Cavco Industries, Inc.

Thank you for standing by. Welcome to the CAFCO Industries, Inc.'s first quarter fiscal year 2027 earnings call and webcast. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you'll need to press star 11 on your telephone. If your question has been answered and you'd like to remove yourself from the queue, simply press star 11 again. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Mark Fusler, Corporate Controller and Investor Relations. Please go ahead, sir.

Good day and thank you for joining us for Capco Industries first quarter fiscal year 2027 earnings conference call. During this call, you'll be hearing from Bill Boor, President and Chief Executive Officer, Allison Aden, Executive Vice President and Chief Financial Officer, and Paul Bigbee, 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. Forward-looking statements include statements about our future or expected business and financial performance and are not promises or guarantees of future performance. There are 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 four looking statements involve risks and uncertainties which could affect CAFCO's actual results and could cause its actual results to differ materially from those expressed in any four looking statements made by or on behalf of CAFCO. For discussion of material risks and important focus factors that could affect our actual results, please refer to these contained in our statements and filings with the SEC which are also available on our investor relations website and at suc.gov. This conference call also contains time-sensitive information that is accurate only as of the date of this live broadcast, Friday, July 31st, 2026. CAPCO 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?

Thanks, Mark. Welcome and thank you for joining us today to review our first quarter results for fiscal 2027. It's only been about two months since our year-end call in late May when we told you that March had showed a big pickup in orders and there was an associated backlog increase. The good news is that that order momentum has carried through the first quarter, and even with sequential shipments being up 13%, our backlog still grew more than 50% from last quarter's ending level. Sequential orders were up double digits in every region, and as a result, backlogs grew significantly across the country as well. The Q1 backlog is also 50% higher than a year ago, and last year it was declining rather than growing. Shipment improvement across the country led to a quarterly record of 5,657 units. Our production increases resulted in capacity utilization of 75%, Still significantly below levels were able to sustain, so there remains significant room to reach higher volume levels, assuming strong orders persist. This is the first quarter in our history that revenue exceeded $600 million. It was up about 10%, both sequentially and year over year. So just to conclude on these points, we raised production and shipments significantly and still saw a large increase in orders and backlogs, both sequentially and year over year. Factory-built gross margin dropped 40 basis points from last quarter, driven by two factors. Part of the downward pressure came from increased costs in manufacturing. The other factor was related to retail pricing. Wholesale pricing to independents remained generally stable across all regions, so that was not the driver. However, in our company-owned retail markets, which are concentrated in the Texas area, we saw increased price competition. and these lower retail prices contributed to the sequential gross margin decline. We do continue to see higher retail traffic in Texas but closing rates declined. This indicates that demand is good but competition for qualified buyers intensified during the quarter. Shifting to financial services, as reported last quarter, we have found reliable purchasers of meaningful loan volume, which has enabled a nice improvement in loan origination and sales. This quarterly origination growth met our expectations and we anticipate we will be able to grow loan sales into future periods. Separately, while the first quarter is a seasonally higher insurance claims quarter, that operation continued their strong performance and exceeded our profit expectations. The favorable insurance claims results over the past couple years have resulted in lower reinsurance costs as well. Very recently, we also received important outside confirmation of the strong insurance performance and trajectory when AMBEST moved to a positive outlook for our financial strength and issuer credit ratings. Shifting to capital allocation, our strong cash generation enabled us to continue investing and plan expansions and strategic projects while still repurchasing another $30 million of company stocks. In a little over five years since we began our buybacks, we have now deployed over $600 million in repurchases with the objective of maintaining a responsible balance sheet. Over 19% of our outstanding shares have been bought back through this return of capital to our shareholders. And we finished the quarter with a healthy $243 million of unrestricted cash. Finally, a few weeks ago, the Road to Housing Act became law. The bipartisan support for the new law and the prominence of manufactured housing elements within it are indicative of the growing awareness that our industry is an in-place solution to the affordable housing shortage in our country. The benefits of this law will show themselves over time as we are able to place innovative home designs in urban and suburban locations with improved market acceptance, appropriate regulations and better support for our homebuyers' funding needs. As I've commented in the past, pay attention to what's happening at the state level as well, where more states are engaged in lowering unnecessary barriers to our homes being placed where they are needed. Now I'll turn it over to Allison to give more details on the financial results.

Thank you, Bill. Net revenue for the first fiscal quarter of 2027 was $610 million, up 9.5% compared to $556.9 million during the prior year period. Sequentially, net revenues increased $59.8 million, driven by an increase in units sold, partially offset by a decrease in average revenue for homes sold. Within the factory-built housing segment, net revenue was $586 million, up $50.3 million, or 9.4%, from $535.7 million in the prior year quarter. The increase was primarily due to the addition of American Home Star and an increase in legacy average revenue per home sold. The increase in legacy average revenue per home was primarily due to a higher proportion of homes sold through our company-owned stores and more multi-wise in the mix partially offset by product pricing decreases. Financial services segment net revenue was $24 million, up $2.8 million or 13.3% from $21.2 million in the prior year quarter. This increase was generated by higher loan sales and gains on the insurance subsidiary's equity portfolio. Consolidated gross margin in the first fiscal quarter as a percentage of net revenue was 22.1% down from 23.3% in the same period last year. In the factory-built housing segment, the gross profit was 20.8% in Q1 of 2027, down from 22.6% in Q1 of 2026. The reduction was due to higher costs per unit sold. Financial Services' gross margin as a percentage of revenue increased to 52.4% in Q1 of 2027, from 40.9% in Q1 of 2026. The increase was primarily due to the growing impact of premium rate increases, gains on the insurance subsidiary equity portfolio, and underwriting changes on policy in addition to higher loan sales. Selling, general, and administrative expenses in the first quarter of 2027 were $81.8 million, or 13.4% of net revenue. compared to $69.1 million or 12.4% of net revenue during the same quarter last year. The increase in these expenses was primarily due to the addition of American Homestar along with the increases in compensation and employee related costs and sales and marketing efforts. Interest income for the first quarter was $3.3 million down from $5.1 million in the prior year quarter. resulting from lower cash balances after the purchase of American Home Star. Pre-tax profit was down 14.6% this quarter to $55.8 million from $65.3 million for the prior year period. The effective income tax rate was 24.2% for the first fiscal quarter compared to 20.9% in the same period of the prior year. The effective tax rate increased compared to the prior year period primarily due to a reduction in Energy Star tax credits. Next income was $42.3 million compared to net income of $51.6 million in the same quarter of the prior year and diluted earnings per share this quarter was $5.43 versus $6.42 per share in Q1 of 2026. During the quarter We repurchased $30 million of common shares under our board-authorized share repurchase program, leaving approximately $188 million under authorization for additional repurchases. Now I'll turn it over to Paul to discuss the balance sheet.

Thank you, Allison. In the quarter, we had an increase in cash and restricted cash of $8.6 million, bringing our balance to $266.2 million. Cash provided by operating activities was $74.5 million. Cash used in investing activities was $27.5 million related to plant improvements and equipment. And cash used in financing activities was $38.4 million, primarily due to the share repurchases Allison just referred to. When we compare the June 27, 2026 balance sheet to March 28, 2026, accounts receivable increased from the increase in homes sold in the quarter. Total commercial loans receivable increased on greater loans originated with more shifting the long term due to the nature and timing of the contracts. Inventories increased from raw material purchases in anticipation of increased costs at our facilities and more finished goods at retail locations for anticipated sales activity. Cruise expenses and other current liabilities increased from higher customer deposits and Mark Fusler. Thank you, Paul. Just to summarize our opening remarks, it was great that we saw the momentum in March really carry forward through the first quarter. And

and it led to record volume and strong backlog growth. The demand environment has felt very uncertain for a long time, but currently strong orders and backlogs are supporting increased production across the system. So with that, Jonathan, why don't we go ahead and open the line for questions?

Certainly. And our first question for today comes from the line of Daniel Moore from CGS Securities. Your question, please.

Bill, Allison, Paul, good morning. Good afternoon for us, but thanks for the color and taking questions.

Hi, Dan.

Backlog growth 50%, as you talked about, implies net new orders reaching the highest quarterly level that we've seen since 2021. Just talk about what's driving that. Break it down between retail, REITs, communities. And I was going to ask about pockets of strength geographically, but it sounds like it's pretty broad-based. Any additional color there would be great.

Yeah, it has been broad-based. I mean, when we looked at the regional dynamics on orders, you know, the ones that had the biggest numbers are ones you really would expect to coming out of winter, you know, the Midwest and the Northeast. So I think the big message there, as we said and you identified, is that it's pretty broad-based. We don't always see that. Sometimes these things can move differentially. But we saw double-digit sequential growth in every region. Take me to your next part of your question.

Just between retail, REITs, communities, anything relative to the strength there.

Yeah, I'm sorry. Yeah, we saw that as well. On a percentage basis, I won't go into the actual percentages, but across the three channels that we track, builders, developers being one, communities being another, and then retail, all of those were up 10% sequentially. So, you know, community, we've talked the last several quarters because it can be very bouncy, but it was strong this quarter and none of the channels seem to really be out of the game of increased orders.

And in terms of the cadence, has that, you know, increase continued into June and, you know, into July as we kind of look into fiscal Q1 and, you know, at this stage, Is it fair to say we're starting to see a more accelerated kind of share shift away from site built, or is it a little too early to call?

Yeah, I'm always kind of hesitant to call trends too quick. I will tell you, I mean, we're just finishing up July here, right? So we don't like to go too far into reporting on the next quarter, but I will say we haven't really seen it crack. So we've still seen generally a continuation. Yeah, you know, I think Watching manufactured housing relative to site builders is always interesting. From my look, they're showing a lot more volatility over a number of quarters when you just compare new home sales to MH shipments. I don't know always what to read into that. I know they're dealing with more issues around inventory in the market and trying to wean themselves off incentives, and those are problems manufactured housing just doesn't have right now. We generally don't have incentives, but we don't have inventory plugging up the retail channels. So we've got some advantages there, and I do think that, you know, I followed a few of the site builders close this quarter, and it seems like, if anything, they continue to move up in price point. And so generally, you know, I think about that upward horizon of what the playing field is for manufactured housing, and it just keeps feeling like it gets bigger, right? So talked about a lot, and I hope it's not redundant, but at the upper price points, the question is really how much competition overlap do we have with site builders, and I feel like they continue to move up and abandon first-time buyer type prices. I don't think they can hit them. And then at the lower horizon where Our prospective customers are just trying to figure out if they can qualify for a low price quality home. You know, that's where the real pain has been. And we haven't seen those folks get much relief with interest rates or anything else. I do think it's, you know, it's telling in my opinion that we've seen this increase in orders, you know, not just for a month, but over a few months now. And it feels to me like people have somewhat accepted the level of interest rates we're at. We got a little bit of stability in rates earlier, which helps the buyer get all the way through the process and have some consistency in what their loan's going to look like when they get to the end of the process. And I think it's just people were struggling to get homes, and it just kind of started to push through again. It's the opposite of when industries sometimes pull orders forward. In this case, it seems like we had some very real pent-up demand that has started to really press through. So the comparison with site builders is always an interesting one, but my big takeaway is I see them continuing to move up in price point.

And can you just tell a little bit more color on what's happening inside the plants in real time? Are we starting to ramp production month over month given the increase in backlog, holding steady? What are you seeing there?

yeah yeah backlogs are a funny thing right I mean they they never they're never stable they're always either going up or down um we have generally in looking across our plants across the country we have a bias where the plants are increasing production and we saw it this quarter I mean we got to pick up in orders in March and we produced and shipped more homes in in the first quarter and As I was trying to indicate right now, the backlogs support us continuing to increase production. The majority of our plants, although hardly any were down, the majority were up compared to flat from quarter to quarter. The dynamic's interesting because when folks go a long period of time without a good backlog and they're struggling to just keep the orders coming in to produce, sometimes we can have a tendency to want the backlogs to be big before we really press behind them and so we try to we try to counteract that that human tendency to want to cushion and right now with the backlogs at the levels they are and I'm not sure we mentioned it you know we're kind of in the seven to nine week range that's up quite a bit you know our discussions with our plants are hey push behind us because big backlogs aren't great either right So it's a nice feeling to be able to lean in a little bit on these orders and backlogs.

Helpful. Last for me, a lot of moving parts, obviously, but the pricing pressure you talked about at retail, is that largely kind of Texas and surrounding markets, or is that something that you're seeing more prevalent, you know, across the country?

Yeah, you know, we know that we experience what we experience in our stores. I don't Part of the reason why I highlighted in my remarks that our stores still are largely concentrated in Texas, you know, we've expanded out of there for sure, but there's still a core concentration there. That was to say that I don't think we should assume that that gets extrapolated across the rest of the country. I think, you know, it's been an interesting dynamic. I hope that my comments explained it reasonably well because if you're a manufacturer in Texas, you're feeling really good, right? Your prices are Stable. Maybe you're going to have an opportunity if orders keep coming in and back loads grow to even increase a little bit. And yet on the retail side, they've got a lot of people out there shopping, and I think it just got a little competitive this quarter. So we'll keep our eye on it. Not having company-owned retailers, our visibility into what's going on in other markets is a little less clear. But I just don't think we should draw rash conclusions about what's going on countrywide or even, you know, if this is just a dynamic we've seen in your term here. We'll keep an eye on it. Very helpful. I'll jump back with any follow-ups.

Thank you.

Okay.

Thank you. And our next question comes from the line of Jesse Lederman from Zellman. Your question, please.

Hey, thanks for taking the question. Could you help us understand, like, would the pricing pressure at captive retail I know it seems to be concentrated in Texas and like I don't want to make it like too big of a deal but is that because the stores you think had too much inventory and that could end up filtering through to reduce orders from the manufacturing facilities or you know can you help us kind of think through the moving pieces there and what you think the cause of it was the pricing pressure at retail?

Yeah that's a Good question. It's important. Probably should have brought it out somehow in my comments. You're picking me up a little bit. We definitely have not seen inventory really pick up. I think the I think it's a transaction by transaction dynamic that they've got a lot of people shopping and those people are jumping around store to store and the retail folks have just gotten pretty, you know, and I'm not going to use the term aggressive and I don't want to be extreme, but they've they've been competing for those orders. I made the comment that closing percentages were down but that's down on higher traffic so we're still getting sales and things are still moving through the system but with a lot of shoppers out there it just seems like for the moment at least it's gotten pretty competitive and I wouldn't even say I also I also would say it's not dramatic like we're not seeing ourselves or others selling at prices that aren't profitable in retail it's just a little tighter of If you think about the spread between the selling price at retail and their invoice on the home, they have other costs. But if you just think about that spread, it's a little bit tighter than it was before. And maybe that's just the market kind of settling out as all those folks are out there shopping.

Sure, that makes sense. What's the appetite to continue to compete on cost in those markets versus like wanting to maintain your retailer margin? Like, how do you kind of think through those dynamics?

Yeah, every day, every store is kind of the answer to that. You know, I think it's just we have good, healthy discussions with all of our retail, particularly the regional level, kind of just making sure we're all keeping our eye on that balance, right? I mean, I think it's an indication that, you know, we operate in a market. And so those guys are out there trying to do the calculus around whether We're going to make more near-term profit if we tighten up that margin and get the extra incremental sale or if we're going to make more total profit if we don't. And right now it's kind of leaned a little bit more toward getting that order. Again, I don't want to overblow it. I think that it's – and it's not a – it's something that gets worked out kind of at the operating level with our close involvement.

Okay. But good to hear it doesn't sound like it's – anything to where they're looking to destock and that will filter through to fewer orders from the independent retailers.

Yeah, Jesse, that's where I think your question is actually really helpful to make sure the picture is complete. We have not seen inventory increase in our retail or in the independence that we sell.

Okay, great to hear. A couple more from me on the SG&A. Assuming a certain percentage of those costs are variable, of course, just kind of isolating what that implies for the fixed portion of SG&A. Looks like those costs were up roughly 2% sequentially, which would obviously already normalize for American Home Star. So it sounds like maybe that was like some stock-based comp and whatnot. Is that expected to persist or will those costs kind of unwind a little bit back to levels from fiscal 4Q as we move through the year here?

I think what's important is to highlight that from last quarter to this quarter, we were able to leverage our SG&A as a percentage of revenue, which is at the core of our of our business model. And if you look from an absolute dollar increase perspective, the quarter to quarter increases were associated with, you know, investment that we would expect when we're working toward having our pipeline grow. So our sales and bonus commission structure, those parts that drive the sales growth and drive the pipeline growth, we see those expenses come through SG&A. And that was a big part of the change from this quarter to last quarter. We've also been investing in our sales and marketing. And again, those are long-term investments that we make. The dollar impact can be kind of lumpy, depending on activities that we have in marketing from one quarter to the next. But what we saw in SG&A and the raw dollar increase is kind of consistent with what we've expected. Continued, very thoughtful, measured increase for sales and sales support activity, along with consistent but small investment in shared services. And we continue to be able to leverage SG&A as a percentage of revenue as we move forward.

Okay, that's really helpful, Allison. So it sounds like, to summarize, there are some incremental costs, fixed costs, kind of isolating for the revenue growth and leveraging the variable costs that will probably kind of remain in the in kind of the structure for the next few quarters, at least that are more structural in your in positioning the company for the expected growth in the future. Is that right?

It's a fair characterization. Thank you.

OK, thank you. And and last one for me, I could read you after is on the gross margin. Allison, you've given some really great commentary on costs in real time and what we can expect based on maybe some costs and what you know from during the quarter and subsequent to quarter end and how that may flow through to subsequent quarters relative to what you just printed. So we'd love any commentary there given you did gross margin down 180 basis points year over year despite pretty steady capacity utilization. So we'd just love any commentary you can give there. Thank you.

Yes, of course. And I think what we'll focus on here is a little bit of what everybody probably wants is an understanding of how tariffs are impacting our COGS. Well, and we know there's an upward impact on our COGS. However, it's really difficult to precisely estimate the impact of tariffs. I think this quarter, our best overall estimate is that COGS was negatively impacted by about 5 million of and just slash inflationary costs compared to the prior quarter. You know, and what we've talked about is our suppliers' ability to really pass through that tariffs. It is a large function of the level of demand for their products. So if the demand for lumber and steel, which are the two main commodities we're watching, start to heat up, we are likely to see that impact our profit margins. But I think it's important that we're not seeing anything that we didn't expect. We continue to focus on the core of our COGS, which is low fixed costs, being able to leverage our factory overhead, offset as much increase in materials that we can. So we're seeing that working, and we feel comfortable with where we're positioned going forward.

OK, that sounds good. And so that $5 million seems relatively steady. which that was $5 million was last quarter and your expectations moving forward aren't materially different than that $5 million.

Yeah, we all have limited visibility at this point to the impact of tariffs and inflation, but that's a fair statement.

Okay, and are there mitigating efforts that you're using to kind of work down that $5 million? Is there any way you think all else equal you could get that number lower or have you kind of exhausted those options?

No, we've absolutely continued to work forward. Our supply chain and our purchasing group is one of the strongest I've ever had the pleasure of being with. And they have been on top of the situation now for going on 18, almost 24 months. So there's a lot of activity around supply chain. There's a lot of strong partnerships that we've had, you know, really across all the commodities, particularly lumber and steel. We'll continue to leverage those and fight the good fight.

Thanks so much, Allison and Bill. Appreciate it. Thanks, Jesse.

Thank you. And our next question comes from the line of Greg Pomp from Craig Howell. Your question, please.

Yeah, thanks. Just wanted to follow up on the last, I guess, thinking about the margin levels, because we've been dealing with inflationary inputs and tariffs for decades. I can comment on that quickly. I also might want to add to what I say. I've had a view for a long time that our product markets have kind of separated from cost to a great extent, so

We really are not a cost plus manufacturer in any way. Having said that, when our costs go up, if we've got the opportunity, well, say it a different way. Our selling price on a home is based on the demand and what the market says that home is worth, not necessarily the cost we put into it. So I think the way this plays out is if we continue it, as an industry to see higher backlogs and higher capacity utilization, then you could expect price to go up, and that'll be an upward pressure on gross margins regardless of what's going on in cost. So I don't know that everyone shares my view, but to some extent, my mental model is that these things are somewhat separated. If we had the opportunity to increase price in a market because the demand suggested that, we'd do it. So that's my view, and I know that's kind of different than others in some cases, and it's a pretty extreme view, but it's not as simple as saying, hey, our price went up, so let's go raise our – or our cost went up, so let's go raise our price an equal amount to see if we can get it back. Yeah.

Go ahead if you need to finish the thought or not.

So I guess you kind of alluded to, you know, demand and if others in industry, I mean, do you think others are seeing, you know, the level of orders that

I don't really have a strong view. I don't have visibility into their orders and backlogs, to be honest. So I guess we'll find out over time.

We follow the HUD numbers, as you do. I know you follow that and look at how we're performing relative to that. They can be bouncy as well, but over time, I think they tell a story. And I'm happy with how our numbers over a number of quarters have compared to the movements in HUD shipments as a proxy for overall factory-built housing. So I feel like we're doing well, but as the HUD shipments come out, we'll see The extent to which the whole industry is experiencing the same things. I mean, a 50% increase in backlog kind of is, I mean, that's a big quarter jump. And I don't think the entirety of that's unique to us. I just think we've certainly done a good job of making sure we get hopefully more than our share of them.

Yeah. Let me ask it this way. Are you, as a company, you know, whether that's at the national level, at the local level, Doing anything differently, pricing homes differently than, you know, A, competition, and B, what you would have been doing a year ago. I mean, I'm just trying to get a sense for whether maybe there's a company-specific item here that is translating into much, much higher order growth.

Not price. I'll tell you categorically, it's not. If you're asking if the company is has changed some strategy around pricing to go get orders. I would say absolutely not. We haven't changed our system. Our system, our philosophy is very much staying in close contact with our local operators, but they make a lot of the decisions. And I can say on the manufacturing side, and this is something we talk to them a lot about, on the manufacturing side, the process is for them to be close to the market and make sure that our products are basically priced right in line with what we're seeing from the competition for like products. So yeah, categorically, I'd just say that we haven't gone into a mode where we're chasing market share with price. I think where we're chasing market share is with things like projects that improve our quality, which we've done a lot of those over the past year. A lot of emphasis that we've talked in the past, and I won't drag you through around How We Go to Market, Digital Marketing, Branding, Product Lines, National Salesforce to make sure we're touching all the right people within the larger customers. That's the hard work we've been doing over a number of years that I do think makes a difference.

Yeah, that makes sense. And then I guess just lastly, now that Road to Housing Act finally passed, Are you getting any more feedback from the channel, from the regulatory folks? I mean, just trying to get a sense for when you think some of this stuff that was included in the bill might actually start to benefit the industry.

Yeah, you know, I think I always kind of try to tell people I'm at the same time incredibly excited about what that law represents. and the opportunities it gives us over time and also I'm kind of realistic in my expectations about how quickly we see like actual volume come from it. One thing I've told people and I might have said on these calls in the past that really caught my attention and this is a little while ago when the industry really got focused on trying to pursue this removable chassis. I was frankly surprised when I talked to company-owned Retail Leaders, you know folks within our organization and retail and also some independents at how excited they were about it because they don't always have the multi-year perspective but they felt like there was a market for that quickly so I think as we get the state definitions to align to the removable chassis and as municipalities start to realize they've got to open their minds to these good solutions the permanent removing a chassis really gives them a home that's even that much less distinguishable from the site built, I think it's real volume. It'll just take a little bit of time to get through that process and it'll be kind of a upward curve, right? So we're not sitting on this end sitting here doing projections about how much incremental volume this stuff will add over a time period, but directionally I know it's going to be helpful and it's going to help us break down some of the zoning barriers So it's good stuff. Yeah, I agree.

All right. I'll leave it there. Thanks.

Thanks, Greg. Thank you. And our next question comes from the line of John Lovallo from UPS. Your question, please.

Good afternoon, guys, and thanks for taking my questions. You know, maybe Allison, I'll start with, you know, it seems like demand is pretty good. Pricing may be under a little bit of pressure. I just want to make sure that I'm understanding that correctly. And also, I mean, how do you kind of factor in diesel and freight into the equation?

Yeah, excellent questions. And one of the things as we talk about the increases that we're seeing in the current period, the way to think about that is if you look at what's going on in the commodity markets right now, which we can all see, and particularly if we think about those for lumber and for steel, what's going on right now in about 60 to 90 days comes through and there are costs of goods sold. So, as we report on it, it probably does feel a little bit of a lag indicator to what we're seeing in the marketplace. But we've seen that as a consistent part of our business model. So, there were, you know, we have a, we use that time period as an opportunity to make sure that we're sourcing at the right levels and that we are, you know, getting as competitive a pricing as possible. But to your point, we'll, you know, we will see the impact in lumber and steel. and this quarter and we'll we expect to continue to see that in the out quarters. But, you know, it's it's something that everybody can have visibility to by watching those commodity markets with us.

Got it. Okay. And then sorry, Bill, were you going to say something?

No, no, we're good.

Okay. Sorry. Yeah. Maybe then switching to you, Bill, just back on the 21st Century Road to Housing Act, I mean, obviously We've been reading more and more that the HUD is currently understaffed given that Doge pretty much took an axe to the workforce there. How do you think about the ability of HUD to actually execute upon this with the staffing levels that they have in place?

Yeah, that's an interesting question because I haven't really been conscious of a big concern there. So unless I'm missing something, I think... I think we aren't seeing it as a barrier. It would be an interesting question for me to talk to some people in DC and ask them directly. When you look at it, they've got some things that they do have to do some pretty heavy lifting on around. One of the ways the road to housing tries to impact zoning, and I think the federal government's ability to do that is somewhat limited. One of the things they have there is some direction to HUD to examine construction financing approaches and to give kind of models for how to set specifications for municipalities. It's kind of like they're trying to give tools to municipalities to enable municipalities to relax some of the barriers. I think that will take work, right? That's going to be labor intensive for HUD. But some of the others that we're excited about, like the Removing the chassis, I think there's enough focus on that. And the infrastructure that's in place to provide guidance to HUD around specifications is all there. So I really think that they won't be slowing those kind of things down. That's kind of my perspective, though, John. I'm not sure if you're picking up that's a concern. I'm going to tune into it more.

Yeah, I mean, we've heard that through several channels, but, you know, look, we're obviously a lot newer to this than you are, so you're probably right. The other thing I wanted to ask you about, though, is that, you know, the NBA recently put out a pretty cautious statement to the FHFA, you know, regarding the potential changes to the lending guidelines within the Duty to Serve program. And, you know, I guess the question is, how are you thinking about potential impact of DTS related to Capco and just the broader industry? And more generally, how are you thinking about the opportunity for improved financing through either the HUD or FHFA?

Yeah, some of what's in the road to housing is direction to various departments to, I'm going to use the word that's been thrown around a bit, to generalize it, to modernize their programs. And I won't address that. I think that work just should happen. And those are things like raise your loan limits because you're out of market, right? So let's not talk so much about that. But the duty to serve, you know, if we go back in time, and again, this is my view of things. I think there's a lot going on here, so I'll preface it with that. If we go back in time, the GSEs a number of years ago kind of prominently had aspects of duty to serve related to home-only lending, which they do not buy home-only loans. And then it just kind of quietly got less and less and went away. And I think part of that was their regulator, FHFA, was not interested in it. They were dealing with big issues around conservatorship and other things. And it's a small market for those GSEs. Now, in the last month or two, I think FHFA has done a 180 and kind of looked at them and said, you guys got to really look at doing these things. I am really excited about where that might lead. I'm not going to get overly optimistic because we've been through it before, but if we make real progress with the GSEs on them creating a secondary market for home-only loans, I think that's a huge plus for the industry. I've talked about that in Congress as well. I talked earlier in answer to one of Dan's questions, I think, about the folks at the lower horizon that are just trying to see if they can afford to own a home, improve the secondary market, or you develop a secondary market through the GSEs for home-only loans, and I think those loans become more affordable immediately. So I'm like cautiously excited about that increased positive discussion we're starting to hear, the rumbling we're starting to hear, and you know, If that goes somewhere and they start to really take action on that, it'll be I imagine it'll be slow. They'll do pilot programs initially and all that to make sure they have data. You know, frankly, whatever, because these loans are proven to be good loans, good investor risk for the coupon that's on these loans currently. So if they test it, they're going to find that that's a market they should be operating in to support affordable housing. So sorry for the rant, but you kind of triggered me on something that I just am frustrated hasn't already happened. And we've seen a 180 where they're now getting a little bit of pressure to look at this stuff again. And I think that's a great thing.

All right. Appreciate the thoughts.

Yeah, thanks, John.

Thank you. And our next question comes from the line of Jordan from Philadelphia Financial. Your question, please.

Thanks. I appreciate the long answer last time, by the way. I don't know of any stick belt owner that's up 50% in backlog. I mean, if they're up 5%, it's been a home run. So it's clearly showing the affordability gap. I have two questions. One is your operating margin reflects your current utilization. But if you get a big increase in orders, the first thing that's going to happen won't it is that the Operating margin will go up to 12% to 15% because you fill up the factories versus build new factories, correct? So isn't an increase in volume have more than a direct flow through because the margins will increase?

Well, you get two things. One is you will get that spreading of fixed costs, which helps, right? I mean, we always tell folks that we strive to be as variable as possible in our cost structure, but there's certainly some fixed costs. Even at cost of goods sold line. So you definitely get that. The other thing you'll get is that, you know, it's kind of the other side of the coin about affordability. But if plants start to be full, that means that retailers are looking for more homes because they know they can sell them. And that's when you start seeing pricing rise and more than covering maybe some of these operating costs. So it really has two effects, I think, what you're pointing at.

But it's not unreasonable to think that there could be upside margin pressure if these backlogs come through.

Well, if they continue, right? I mean, if we see there's a lot of scenarios, this is the uncertainty of the industry. If we see, for whatever reason, we see orders now slow down a bit, we've got a backlog. So we'll be able to run that for a period. and maybe, but in that scenario, it'll come down over time and we'll kind of be back to where we started. If orders stay at the level they're at right now, the industry utilization is gonna go up. And as the industry goes up, you're gonna be in that different pricing scenario.

Second question is, there's different trials of HUD funding and right now your mortgages are three to 400 basis points higher than traditional stick-billed homes. When does the first trial begin, and how much do you think a 300 or 400 basis point improvement in cost would even further exacerbate that affordability difference for you guys?

Yeah, let's be clear. A 300 or 400 basis points on land home is high, right? I mean, land home tends to run, looking at about half to a percent higher than a stick-built land home mortgage. So probably what you're looking at is the difference between a home only loan. Correct.

Just the home only loan. Correct. Yeah.

And those really don't move with mortgage rates. They're very sticky and aren't really as driven by like the 10 year as land home rates. And again, that's where we're talking. That's where I got on my soapbox a minute ago talking about the GSEs and what a big difference it would make. It's that home only lending market where, you know, a lot of our customers are just borrowing against the home. and if that comes down because the market becomes more efficient, then that really has a big impact on our market and folks' ability to afford homes, which I think is your question.

Correct. And when do you think the first trial could start in that? Because like I said, it's 300 to 400 basis points less on the home only.

Yeah, I'm not sure that you're going to see home only loan rates come down too Be anywhere close to par with the land home because the loan values are smaller. And so there's some just fixed costs of origination and things like that that will probably always have land home be a bit higher. I'm sorry, home only be a bit higher than a land home loan. And I can't even I would be probably foolish to guess that when the GSEs might try to actually start buying loans. I mean, we're we're going to talk to them as much as they want to talk and we'll provide loans if that's what we have to do. but I can't even make an educated guess on when we might see some movement there because we've been disappointed in the past.

Okay. Thank you. But it's a huge positive.

Yeah. Yeah, absolutely. The direction of the discussion in DC is what's exciting, right? We just have to keep feeding that.

Okay.

Thank you.

Thank you. And as a reminder, ladies and gentlemen, if you do have a question at this time, please press star 11 on your telephone. Our next question is a follow-up from the line of Jesse Lederman from Zellman. Your question, please.

Hey, thanks for taking the follow-up question. I have a couple similarly related to the legislation, but more on the state-level side, Bill, like you kind of talked about earlier, which seems really encouraging. We understand that a lot of the kind of reform on the state side specifies that More similar zoning as for site-built single-family homes, but specifically for homes that are titled as real property on the MHDOD. So curious what you're hearing out of builder developers from your Rolodex in terms of what their appetite might be in some of those states and if that's increasing relative to discussions you've had previously.

Yeah, here's where I'm going to fight my tendency to want to not overpromise and tell people about things that are probably still out in time. But I will tell you your question that we have had an increase of discussions with land developers that historically we haven't had before. So I think people are starting to show up to the story. I don't know if I'm getting ahead of myself to set any expectations there, but you asked the question and we've had some really good discussions with some folks that two years ago probably wouldn't have been interested.

That's awesome. Great to hear. And question on this is probably premature, but just curious for, you know, the removal of the permanent chassis requirement really just makes it optional. I'm curious if that introduces any inefficiencies at the factory, if you're going to have to, you know, one home is maybe going to be chassisless, the other home is going to have a chassis, like if you've thought through kind of the logistics of actually adding essentially a new product line to all of your different factories.

Yeah, it's, I mean, factories have unique constraints, but I'm pretty optimistic about this for a couple reasons. One, if you've got a factory that's making both HUD and modular, they already do it. So it's not a big technological leap for that factory. And a lot of it has to do, if a factory's constrained, it's due to some physical limitations in their factory. The other thing I'll tell you is that one of the things we've invested in in a lot of our projects and our plants is to, instead of rolling the chassis in and building the floor on that and dragging that down the line, which kind of creates not as high quality from a level floor perspective, a lot of our project investments have been to build the home off the chassis and at the end of the line raise it up and set it onto the chassis. So any factory that's set up that way is in great shape to build this product because we'll just be picking it up and setting it on a chassis it won't forever be tied to versus the next home coming down the line might be built to stay on that chassis. But we think that from a We have seen increases in the in the transportation

But I think they've been somewhat offset partially at least by improvements that we're making in services and that they flow both through. So it's kind of a net impact of what we want to see as far as our customer service, slightly offset by some of the cost of the transportation it's having to us.

When you think, what do you mean exactly when you talk about customer service?

So cost of our technicians to go out and perform service requests.

Okay, got it. Okay, that's helpful. Last one for me again. Really appreciate all the tolerance. It's incredibly insightful. I've heard kind of mixed things on the removal of the chassis, if that's really going to strip costs out or if costs from perhaps the recycling of the steel from the chassis will just be replaced with the need to crane set homes or some other offsets. Curious what your math suggests on the potential cost removal from removing the chassis.

Our view is a little more on the conservative side. You offset the cost of not burying a big steel chassis in the home forever. You offset that cost with you're going to need a little more you know structural like wood for example for the structure because the chassis does provide some structural integrity when you get to the site to set the home instead of being able to kind of roll it in place set it up and go you're going to be looking at a lot more sets that require cranes so for us we're not really viewing it as big of a cost savings element as we are You'll have customers that we fully expect to still make a lot of homes on permanent chassis. You'll have customers that don't value that, and their set might be less expensive, so their total delivered cost might be lower with the permanent chassis, and you'll have others that want to Have their homes set very close to ground. They're going to invest in the foundation to do that. They're okay with, you know, they're okay with the added set up costs. And so we're really going to have just an opportunity to sell to both types of customers. So we view it that way, Jesse, more than as a cost savings.

Makes sense. Thanks again.

All right.

Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Bill Boor, President and CEO, for any further remarks.

Yeah, thank you. Hey, we feel good about our positioning. I think that hopefully that's coming through. We feel like we're really well positioned, and I think that's because we've been very consistent in investing in our plants through the cycle, and I've alluded to during the Q&A, we've had a very methodical and committed execution of a long-term go-to-market strategy that I think is paying off for us. So correctly predicting where the market's going to be even a couple quarters out is really difficult. But instead, we just stayed steady and nimble, which is what I think is necessary in uncertain and sometimes volatile markets. So we believe building a better company and bringing better solutions to the affordability crisis is what creates value over time. And that's where our focus remains. Thank you, ladies and gentlemen, for your participation at today's conference. This does conclude the program. You may now disconnect. Good day.