Q3 2022 Cavco Industries Inc Earnings Call
Okay.
Good day and thank you for standing by. Welcome to the third quarter fiscal year 2022, Cavco 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 this session you need to press star one on your telephone. 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, director of financial reporting and Investor Relations. Please go ahead.
Good day, and thank you for joining us for Cavco industries third quarter fiscal year 2022 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 under the provisions of the Private Securities Litigation Reform Act of 1095, including statements of expectations or assumptions about Cavco's financial and operational performance revenues earnings per share, cash flow or use.
Cost savings operational efficiencies current or future volatility in the credit markets or future market conditions.
All forward-looking statements involve risks and uncertainties, which could affect cap those actual results and could cause its actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of capital.
I encourage you to review Cavco'slings with the Securities and Exchange Commission, including without limitation. The company's most recent forms 10-K, and 10-Q, which identify specific factors that may cause actual results or events to differ materially from those described in the forward-looking statements.
This conference call also contains time-sensitive information that is only accurate as of the date of this live broadcast Friday, February 4th, 2022.
Cavco undertakes no obligation to revise or update any forward looking statements, whether written or oral to reflect events or circumstances. After the date of this conference call, except as required by law.
Now I'd like to turn the call over to Bill Boor, President and Chief Executive Officer. Bill.
Thank you, Mark. Welcome and thank you everyone for joining us today to review our results for the third quarter of fiscal year 2022.
We're very happy to report another record quarter for revenue and earnings. Revenues increased nearly 50% year over year and diluted EPS was $8.57 compared to $2.12 in the year-ago quarter.
EPS included a large positive impact from nonrecurring tax credits, which Alison and Paul will explain in more detail.
It's really important to recognize that even excluding that impact EPS was up about 150%.
Due to outstanding results from our operations.
This was a quarter that showed operational gains resulting from improvements set in motion over a long period of time and we expect to continue that momentum.
Our plants achieved a higher production level when we reach capacity utilization of approximately 80% this quarter. This is in line with our pre-pandemic utilization and it was accomplished despite persistent labor challenges in supply inefficiencies.
The improved throughput is a result of the focused effort across all of our plants to simplify their product offerings and it's also the result of work underway for some time to improve staffing and retention.
The combination of a more stable and higher skilled team.
And our rationalized product offering is paying off.
Our backlog remained consistent with last quarter at $1.1 billion.
It represents 36 to 38 weeks of production.
You might recall that this is down a few weeks from last quarter, which is purely a function of our higher production rate.
The takeaway is that the backlog remains large with continuing strong orders and improving production to meet those orders on a related point strong backlogs exist across the industry. So we're not seeing any pressure on wholesale pricing.
While our consolidated average selling prices down slightly compared to Q2. This is the result of a number of factors, including the mix of retail and wholesale sales and the addition of Commodore.
So on a same plan basis, both volume and pricing continued to improve upward during the quarter.
I'd like to come back to labor. It would be difficult to say, one way or another whether the general availability of labor has really improved at this point if it has it's been a modest improvement.
However, we have made significant progress which is directly enabled the operating improvements I've already commented on.
While still below target levels, we've been able to increase plant staffing.
The improvement we're now seeing is a result of long term efforts in recruiting, onboarding learning and development investment in the workplace and improved pay and benefits.
It's been a very holistic approach that started before the labor disruption over the last 18 to 24 months.
Continued progress in staffing and retention will enable even higher levels of productivity. We expect to continue the recent momentum we've seen in our people strategies.
Demand for our products remains strong as we've discussed for some time demographic housing drivers in the large housing deficit buildup over the past 10 to 15 years provide.
A very positive demand outlook.
These drivers apply particularly to manufactured housing due to the intensifying need for affordable homes.
Of course, short term economic factors impact the industry. However, when you consider
The extraordinarily strong demand we've been experiencing for a number of quarters, despite significant home price increases and lengthy backlogs. It really reinforces the growing housing shortfall that exists and the need for what we do.
With regard to some of our larger growth investments, we remain on the same schedule previously communicated for starting up the new Glendale, Arizona facility, which will be in the second quarter of this calendar year.
To remind folks Glendale will double our park model capacity, while freeing up a line at our Goodyear facility for additional HUD production.
We're now one full quarter into the Commodore acquisition, we're very happy with how everything is going.
The hardest work comes after the deal closes when transition activities require a lot from everyone involved.
And this has certainly been the case over the last quarter.
I want to express sincere appreciation to all of the folks that Commodore and within Kafka, who have worked so hard on various aspects of integration.
We accomplished a lot in this position while at the same time staying very focused on the work of getting customers.
Commodore's contribution to our volume has been right in line with our expectations this quarter and their margins are improving as they work off lower-priced homes in their backlog.
And with that, I'll turn it over to Alison to discuss the quarterly results in more detail.
Thank you, Bill. We are pleased to report that Cavco achieved record breaking net revenue and net income results for the third quarter of fiscal 2022.
Revenues for the period with $431.7 million up 49.5% compared to $288.8 million in the prior year's third fiscal quarter.
The Commodore homes acquisition contributed $73.1 million of this increase.
Sequentially, from the second quarter 2022, net revenues increased by 21% with Commodore's first full quarter of results in the main driver for the increase.
Within the factory-built housing segment, net revenues increased 52.7% to $413.6 million from 278 million.
In the prior year quarter.
The increase was primarily due to the full quarter of Commodore's operation and a 24.4% increase in average revenue per home health.
The increase in average revenue per home sold was driven by product pricing increases and the mix shift to more multi section homes.
The total units sold increased by 22.8% to 4,424 up from 3,603 units in Q3 of 2021.
<unk> 3603 units in Q3 of 2021.
Our factory utilization increased from 75% last quarter to 80% in Q3 of 2022.
The highest level since the pandemic.
This improvement in utilization as a result of an increase in factory labor head count.
Coupled with the reduction in production hours per module.
Our field operations continue to be successful in overcoming challenges unpredictable employee absenteeism and building materials supply disruptions.
Financial services segment net revenue increased .6% to $18.1 million from $18 million.
$18 million.
Due both to a higher number of insurance policies and higher home loan sales compared to the prior period.
In addition to year over year increases in revenue for the quarter. We also expanded our gross margin percentage.
Consolidated gross profit in the third fiscal quarter as a percentage of net revenue was 26.7%.
Up 20.5% in the same period last year, driven largely by the factory-built housing segment.
The gross margin for the factory-built housing segment increased to 25.2% in Q3 of 2022.
Versus 17.4% in Q3 of 2021.
This was driven by pricing, operational improvements and declines in lumber prices experienced last summer that continue to flow through cost of sales in the quarter.
As Bill explained, though our average selling price on a consolidated basis was down slightly compared to quarter two of 2022.
We still generated 110 basis point improvement.
The acquisition of Commodore negatively impacted gross margin percentages from purchase accounting related items as no gross profit was recognized on the sale of homes and inventories that were acquired in the transaction.
As required by GAAP. These assets were written up to fair value on the acquisition date.
All acquired inventory has now been realized and net sales in future periods will not be impacted.
Additionally, we continue to work through sales of homes that will comment on this backlog that we are price-protected and therefore has lower gross margins.
Working our way through these homes and gross margins improved as we progressed this quarter.
Gross margin as a percentage of revenue in financial services decreased to 61.2% in Q3 of 2022.
Up 68% in Q3 of 2021 due to higher weather-related events, and lower realized and unrealized gains on marketable equity securities and current period.
Selling general and administrative expenses in the third quarter fiscal 2022 was $60.3 million or 14% of net revenue compared to $35.4 million or 12.3% of net revenue during the same quarter last year.
The increase is due to $8.7 million from the addition of Commodore homes.
Cost associated with third party consultants to review the nonrecurring energy tax credits and greater incentive and commission wages unimproved earnings.
Net other income this quarter was $4.3 million compared to $2.2 million in the prior year quarter.
This increase is primarily driven by a $1.5 million higher unrealized gain on marketable equity securities and higher interest income earned on our commercial loan balances.
Pretax profit was up 147.4% this quarter is $58.9 million and $24.9 million from the prior-year period.
The effective income tax rate was a benefit of
35.1% for the third fiscal quarter.
Compared to an expense of 23.9% in the same period last year.
Our Q3 2022 income tax included a nonrecurring benefit at $34.4 million.
Or credits related to the sale of energy efficient homes.
Excluding this one-time item, our tax expense as a percentage of pre-tax income would have been 23.3% consistent with prior period levels.
Let me take a minute to expand on the nonrecurring $34.4 million tax benefit recorded this period.
Under the internal revenue code section 45L. The company qualifies for credits related to the sale of certain energy-efficient homes between fiscal year 2018, and the third quarter of fiscal 2022.
These credits are available for manufactured homes that meet specific energy-efficient levels has established under the federal Energy Policy Act of 2005, which was extended in the consolidated Appropriations Act through the end of calendar year 2021.
The company enlisted a third party qualified expert.
To examine the information on our manufacturers homes sold and determined which units qualified for energy-efficient tax credits under the program.
This federal program ended on December 31st, 2021, and as such the company will not benefit from these tax credits in fiscal 2023 and loves the program has extended or modified by future legislation.
In total after considering the net tax credits and associated expenses diluted net income per share for the three months ended January one 2022 was favorably impacted by $3.23 per share.
Cash related to these credits will be received in the form of lower estimated tax payments of approximately $14.2 million for this year's tax return.
Cash refunds related to previous periods are expected to be received through fiscal year 2024, as we amend the associated tax returns.
Net income attributable to Cavco shareholders was up 303.1% to $79.4 million compared to net income of $19.7 million in the same quarter of the prior year.
Net income per diluted share this quarter was $8.57 per share versus $2.12 per share in Q3 of 2021.
Now I'll turn it over to Paul to discuss the balance sheet.
Thanks, Allison. So I'm going to highlight some of the changes in our balance sheet from January 1st, 2022 compared to April 3rd, 2021.
The cash balance was $257.3 million down $55 million from $322.3 million nine months earlier.
The decrease was primarily due to cash used for the acquisition of Commodore.
Repurchases of common stock and higher inventory purchases.
These decreases were partially offset by net income reduced for noncash items changes in working capital and sales and collections on consumer loans.
The number of accounts increase as a result of Commodore including accounts receivable commercial loans receivable inventories property plant and equipment goodwill and intangibles accounts payable and accrued expenses.
Consumer loans receivable decrease from principal collections on loans held for investment and it's now up in cash.
Prepaid and other assets increased from the income tax receivable related to the 45-hour energy-efficient tax credits Alison just discussed.
Crude expenses and other current liability balances increased from deferred payroll tax payments under the cares act and higher volume rebates and customer deposits received due to greater order rates.
And last, stockholders' equity was $806.2 million.
As compared to January one.
I'm, sorry, so it was $806 million. From $122 6 million from $683.6 million nine months previously.
From.
$122 6 million from $683 6 million nine months previously.
Thank you, Paul. Catherine, let's turn it over for questions.
Thank you. As a reminder, if you'd like to ask a question press star one on your telephone. Our first question comes from Daniel Moore with CJS Securities. Your line is open.
Thank you, Bill, Alison, Paul, Good morning out there and thanks for taking the questions.
Start with Commodore. I think you said it contributed $73 million if I heard that right in the quarter.
How many units did they ship just trying to get a sense of what the organic shipment growth look like?
Yeah, we're not going to go down the path of separating out Commodore's shipments some but like I said in my comments they were pretty well in line with what we expected when we've talked in the acquisition that they add about 25% of our overall.
Capacity and shipment expectations.
Okay. Maybe obviously, demand and backlog remained exceptionally strong just elaborate on I think you've described a moderate decline in order rates as that.
Maybe obviously demand and backlog remained exceptionally strong just elaborate on I think you've described a moderate decline in order rates as that.
Just normal seasonality from your perspective or are we slowing be beyond that?
Any comments or color there would be great.
I don't know, where we set a moderate decline to be honest, Dan.
I don't know, where we set a moderate decline to be honest Dan.
Yes, the order rates continue to be very strong and there is some.
I guess I feel like after a period of about 12 months from mid '20 to mid '21 which the order rates were just unbelievably high.
We've kind of gotten back to where we are seeing a seasonal shape to the order rates, but they're still above 2019 levels, which were strong so.
We've kind of gotten back to where we are seeing a seasonal shape to the order rates, but they're still above 2019 levels, which were strong so.
We're still demands does not seem to be a problem and in fact, we're still in a mode where we.
We talk about backlogs and we've talked about industry shipments and things, but we're still in a mode, where we're turning away business at this point so.
Backlogs and we've talked about industry shipments and things, but we're still in a mode, where we're turning away business at this point so.
Demand is holding up really well.
That's helpful. Thank you.
Talk about gross margin a little bit. There's some moving parts in there.
How much of a benefit would you say you experienced during the quarter from timing of raw material lumber purchases?
And.
And how much did selling? Conversely, how much that selling Commodore is price-protected homes impact backlog.
in backlog impact margin in the quarter, just trying to get a sense for what a really normalized gross margin would look like.
Thank you Dan. It is the lower lumber prices from late last summer. They continue to flow through our third quarter cluster goods sold.
And the backlog is still supporting [inaudible] for our homes.
And the backlog is still supporting [inaudible] for our homes.
Prices for our homes.
Costs, essentially of every input including labor are increasing in the commodities remained volatile and kind of unpredictable.
Unpredictable in the near term.
I think if we take a step back with just a high level and try to quantify what the impact in the quarter was from Commodore or the writeup.
It was about 50 basis points.
Okay, that's very helpful.
Go ahead, yes.
Specifically related to the accounting issue.
Does that run off in fiscal Q4, and we have another quarter or so to go.
No, we were able to as we shared with you last quarter. This quarter, we did in fact run through them.
Perfect.
And then just one more for me.
We are at 80% capacity utilization, obviously doing a great job despite some.
Lingering headwinds of getting more through the plant. How do we think about unit growth sequentially into fiscal Q4? And maybe the first couple of quarters do we expect to see.
Some modest pick up sequentially. Can we get a few more homes through just
In terms of production capacity.
Production capacity.
And utilization, any comments would be helpful. Thanks.
I feel really good about where we're heading. I remember last several quarters, we've pointed out to folks on these calls that.
I still am preparing a lot of things back to pre-pandemic because they are good solid comparisons to be made there.
And the comments last several quarters and we've talked we're around.
How we're getting our volumes up even though we had dramatically less production employee hours. So the fact that we've.
We've now gotten back to 80%.
And we're still challenged with labor and we're still challenged with supply inefficiencies. That gives me confidence that we ought to be able to keep pushing production.
And I think the momentum is there right now.
Get a little bit ahead of myself here, but I'm going to say I think we should be able to keep climbing up.
Very helpful. I'll jump back in queue with any follow ups. Thanks.
Thank you, Dan. Thank you.
Thank you. Our next question comes from Greg Palm with Craig Hallum.
Thank you. Our next question comes from Greg Palm with Craig Hallum.
Your line is open.
Yeah. Thanks. Congrats on the good results, everyone and thanks for taking the questions here.
Thanks, Greg.
Yeah.
I'm curious, maybe if I can start with with Commodore any initial thoughts on synergy capture there.
I'm curious, maybe if I can start with with Commodore any initial thoughts on synergy capture there.
Yes.
We didn't overblow or putting too much out there about synergies to begin with.
We do believe there are some we think that the.
In my opinion, they come in two big forms that are more operational than cost oriented one has the opportunity to kind of.
Optimize our customer, I guess and we've talked about this with other transactions in the past our member Destiny. This was something we talked at length.
Our customer I guess and we've talked about this with other transactions in the past our member Destiny. This was something we talked at length.
Being able to work with dealers and customers that they brought to the company with and get more of our products into those chains and vice versa, there's always an opportunity.
Work with dealers and customers that they brought to the company with and get more of our products into those chains and vice versa, There's always an opportunity.
The other thing we've talked quite a bit about is
Operational improvements.
Commodore is done some things with manufacturing technologies that I've talked about quite a bit before.
And after being kind of together you are for a couple of months, I feel really excited about the opportunity to.
We'll bring some best practices and thoughts to their operations, but certainly, it's going to go both directions and Commodore.
It can really bring a lot to our broader system around.
Technologies that improve quality improve safety and reduce kind of.
The labor content going into the production process. So those are the things that we're most focused on I think from.
From a cost perspective, and overhead we could talk about those kinds of things, but for right now similar to the transactions we've done in the past, we're just looking to stabilize things and figure out where we go long term, we're not pushing for any synergies of that nature.
Got it and the factory utilization number was that driven at all by inclusion of Commodore if I recall, they had a pretty big utilization number I think you had mentioned when you acquired it.
Interestingly, they are kind of right at the rest of the system. I would say it has no effect up or down there right in that 80% range as well.
Got it, okay.
Yeah.
Given that.
What are your sort of thoughts on.
Really the appetite for new plant openings. So you got the park model plant coming online here soon.
A new hotline.
What about sort of Greenfield in, can you remind us, I don't know, if you have any if you still have an idle facility outside of that? But what are your sort of thoughts on increase in capacity outside the existing footprint?
Yes, I think the industry frankly needs more capacity. So we're constantly looking at how.
How we can participate in that Glendale is a big move in that direction, we've got a couple of
Things that we're working through to try to figure those things out.
We have one production line at our plant City, Florida plant that.
Many years ago was idled. To call it a production line probably has a little bit of an overstatement. It's a building that used to produce manufactured housing, but it would be a project to bring it back up.
So we're evaluating that currently.
And not to belabor this or sounds like this means that we won't be doing those kinds of products projects. The near term concerns about adding capacity from a physical perspective, you could get up pretty rapidly.
Not to belabor this or sounds like this means that we won't be doing those kinds of products projects. The near term concerns about adding capacity from a physical perspective, you could get up pretty rapidly.
The concerns our staffing and supplies.
And so that's the only thing that really gives you any pause when you dig into those kinds of opportunities. So we're working on things I think.
As I said in my comments.
There will be ebbs and flows due to near term economic factors I don't think we're of the mind that this is no longer a cyclical industry to a point, but the underlying demand is fantastic and the drivers of the underlying demand. So we're pretty confident from a demand perspective, when we're thinking about this kind of project decision.
<unk>.
I guess, maybe dovetails into my last question about demand, do you have a sense?
I feel like I've asked this question, but before but.
Where the demand is the strongest either by channel by demographic?
What are you seeing out there in terms of buyers?
Yeah, well there are a couple of different dimensions to it that are interesting. I mean, from a channel perspective.
You guys know the history, there was a period of time when.
Well before the pandemic most of the growth in this industry was coming from community business.
About a third or 30% or so of the total.
Endpoint for manufactured housing, but before the pandemic, that's where the growth was coming as we steadily we're building back up as an industry. And as you guys know pandemic hit and for a period of time.
That business all that channel almost stopped. They held orders and kind of took a wait and see attitude and dealers really picked up.
It's been quite a few quarters now where I don't think you could really separate.
Demand from either of those channels. They are both looking for more homes and we're being able to produce so both channels are really strong from a.
From a demographic or from a market perspective.
I think it is.
Pretty interesting to think about what's gone on when prices have shot up so much.
But manufactured Housing's advantage relative to the site built grows and our cost inflationary market as we've talked.
Most of what I think we're seeing right now in the industry is that interface between the upper end of what manufactured housing does and the price points site builders just can't hit anymore.
Really think we're taking a meaningful.
Increased share in that kind of zone and Conversely affordability at the lower end is is worse right. So folks that couple of years ago could have afforded us a single module home kind of at the lower price points Theyre priced out.
And that demand still exists and hopefully we'll be able to find ways to get those people in homes too, but it's been a shift more to the upper end of what manufactured housing does and I think you've seen that in continuing.
Shifting to more multi section homes relative to single family. So that's really the movement that I have seen in the industry over the last several quarters.
Yes, that's helpful.
Last one for me I mean, everybody in the industry is facing the same capacity issues that youre kind of talking about and the need to increase production rates.
Could you talk about turning down orders.
Where are those orders coming from and more importantly, where are they where are they going if everybody in the industry is sort of in the same spot.
My My guess our assumption is that.
There's even more pent up demand out there that we don't even really know thats not really been showing up in the numbers in the orders and the backlog is that right or not necessarily.
Youre absolutely right.
Good.
Yes, I think the industry shipments and we've been talking this for quite a while to industry shipments don't reflect demand by any means and orders our orders probably well, we believe orders really understate true underlying demand. So when we talk about turning away orders, it's really a couple of things mainly.
No.
Dealers that we Havent worked with are looking for homes and they're coming to us, saying can I placed some orders and we're just basically saying we're not taking on new points of distribution. So that's a form of turning down orders and the other is really.
There is a lot of.
Demand in the community the reach in the community operators for projects.
Many homes in an order and we're just telling them we can't we can't take that on given our backlogs so yes.
Yes, I think I think the conclusion I am very comfortable with the conclusion that backlogs and shipments that are not reflective of total demand right now.
Interesting alright ill leave it there thanks and good luck.
Thanks Kurt.
Thank you and as a reminder to ask a question press star one on your telephone.
Our next question comes from Jay Mccanless with Wedbush Securities. Your line is open.
Hey, good morning, everyone. So my first question on Commodore.
That was a 50 basis point drag this quarter.
Should we expect that to turn around and be a tailwind going forward and maybe even a little bit more I can't remember if you guys have broken out what commodores gross margins looked like versus legacy <unk>.
Yes, we haven't broken it out specifically, but.
Yes.
<unk> focus on.
Right.
<unk>.
The inventory that we assumed at the time of the acquisition.
50 basis points, we would see that having been.
<unk> gone through this quarter it would not be there is a drag in the coming quarter.
Also as we've taken a step back we've also mentioned the fact that they are.
Backlog that we inherited during the acquisition also.
Is price protected so as we work through that lower margin, we would expect to see over time and that backlog being worked down to zero.
<unk> margins to be comparable to <unk> network margins.
I want to make sure it's really clear that the.
The 50 basis points is specific to that.
Purchase accounting need to write up their inventory at acquisition that was just isolating that piece their overall impact on our margins was a bit larger than that because of the backlog pricing issue. So.
I'm not sure if that's clear or not but wanted to make sure. It was.
Yes, Thank you bill.
I'd Echo allison's comments to that.
We got backlog to work through but.
Our expectation is that Commodore plants will be on par as far as profitability with the rest of our system. That's the goal.
Okay.
I guess the next question on that and just because looking at the gross margin you did in <unk> was 24% without Commodore and then you have a little bit of a drag.
I'd love It if you guys could break out the benefit of lumber if you have that for the third quarter.
It looks like moving up to this mid <unk> gross margin is the natural path.
Over the next few quarters.
What are you guys thinking about that.
So.
So we won't be breaking out the specific impact of lumber.
I think that.
As we've seen for the last several quarters, it's kind of it's hard to speculate on a margin perspective, I mean, the really good news is in backlogs will still provide the ability to price and cost increases.
And our clients have shown that we've done a good job of that.
But we don't really expect to see any relief on the variety of materials and supplies that go into our homes and we've seen.
We all have a recent uptick in the number of commodities.
The main wildcard does remain in lumber and OSB cost.
Right.
Any chance you guys could give us the average backlog price or what you think the average price.
For this quarter that you're about to deliver just trying to figure out what the balance on prices between Commodore in cap coast product.
Got it.
So again, what Youre looking for Jay.
Yes.
The if you have just the average price for whats in backlog now or if you have an idea of what the average price that you think youre going to be able to deliver this quarter would be just still trying to figure out the.
The difference between Commodores pricing cap coast price I mean, we've done a rough number on it in our model, but if you guys would be willing to share some of that that would be helpful as well.
I don't think Theres anything specific that we would want to share at this point between the differentiation in the pricing between.
The overarching networking capital carved out until we're beginning to integrate very much.
Backlog.
Excluding Commodore I think you can think of as pulp price to current market. So it's a matter of them continuing to work through their lower price backlog, which has happened.
Because I think I also said in her comments their margin they left the quarter with higher margins than they went into it with because they are working down that lower price stuff.
Not going to be able to just specifically separate their pricing from the rest of the system at this point.
Got it.
And then your competitor a couple of days ago had some very favorable comments about chattel rates staying low as well as some new money potentially coming into the manufactured housing space I'm, assuming for both travel and land home deals would love to get an update what you guys are seeing on that front and also just made.
An idea of where charter rates are now and what you guys are seeing.
Yeah, well generally agree with.
What Mark said.
Charter rates have stayed very stable since they kind of took a big drop.
Trying to think of the timing, it's probably been a year and a half ago.
On slides, but theyre kind of.
We're kind of in the high fours to low fives low to mid 5% rate.
And that really Hasnt moved up over the last month or two it's been very stable. So the.
It's essentially a different market rate, we always say channel.
Rates are really not correlated to mortgage rates are much more stable.
If you compare that to land home rates at this point I can't imagine it's ever been close to this tight.
Then there is another discussion kind of about the premium of manufactured housing land home loans compared to.
Site build or what the Gse's called single family non MH loans, and I think that's been pretty stable to that's kind of in about a 50 basis point range that premium for MH for our MH product. So channel is very stable.
MH.
Land home I was kind of just moving right up as mortgage rates are at this point.
Was there more to your question I might have missed something there.
And then I'll ask you the same follow up that I ask Mark I thought it was very interesting that the FHFA projected the duty to serve submissions from from the GSE.
Would love to hear what you guys are hearing if anything from the GSE is right now.
Could it expand the duty to serve be something that might help the manufactured housing industry.
Yes, we'd love to see it.
Frankly, we and I'm not saying this.
Bitterness, we just haven't seen a lot come out of the duty to serve over time and again I don't mean that.
And then on an overly negative or accusatory way, it's just kind of the fact and yet.
Capital is very interested in the MH lending space. So we're seeing really good interest from investors, we sell loans too.
It really hasnt been an issue if people are qualified they're able to get good loans at this point in time.
The GSE is really arent driving much there.
Got it.
Okay, great well, thanks for taking my questions.
Yes.
Thank you. Our next question comes from Deforest Hinman with Paulson <unk> Company. Your line is open.
Hi, Thanks for taking the questions from shareholders.
On the gross margin commentary this 50 basis points. Just so we're clear is that the consolidated gross margin or is that the segment gross margin for MH right. That's on the consolidated gross margin.
Okay. Thank you.
Furthering the discussion on.
The credit side, the mortgage side do you have any insights in terms of <unk>.
Credit quality on the inbound.
From FICO score or any color you can provide there.
Is the demand coming from quality customers.
No.
That are going to be able to pay longer term.
Yes.
We've generally.
Our lending business I think this is <unk>.
<unk> disclosed in our filings we generally are working in.
What I would consider higher FICO scores.
And we've continued to see.
Strength in applications. There. So I really don't think we've seen any real shift that would cause you to think that the industry is lending to.
The skewing more to lower credit applications at this point.
Okay.
Youre, making call it.
Before so lending industry has been I think very disciplined and.
I guess that makes sense to when you're in an industry, that's really supply constrained.
Theres really no need and we havent seen chasing credit down.
No it's very helpful.
Glad you provided lots of color on this call because I think over the last couple of weeks there has been this.
Overhang on the whole space around.
Rising rates and demand is going to fall off the table and I think it's becoming more clear to everyone that thats not the case and there seems to be.
I don't know if you want to use the word fundamental change in demand and Im glad youre spending time discussing this but.
To further that discussion you talked about units being turned away mentioned the communities.
In the REIT space, but.
I mean is there anything you can share with us in terms of just how big that opportunity might be and I'm not even thinking about the next year Im thinking further than that because.
I'm sure you've done some analysis and you looked at some of these are customers that have done business with you and they've made some disclosures publicly and maybe sometimes not publically, but.
The parks have a certain amount of acreage you can kind of do some math in terms of.
Units per acre and you look at some of the returns that some of these parks.
Public Reits are making from a return perspective and their availability of capital.
It's very attractive to build out these communities.
So any color you can provide you have anything in there that says look these guys need.
50000 units of 100000 units over the next five years. So just so people can really understand how you guys are framing the demand because you are obviously, making positive comments, but.
Any facts or figures you could give the shareholder community.
Would be very appreciated you just understand just how how youre looking at things.
Yes, I don't know if we have a big number projects.
<unk> over a certain number of years I guess, so we most immediately see is just the interaction with our customers and as I said earlier.
<unk>.
It's not a comfortable position to be as a manufacturer to not be able to come close to the.
Fulfilling the orders that they are asking us for so we certainly.
Haven't seen any letup.
Over a number of years in the community's interest in and buying a large number of homes and.
No that it does get talked about about the availability of land and certainly zoning as it impacts us, but it doesn't feel like we're close to that being a constraint and I know that's a very general answer to your question before so I wish I could give you something more specific but.
We see it being strong and we'd see it stands strong for a while from what we can tell now.
I also wanted to come back because you did touch on it in.
With rising interest rates.
You've kind of commented that I think your comments were that causes people to be really concerned about demand.
It impacts us if interest rates go up.
<unk> payments go up and Thats the basis of our customers' violent.
The thing is you got to weigh that off against.
Let's just talk about loans first weigh that off against the increased length of loans that we've talked about last quarter.
That helps lower monthly payments. So that's been a positive move for People's affordability and then.
You just look at the.
When you looked at the demographics as I alluded to so.
It has to be that rising interest rates or a downward near term pressure when they go up.
But it affects manufactured housing in my opinion significantly less and it affects site builders.
The affordability of the flow toward affordability comes right to us and I think history shows that I think you've seen in rising interest rate environments.
Environments.
A muted impact on manufactured housing not that Theres no impact.
So we're going to keep our eyes on all of these things Theres a lot of pressures upward and down but man if you look at.
The demographic drivers over time it's.
I am very confident about the ability to invest into that.
No that's very helpful.
Good color for everybody.
And then just on the I think I know the answer but I'll ask the question anyways on the raw material front can you just.
Give us an update in terms of.
What's the where are the pain points in terms of products that youre dealing with.
And are you seeing any improvement.
Staying the same or things are getting worse.
Any of these given raw materials that you're.
Struggling one yeah, yeah. It is.
Sure continuing very challenging situation I've said before I do feel like a broken record because it's across the board.
We're actually on the phone with our operating guys. This morning, just to rattle off from my notes installation fasteners electrical carts.
We've had we've had plants that have been told that there are months out from getting refrigerators for example.
One of the interesting things, it's really a heartburn right now is overhead flex duct. So my point isn't so much the specific items. It's the fact that it's across the board and I would say it's affecting us from.
Efficiency.
Perspective every bit today as it has been.
The interesting dynamic now is that trucking and this isn't news really but.
Trucking issues are a major part of the story, where sometimes we're ordering given supply and the supply is available but the trucks late.
Significantly late.
So logistics are a big part of the supply things, so I'm not I mean.
Aye.
I feel like our guys are really managed it well and it's been a drag on efficiency and yet we've been able to push our throughput back up so I'm really confident in how we're approaching it but every day, we feel like we're kind of a little bit on the edge about whether a given plant is going to be able to continue running and you never know which supply. It is that's going to cause them to.
Stop if they stop overall we've had.
Some but minimal true shutdowns, but a lot of efficiency impact from this really hard to quantify.
Okay. Thank you and then just the last question on the energy tax credit can you just give us.
Uh huh.
Color there I mean is this suddenly just we're missing over the last.
I don't know five or 10 years.
It's something that came up with an audit review.
How are we not accruing for that previously.
Yes. Thanks for the question, it's a good one.
Always evaluate and continue to evaluate opportunities SaaS attack.
And this opportunity was identified as part of our overarching.
<unk> process.
Pilots.
As you can appreciate the complex and the IRS code is complex and we've been researching this credit for some time now.
So a great deal of reveal any specifically consultation with a third party expert.
And actually some of our homebuilding peers.
We did determine that we will be able to utilize this credit and moved forward with what was a fairly lengthy process.
As you can tell with balanced with the size of the credit.
To estimate the impact in the <unk>.
Current period and under GAAP, you kind of have to take all of the periods.
One first which is what you're seeing capsulate it.
This quarter's earnings.
Okay Perfect and then last question on share repurchases I know you had this kind of odd situation with this energy credit does that preclude us from buying stock at any point during the fourth quarter.
If it did should we be anticipating a higher <unk>.
Level or accelerated the pacing of share repurchases going forward.
So this particular item did not preclude us from purchasing shares buyback still is a very important lever for us to be able to return excess cash to our shareholders.
We were able to accomplish about $9 million in the quarter and if you'll recall, we have about $100 million in.
Purchase authorization and we burned through about a third of that so we still view this as a very.
Proactive way for us to.
Deploy and return excess cash to the shareholders.
So is $10 million, probably the right number or is it more or less.
We won't be guiding to a particular outcome I think that if you look over the last couple of quarters to probably gives an indication.
It's very simply it accordingly.
Depending on the information that the company has a visa visa marketplace.
Okay. Thank you for taking all my questions.
Thanks to force.
Thank you. Our next question comes from Ethan Steinberg with SG capital. Your line is open.
Hey, guys. Thanks for taking the call great job on the execution.
I was curious if that 50 basis points was just on the accounting for the acquisition can you give us a sense of how much drag there was from just working through the low priced backlog.
Yes, I would say that working through the lowest price backlog was probably two to three percentage points.
In the quarter or two or 300 basis points, yes.
Yes, that's correct. So the total gross margin.
Yes, that's correct.
Okay and can you give us a sense of how much of that is left it sounds like that's been worked down quite a bit.
No specific price point, but it's as we've progressed through the quarter of course, it becomes less and less so as you think about the average length of the backlog that gives some indication of how the.
We might think about the uplift in the coming quarters.
So their backlog at August 31.
On a ratio basis stores. So it's not just to give you a feel for the backlog.
Yes, so when we're thinking about the 25% run rate building 26 unchanged blended theres a lot of upward momentum to that sequentially from here based on.
Those two factors it seems like it might is that the right interpretation.
On.
The guys did those two factors in isolation that would be fair.
Yes, that's a lot of tailwind and then Bill I also wanted to check.
Do you apply but units do you still feel pretty good about growing units nicely from here absent big surprise us on operations.
I do I mean like I said.
And there's always a little nervous getting ahead of myself, but we've got momentum and we're driving it with kind of what I would consider fundamentals and we've.
I think it's a huge accomplishment for our operations to get the 80%, while we still do have these labor and supply challenges.
We can get to 80% with these challenges by continuing to make progress on labor, which we're doing and with a hope that someday suppliers will settle out then you would it would be natural to think you ought to be able to go higher.
Yes, what do you think you are mostly done on working down that low priced product, maybe not 100% of it but when do you think it's something that we don't put that way, we don't need to say youre measure that much anymore.
That's done by the end of this quarter.
I think it's hard to pinpoint I would say in the quarter the aggressive projects and probably something that is more akin to looks to the timing of the backlog that we have with them, which is similar to ours.
But the degree of pressure diminishes.
Yes, that's correct if you think about it.
<unk> got a stratification of prices.
Not perfectly this way that the homes, we're making today are the oldest ones in the backlog the lowest price. So the impact will dwindle down over the next several quarters will be a way to think about it.
Yes that makes sense last thing it was just it was helpful getting the color on that.
Moving pieces on the average price based on what's in the backlog should be price still be going up sequentially generally from here or not.
So I mean, I've kind of always say this that we're in an industry that has long backlogs right. So we do talk about it quite a bit appropriately being in relation to cost.
But theres not much pulling price down for sure. So we manage price at a local plant basis, our local like our local plants talking with us.
But it's pretty much unique to their cost inputs and their market dynamics.
I made the comment in my remarks during the third quarter, we still on a same plan basis, we're still seeing increasing prices. So theres still some room there potentially.
That's great I thought one more thing was there any acquisition.
One time ish cost and SG&A your opex.
No not this quarter.
Okay, Alright, great job. Thank you.
Thank you and we have a follow up from Daniel Moore with CJS Securities. Your line is open.
Thank you again and Allison if you would.
This forgive me, but what was the SG&A impact from the.
The consultant fees during the quarter related to the tax benefit.
Yes.
It was.
High level of expert that we used in a pretty attractive.
Process that we went through so the fees in total estimated to be right around $5 8 million.
Very helpful. Thank you.
Thank you and there are no other questions in the queue I would like to turn the call back to Bill <unk> for closing remarks.
Yeah. Thanks, Catherine we do feel it was a really strong quarter from all of the operational improvements that we've talked about you know beyond what are clearly favorable market forces we made.
Great strides in many areas that ultimately led to operating improvement.
We really appreciate everyone's interest and we look forward to keeping you update updated as we go forward. Thanks.
This concludes today's conference call. Thank you for participating you may now disconnect.
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