a time when many families are unable to purchase a home. And this is a demand buffer unique to manufactured housing. Similarly, we know that because site builders have become less able to hit anything approaching a starter home price, people are taking a look at factory-built homes, an option they might not have considered in the past. What they're finding is that we're ready with attractive and significantly more affordable homes for them. Notably, manufactured housing shipments as a share of new home sales had been around 10% to 15% in recent years. In the last six months or so, that share has increased to the high teens and low 20s. This is indicative of how manufactured housing can weather the cycle better than the general housing market. Just to reiterate, prices and interest rates are high, so the monthly payment impact is clearly a downward pressure on near-term demand. This is offset by market share gains from manufactured housing at price points site builders simply can't hit anymore, and aggressive community growth plans, which are less sensitive to the recent rate changes. Our strong confidence in mid- to long-term demand is based on the extreme undersupply of lower-cost housing we've been speaking about for several years, and that has recently only worsened. With that, I'd like to turn it over to Allison to discuss the financial results in more detail.

Thank you, Bill. Net revenue for the period was $577.4 million, up 60.6%, support $217.9 million, compared to $359.5 million during the prior fiscal year's second quarter. The commoner homes acquisition contributed $102.7 million of this increase. Within the factory-built housing segment, net revenue was $559.6 million, up 63.6%, or $217.5 million compared to $342.1 million in the prior year's second quarter. This increase was driven by a 42.1% increase in the number of homes sold and a 15.1% increase in average revenue per home sold. The increase in average revenue per home sold was due to product pricing increases. As Bill mentioned, factory utilization was approximately 80% during the quarter. Q2 2023 utilization was lower than Q1 2023 due to some days lost to Hurricane Ian and scheduled market downtime. Our solid utilization levels continue to be driven by product simplification, sustained production headcount levels, and general process efficiencies. Financial services segment net revenue increased 2% to $17.8 million from $17.5 million. This year-over-year increase was due to a higher number of insurance policies in force and loan sales in the period. These increases were partially offset by lower interest income earned on the previously acquired consumer loan portfolio as it continues to amortize as expected. Consolidated gross profit in the second fiscal quarter as a percentage of net revenue was 27.3%, up from 25% in the same period last year. This year-over-year increase in gross margins was driven by the factory-built housing segment, which rose to 26.7% in Q2 of 2023 versus 24.1% in Q2 of 2022, primarily due to pricing. The Q2 2023 factory-built housing segment gross margin of 26.7% was 230 basis points higher in the Q1 2023 level of 24.4% due to decreased material cost per module as lower lumber prices flow through our cost of sales. Gross profit as a percentage of revenue in financial services increased to 44.6% in Q2 of 2023 from 43.7% in Q2 of 2022 primarily due to higher home loan sales volume, fewer weather-related events, and lower unrealized losses on marketable equity securities in the current period. Selling, general, and administrative expenses in Q2 of 2023 were $66.9 million, or 11.6% of net revenue, compared to $45.4 million, or 12% of net revenue during the same quarter last year. The SG&A dollar increase was due to the addition of Commodore, greater incentive wages and improved earnings, increased legal expenses related to the SEC inquiry, and cost of third-party consultants assisting with the energy tax credit project. Net other income this quarter was $2.3 million compared to $4.7 million in the prior year quarter. This decrease was primarily driven by a $3.3 million non-recurring gain that was previously reported associated with the consolidation of a joint venture. Pre-tax profit was $92.8 million, up 89.4%, or $43.8 million compared to $49 million for the prior year period. The effective income tax rate was 20.1% for the second fiscal quarter, compared to 23.1% in the same period last year. The Energy Efficient Home Tax Credit Program was extended past calendar year 2021 as part of the Inflation Reduction Act of 2022. As a result of this program being extended, we recognize 2.7 million of tax credits. Lastly, net income attributed to capital stockholders was $74.1 million, up 97.1% or $36.5 million compared to $37.6 million in the same quarter of the prior year. And diluted earnings per share this quarter was $8.25 a share versus $4.06 a share in last year's second quarter. Now I'll turn it over to Paul to discuss the balance sheet.

Thank you, Allison. When comparing the October 1st, 2022 balance sheet to April 2nd, 2022, the cash balance was $333.2 million, up 36.4% or $89 million compared to $244.2 million at the end of the prior fiscal year. The increase is primarily due to net income, non-cash items and changes in working capital such as decreased inventories, and increased accrued expenses, partially offset by repurchases of common stock and purchases of property, plant, and equipment. Investments are slightly down from unrealized losses on securities held at the end of the period. Inventories decreased due to lower raw material costs and a decline in inventory at the retail division locks. Prepaid and other assets decreased due to lower workers' compensation insurance prepaid income taxes, and assets recorded for the loan repurchase option we have for delinquent loans that have been sold to Ginnie Mae. Property, plant, and equipment is up due to the purchase of the manufacturing facility in Hamlet, North Carolina, and continued development of the Glendale, Arizona facility. Accrued expenses and other current liabilities increase due to higher rebates payable, more setup, freight, and foundation work, and warranty reserves, all related to higher sales. Lastly, stockholders' equity was approximately $928.9 million as of October 1, 2022, up 11.8%, or $98.4 million, compared to $830.5 million as of April 2, 2022. This completes the financial review, and I'll turn it back to Bill.

Thanks, Paul. I think this is a good opportunity to revisit our capital allocation priorities. We've consistently said that we will invest in organic growth, seek value creating acquisitions, and utilize share repurchases to responsibly manage our balance sheet. On that last point, we've emphasized that share repurchases can be completed without hampering our ability to reinvest strategically. Taking a look over the last six quarters, dating back to the beginning of fiscal 2022, we have invested $52 million in high return capital projects to improve and grow our network of plants, including the Hamlet and Glendale projects. Additionally, we've committed $244 million to the acquisitions of Commodore and Solitaire, growing our capacity by approximately 35%. Rejecting forward to the completion of the Solitaire acquisition, our plant network will have grown from 20 production lines to 32, and we have increased our retail network by over 50% in direct support of our core manufacturing focus. During the same period, we returned $100 million to shareholders through stock repurchases. After all of that, excluding the cash allocated to the solitaire closing, we have a cash balance of approximately $240 million, which demonstrates our cash generation and ability to invest strategically while retaining ongoing strategic flexibility. We've been very successful following through on our stated capital priorities and we continue to position the company to have an increasingly positive impact on the affordable housing problem. With that, Michelle, let's turn it over for any questions.

As a reminder, to ask a question, please press star 1-1 on your telephone. Please stand by while we compile the Q&A roster. Our first question comes from Daniel Moore with CJS Securities. Your line is now open.

Good afternoon or good morning out there, and thanks for taking the questions. Bill and Allison, Paul, maybe, you know, obviously we'll start a little bit with, as you guessed, we'll talk about the demand picture. And, you know, the decline in backlog, how much of it relates to dealers pulling back on inventories and how much of it relates to you know, what declines in end consumer demand. I know you said traffic is still up, but, you know, folks are kind of holding off on buying. So I know that's a really difficult question, but if you could give us your thoughts, that'd be great.

Yeah, it's a simple question with a complex answer, I guess, and that's because the differences you're pointing out are hard to separate, right? I was thinking about kind of how to describe what's going on in the retail channel, and I'm not sure this will be super effective, but I thought we'd talk about it on the level of an individual dealer. Previously, individual dealers could sell any home they could get their hands on, and the turns were high, right, because their inventory, you know, people were showing up, they had long lead times. If they had an available home, they knew they could sell it quickly. And certainly, we've mentioned that over time set up, As much as setup was as much a constraint to how many houses could be pushed out to the market as anything. Now we're in a situation, and there will probably be a follow-up question, which I can hit on, about regional differences. But in regions that have really seen a market shift, the impact of rates and everything we've talked about has kind of caused the buyer to still be looking, but they're little more patient so the pace of those sales has slowed a bit not to help not the levels by historical standards that are low but off of the crazy highs so at the same time manufacturers have found ways to make more right we got our feet under us and we've been pushing more homes to the dealer and what that looks like to a dealer is a home that he might have thought was going to show up in four months and The plant's saying, hey, we're going to put that home in production. You're good. And the dealer now is looking at his inventory turn rate and the amount he's spending for floor plan costs. And he says, wait a minute, I didn't expect that house. Now I don't want it. I can't take it. I'll get it later. We call that a cancellation. And it goes out. That dealer and the other dealers do the same thing on homes that are coming at them faster than they expected. Our backlogs go down a bit. And we call them about the house they thought was going to show up six months from now. And so suddenly you have more cancellations and the underlying demand or the end user demand is still there, but they've got this adjustment period to the different rates of placing homes out in the market and receiving homes from the dealers. And so they are trying to manage their turn rates and in good business people, they're trying to make sure that their floor plan costs are appropriate, and they slowed their wholesale orders in many cases. So that's going to take a little bit of adjustment, as we've talked in the past. And whether that's characterized as destocking, I think of it more as an adjustment to the different rates of sales and production. The home buyer has certainly been kind of put on their heels a bit by inflation, economic uncertainty rates. but they're still showing up to look for what they can do, right? They're still showing up at stores. They're still shopping online. They're still engaging. And I've always felt that that is a clear indication of this bigger picture fact that people need homes. So we've got to get through this transition. I think people, the system will adjust to the rates going out and the rates coming in at retail. Inventories will be brought down a bit But I think once we settle in, we'll see what the true demand is. And, you know, a lot of that's uncertain with the economy, but over any meaningful period of time, we're pretty confident about it. So that was a mouthful. Again, that was a lot more than you asked. I don't know if I hit their points, and if I didn't, I'm happy to kind of follow up.

No, you certainly did. What can you say about, you know, those folks that are showing up, their ability to secure financing? Are you seeing more cash buyers, one, but number two, you know, with these higher rates, the monthly payment goes up? You know, talk about their ability to secure financing versus maybe their patience, if you will.

Yeah, we have seen more cash buyers, and we've also, you know, we stay pretty close. It's great to have a mortgage lending company because we stay pretty close to the quality of applicants as well. We haven't seen that go down. We've seen good credit. So people are qualifying for loans. I think they're just in a period where their individual decision is affected by the uncertainty and also kind of getting a feel for what they can afford. You know, what they can afford today is so different than what they could have afforded in previous periods. And so that's just their individual buying process suggesting. But loans are available. Credit quality on applications is still pretty good. more cash buyers. So, you know, it's kind of where it is as far as availability. It has not been a reduction in available funding for folks.

Got it. With all that, what can you tell us about your expectations for, you know, shipment levels as well as factory-built housing revenue? Let's take Solitaire out of the picture for now, you know, on a like-for-like basis. over the next two quarters relative to what we saw here in fiscal Q2?

Yeah, I'm going to give you our standard answer that we don't provide guidance. You know, I touched earlier, and this is not directly at your question, I apologize, but I touched earlier on regional differences. You know, our, and this is giving more color, maybe just addressing some questions that are yet to come. Our backlog we talk about is 17 to 19 weeks. It's differential now. You know, we definitely have seen some regions that have held up very well and have not seen a rapid decline in their backlog. And then we've seen others that have gone down more quickly and are farther along in that adjustment, perhaps. Those regions that are a little bit lower on their backlog or on the lower end of weeks in the backlog really are Texas and the southeast. But as I say, the southeast, you really got to take Florida out of that. Florida's got some of our longest backlog still. So, you know, what we're seeing at the front end of this is Texas in the southeast, seeing the biggest drop-off. You know, we expect to have, you know, some days of balancing production to wholesale order levels in those regions. So there will be some market downtime. But at this point, we're not expecting it to be you know, huge. We're not going to come to a stop. That gives you a little bit of color, but short of giving the numbers, I guess.

Fair enough. I'll ask one more in that genre, if you will, which is, you know, from a margin perspective, you've passed through a ton of price in the last year or so, and raw materials have pulled back a little bit. Just talk about pricing and, you know, your expectations or outlook for gross margins relative to this quarter.

know over the next quarter or two with all the puts and takes thanks yeah thanks to the question i've had very healthy margins for the quarter and as we've seen historically it's really hard to speculate on gross margins but there are a couple elements that drive the fluctuation the first is pricing and the second is cost largely the price of materials so on pricing as bill mentioned we are seeing regions where pressures are becoming more apparent and starting to see some competitive pricing in regions such as Texas and the Southeast. And when I say the Southeast, that's excluding Florida. But elsewhere, we're really seeing pricing pressures at this point. Now, the material costs, as we shared before, we expect that basically everything but commodities will most likely go up. And the movement in those non-lumber and USB commodities has been volatile and hard to predict. So you have to kind of see where and how lumber and OSB pricing plays out. And just as a reminder, for commodity lumber and OSB costs, it takes a couple of months for the level that you're seeing in the market to really flow through our cost of goods.

Thanks, Allison. I've got more, but I'll pass it off at least for now. Thank you again. Thanks, Jan.

Please stand by for our next question. Our next question comes from Greg Palm with Craig Hallam. Your line is now open.

Thanks. Just wanted to dig into this sort of demand environment a little bit more, if I could. So in terms of whether you want to call it the excess orders or the excess inventories, however you want to characterize it. I'm just trying to get a sense of what's your best guess on how long this will take to better normalize.

Yeah, that's obviously a tough question. Expected one, but a tough one. Man, I don't even know how to give any useful perspective on that. I think, and the reason is because I'm so much more focused on what I talked about as far as the pace of getting houses placed out in the field and the pace of production. I think we're probably, and this is just kind of throwing it out there, I think we're probably looking at a couple more quarters where things are settling out. But I sure as hell can't pinpoint it.

Yeah, it's fair. I know there's a lot of uncertainty. I mean, if we think about what's going on outside of the retail channel, which seems to be where you're seeing the most, you know, impact. Can you just give us maybe a little bit better sense on, you know, what, you know, either order levels or deposits, some other metric on the community side of things, just to see on a relative basis how things are holding up?

Yeah, I appreciate that question, because I think we all start focusing on the area we're most concerned about. And communities, I think, are a real positive here. And I touched on that in my opening comments. You know, it's been consistent. Communities are still strong. They've got money to put to work so that they can get their real asset, the land, working. So, they've got available capital. They're a little less sensitive to the, you know, mortgage rate type changes that are going on. And we've really seen communities be very consistent with large growth plans. And so it's a real source of strength for the industry right now. Really no change to the negative that I've seen. That kind of does tie in, Greg, but that ties in the comments I made about rentals, right? I mean, communities are very open to buying homes to rent as a way to get that asset working as well. And that's the offset to people not being able to afford to buy a home right now. So, again, source of strength.

And remind us, I mean, do you have a good estimate of the mix of your homes that go into the community channel versus retail?

It's pretty consistent over time. It's about 30% to communities. Now, you know, if they're going to grow in the near term more quickly, that might shift up or would shift up a bit. But over time, we're pretty consistent with the industry, and I think that's a fair estimate for the industries. you know, 30% to a third, right in that range.

Okay. And then on financing, obviously good to see that, you know, the availability hasn't changed all that much. Can you comment on, you know, what rates are and is there maybe a larger risk if you see an increase from rates here that that could cause maybe another, you know, further adjustment versus what you're currently seeing now?

Yeah, I mean, absolutely. We're not going to claim that we're immune to the rate impact on near-term demand, right? I think it's been the shock of the increase of rates as much as anything, because a lot of people, if you sit back and look at it over time, these rates by themselves on a spot basis are not exorbitant historically, but it's the adjustment people are making, and it's piled on top of, frankly, high home prices, right? So That's what's caused the pause and the readjustment, people recalibrating what they can afford. They give you a sense of rates for manufactured housing, land, home, through the GSEs. We're about 9.5%. And that includes, we adjust these to factor in points and fees and costs. So it's kind of an effective rate. It's about a percent higher than the GSE traditional land home, non-MH. So there's about a percent premium for manufactured housing. This is maybe more confusion, but it's interesting, so I'm going to throw it out there. The interesting thing that's been going on for a few quarters is that non-GSE rates, so land homes sold to investors, credit unions, banks, and others, that's actually a bit lower than the GSE rate right now And that's a little bit upside down. You expect to see a little bit of a premium for non-GSE. So those loans are really the favored loans, and they're a bit lower than the 9.5% or so. Just to complete the story, home-only rates are kind of in the 9 range. And I always tell people or remind people that the home-only rates do not highly correlate to land-home rates. They're kind of in their own market and tend to be relatively stable compared to mortgage rates, which are constantly moving. Did I cover everything, Greg?

Yeah, no, that's helpful. I think I'll leave it there for now. Appreciate the answers and best of luck.

Thank you.

Please stand by for our next question. Our next question comes from Jay McCandless with Wedbush. Your line is now open.

Hey, good afternoon, everyone. Thanks for taking my questions. The first one I had, Bill, talking about how Texas and Southeast Florida is down. I guess if you think about what that does to the price mix of the backlog, does the price mix of what you might be delivering over the next couple months look fairly similar to the 109 that you guys put up this quarter? or does it look higher actually because you're taking some lower-cost markets out of the mix?

I don't understand the question around the lower-cost markets. I'm not sure I differentiate the selling price across the regions necessarily. I'm looking around the room and seeing if you guys feel differently, but I'm not sure a regional difference is going to shift the average selling price. But the pricing in the backlog on homes that were previously sold is different. pretty solid, right? So I don't anticipate that kind of dropping. We've basically gone through a period where in the last quarter or so, pricing at a local level has drifted up, but it's slowed as far as the rapid increases. And then as Allison pointed out, in the regions that have seen the backlogs drop more quickly, they've seen it, some price competition, not a whole lot, but some. So I feel like I'm rambling around your question, which I don't intend to do.

No, it's just, I didn't know if there was enough of a difference with, you know, especially with Commodore, maybe selling a little more expensive product. I didn't know if there was going to be a marked difference in the price mix of what you have now. versus, say, three months ago or six months ago when you were selling a lot more homes into the Texas market or Southeast Florida. But it doesn't sound like there is.

Yeah, I would say regionally, I don't expect the regional shifts to cause that kind of a change in the price that you see.

Okay. Okay. Yeah, that's what I was trying to get. Thank you. And then if we think about, you know, you've got 19 weeks of backlog. So basically, a quarter and a half or just under a quarter and a half of units to get shipped and not thinking about solitary yet. But if I think about your average plant and where orders have gone, I guess maybe on a percentage basis, could you talk about how, what percentage orders might be down versus last year? So we can start thinking about once you've sold through this backlog back to a normal four to eight week type of backlog, then what type of order declines should we be considering?

I'm trying to look at some things here to see if I can get your question. You're asking, I mean, looking at the length of backlog and then you want to understand the pace of orders relative to production, right?

Yeah. To see how the backlog ends. Well, just trying to think about if you didn't have a still very healthy backlog to deliver and we think about where orders are going now, is it negative 5%, negative 10%? What are you seeing on average when you talk to the plants right now? Because I think solitaire is a good thing. It's going to give you some volume that you didn't have in the previous year. But I'm just trying to think about Cavco's business now with these higher rates, with the dealers having to back off some. If you're a stick builder and you were putting up an order number, what would that order number look like, I guess, is what I'm trying to get at.

Yeah, I'm not sure I have a quick answer for you. I mean, the one thing I think gets lost even in how I've talked about the market dynamics is that there are still orders being placed out there. And, you know, we've since the pandemic began, we compare a lot of times to 2019 because that was before the pandemic. And it was kind of a relatively balanced year for the industry where you had, well, you had balance, right? And We are kind of probably returning to that kind of not aggregate order rate, but that kind of balance. We're seeing seasonality come back in. So month to month, the changes are starting to make sense to us from a seasonality perspective. So I know I'm not getting at it, it's a tough question to generalize, but we're not expecting production or orders to drop to the point where you'll see our backlog just disappear in the very near term. We still have confidence in the pace that people are showing up and the underlying demand for the product. Jay, I know I'm not giving you the numbers that you're looking for. I'm trying to think about the best way to characterize for you and I'm not coming up with it.

No, because I mean, this is, I think everybody's trying to figure out right now what, regardless of whether you're a stick builder or a manufacturer, where orders are going to shake out, especially when you see Zillow, for example, talk about real estate activity going to be down 25% to 35% in the fourth quarter. Just trying to read that through to you guys and to the rest of the industry.

The next question I had... Just on that, I don't see that kind of an impact here. I think when they're talking about that, the other dynamic going on in the general home market is... people that are in a house with their refinanced 3% rate can't afford to move. So that kind of resale activity is a whole different thing than the need for new homes because of the undersupply in the market. So I really don't see anything of that magnitude, particularly for manufactured housing, for the reasons I talked about where I think we represent kind of an answer in these kind of times. We'll have areas, and we've had plants even this last quarter that took a day down here, a day down there to try to keep the balance in the backlog. But I'm pretty confident about just the basic need for our homes, even in the reasonably short period of time. People are still showing up looking for homes.

Gotcha. So, you know, one of your public competitors earlier this week talked about the lack of floor plan availability, and I know that you guys have floor plan at least for your own locations, but is there an opportunity maybe near term to do a little bit of floor plan lending to some of the independents and help out for some people who might need, you know, have the houses sold but just need a little excess room on that credit facility?

Yeah, we work, we do, as you identified, we do floor plan lending for dealers, for independent dealers. We manage those on a file-by-file basis. We feel like we've got our ear to the ground in that market pretty well. The one thing I would say to kind of answer your question is that we don't see the credit risk of dealers being a negative at all right now. They're still running a good business with good flow. So we review them on an individual basis. We're not necessarily tightening up in general. We're just kind of looking at their situation and in some cases over the last couple of years as prices of homes have gone up, we've extended more credit. So I think that, I think that floor plan market per se, if you're an independent dealer is still there for you.

Right. Well, I just didn't know if you guys had any aspirations of getting bigger during this period when, you know, based on the way your competitor described it, it sounded like there were some people pulling back on floor plan financing and And I didn't know if that was an opportunity for you for Capco to expand the dollars that they're putting into the market.

Yeah. And probably less satisfying answer, but not with a macro strategy, but individually we'll look at every situation. If there's a reason to, to, um, give more floor plan credit to a given independent dealer, because we're confident in them, then we'll do it. Okay.

And then, um, Just what are you seeing in terms of set crews and is that getting any better in the field or is that still a pretty big bottleneck in terms of getting homes sold and out of the plant?

Yeah, it's still a challenge. I think that's kind of an ongoing challenge. And, you know, even if you put all these short-term dynamics aside, the industry is shipping more homes than it was. So there's more of a load on the under-resourced setup crews that are out there. So, you know, in regions, I guess I would say Florida, for example. We've touched on Florida a couple times. Florida, our backlogs are very strong, and you would kind of say that the constraint to a great extent in Florida would be setup capacity. If they could get more homes set, then they'd be taking more homes on. So, it really, the degree to which setup is a challenge is going to differentiate by region. If it's a region where volumes are coming off a little bit, then it's not going to be a bottleneck, but in some regions it remains one. Overall, through time, I think it's an issue for the industry to not have set up the constraint when people are buying a lot of homes. Gotcha.

Okay, great.

I guess I'd say it's not the biggest problem, but it's still something that people are bumping into.

Gotcha. Okay. Thanks again.

Thank you.

As a reminder, to ask a question, please press star 11 on your telephone. Please stand by for our next question. Our next question comes from Daniel Moore with CJS Securities. Please go ahead.

Thanks again. Just wanted to ask a little bit more about Solitaire. you know, the types of homes they're building, how do the ASPs compare to yours, and then it's in terms of, you know, manufacturing or operating synergies, the ability to streamline production across the two manufacturing footprints.

Yeah, thanks for bringing it up. It's something we're pretty excited about. I mentioned that they add about 10% to our overall system. They're located just to rehash a little bit. They've got a production facility in Deming, New Mexico that focuses on multi-section homes. They've got one across border facility. Essentially, it has two lines in Ojinaga, Mexico, right across from Presidio, Texas. And that operation focuses on single-section homes. And they've recently reopened Duncan, Oklahoma, which, again, is a multi-focus. ASPs, you know, I don't think they're markedly different. Their product is really known for being high quality at the price points they hit. They really build a good home. From a modeling perspective, if you want to go there, I wouldn't say that with it being 10% that I dramatically think of them being that different from us on average selling price or gross margin. And Just to go another step, because obviously it's the topic of the day, I think their backlog is right in line with what we're seeing in those areas. So they still have a backlog that they're working from, and they'll fit right in. I think you asked about value creation and that deal as well, Dan. Yeah, I mean, we're coming off the Commodore. We're still getting used to and fully benefiting from Commodore. And that was a great example where And truly, I mean, this isn't something we just say, but truly best practices and skills trading across both directions in a deal like that really contributes value. And I think Solitaire is going to be similar. I think there are some best practices we can bring to them, and we're going to learn a bit from them as well. So that manufacturing benefit, I think, is real, and we'll get good value from it. I touched on in my comments, but it was kind of a passing comment, I think one of the clearest benefits of this deal is that their 22 retail stores sell exclusively their product. And their product's great, it's in a certain niche area. It happens to be a niche area that complements the product that we sell through our network, which is in the same broad area, right? Our network of retail stores. So I think there is a really good opportunity to put some of our product into their stores that will really benefit those stores, give them a full product mix, and their products are going to add complementary into the portfolio that our retail stores sell. So all of the stores on a combined basis are really going to be, are really going to benefit from this. It's something we're pretty excited about, and that'll be real value.

Helpful, very helpful. Last for me, Allison, just Maybe talk about your expectations for working capital and free cash flow generation. You know, the extent that production does pull back here for another quarter or two with some of the inventory rebalancing.

Yeah, I mean, just if we go back and think about, you know, it dovetails into our capital allocation strategy. And with the business model that we have at the level of cash flow that Bill mentioned, which is about 240 after the acquisition. We have available to us still the ability to be able to generate organic growth through investments in our facilities, continue to look at M&A strategy. And we still have the $100 million share buyback that's still open to us. We intend to continue to evaluate that. This quarter, we were clearly out of the market due to the information that we had on the SEC settlement and on the acquisition. That's something that we look to actively pursue in the future.

Makes sense for ship color. Thank you again.

Thanks, Dan.

At this time, there are no further questions. I would now like to turn the conference back to Bill Bohr, President and Chief Executive Officer, for closing remarks.

Thanks, Michelle. Again, it's great to report on a good quarter. You know, as I work closely with our operations, I'm really confident in CAFCO's readiness for the near-term market shifts we're discussing. Across manufacturing, retail, lending, and insurance, our operations are performing very well. We have strong margins, still healthy backlogs, and business leaders who understand how to be nimble and seek opportunities throughout the cycles. Our teams have demonstrated their ability to get results, and they're ready for the near-term dynamics, but they're really focused on the bigger picture, and that's making a difference in our customers' lives with our homes, loans, and insurance. And we know there's a fundamental and very dire need for what we do. So I want to thank everyone for your interest in Capco, and we look forward to keeping you updated.

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

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