Q2 2023 Cavco Industries Inc Earnings Call
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Good day, and thank you for standing by and welcome to the second quarter fiscal year 'twenty 'twenty three Casco industries earnings call webcast.
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I'd now like the conference over to your Speaker today, Mark Busler corporate controller and Investor Relations. Please go ahead.
Good day, and thank you for joining us for KEPCO industries second quarter fiscal year 2023 earnings call.
France 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 <unk>, Chief Accounting Officer.
Before we begin we'd like to remind you that the comments made during this conference call by management may contain forward looking statements, including statements of expectations or assumptions about cap coast financial and operational performance revenues earnings per share cash flow or use cost savings and operational efficiencies.
Our future volatility in the credit markets or future market conditions.
All forward looking statements involve risks and uncertainties, which could affect <unk> actual results and could cause actual results to differ materially from those expressed in any forward looking statement made by or on behalf of KEPCO I encourage you to review calculus filings with the Securities and Exchange Commission, including without limitation the comps.
These most recent forms 10-K, and 10-Q, which identify specific factors that may cause actual results or events to differ materially from those described in these forward looking statements.
This conference call also contains time sensitive information that is accurate only as of the date of this live broadcast Friday November four 2022 capsule.
<unk> 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.
Thank you Dave Officer Bill.
Welcome and thank you for joining us today to review our results for the second quarter of 2023.
I wanted to start off by saying that we are fortunate that our employees who are close to the areas hit.
By Hurricane Ian we're all safe.
Damage to our manufacturing and retail locations was minimal and the entire team did a great job preparing and then responding to the situation.
Most impressive was the way they shifted their attention to.
Two providing a relief and supplies to the more heavily impacted areas following the storm.
Our thoughts go out to those who have been more severely affected and our thanks go out to our folks who rose to the occasion, so impressively and reached out to help others in such meaningful ways.
There's no easy transition here, but let's turn our attention to another quarter with outstanding results.
Teams across our businesses are doing a great job of managing in a changing market.
Revenues were up over 60% year over year to $577 million.
And net income nearly doubled to $74 million.
Gross margin in factory built housing grew another 230 basis points compared to the second quarter, driven primarily by higher average selling price along with a lesser impact from reduced costs as lumber and OSB prices flowed through the P&L.
Yes.
Our manufacturing plants have continued at the higher level of throughput and efficiency. They established in recent quarters.
As reported in our release capacity utilization was 80%. However, we calculate this using all potential operating days.
Adjusted for some days lost to hurricane Ian and downtime.
Taken to match order rates utilization remained consistent with last quarter at approximately 85%.
The industry is clearly in transition from a period with historically high orders to one with rapidly increasing interest rates and declining consumer confidence.
While the plants are producing at a higher rate retailers are continuing the process started several months ago to manage their inventories and their churn rates.
Buyer interest remains healthy as evidenced by retail traffic.
Wine leagues, and quotes which have not dropped off in recent months.
Our interest rates inflation and shorter lead times.
Have made prospective homebuyers.
We're patient and frankly more cautious.
So wholesale orders net of cancellations are down resulting in a declining backlog.
Our backlog is down 35% sequentially to $651 million equate.
Equating to approximately 17 to 19 weeks at current production levels.
While a clear picture of near term demand is clouded by ongoing setup challenges in retail inventory adjustments were very confident about mid and long term demand.
The industry is cyclical and the near term for all the reasons I've touched one however, the need for our products is undeniable.
We're fortunate to have the financial flexibility to stay focused on our capital allocation and growth strategy, while we manage the near term dynamics.
In that regard production has commenced at both our new plants Glendale, Arizona is focused on park model production in hamlet North Carolina will be producing HUD code homes.
Both facilities are state of the yard and equally important they're both starting with model work systems and cultures as we continue our focus on employees in the workplace.
Continuing the theme of investing for the future last week, we reached agreement to acquire solitaire homes strong manufacturer and retailer of high quality homes sold in Texas, New Mexico, Oklahoma and surrounding states.
We have a lot of respect for what <unk> said in his team that built it solitaire and we're very appreciative that they chose to join <unk>.
Their operations complement our plant in retail system and will significantly improve our capacity to provide quality homes.
The addition of Solitaire three locations and four production lines adds roughly 10% to our manufacturing capacity and the addition of their 22 retail stores creates value as we fill out our product offerings and stores across the combined company.
As we previously reported we expect to close this transaction early in the fourth fiscal quarter.
I recognize the greatest interest today is about trying to understand near term demand. However, the bigger story is how manufactured housing is differentiating itself from the broader homebuilding segment in this market environment.
While our industry is certainly subject to the impacts of inflation higher prices for homes.
Our interest rates and other drivers of near term demand.
We're also a solution for families in need of affordable options.
At the same time that retailers are adjusting inventories communities are continuing with their high growth plans.
The community operator demand for build to rent units is very strong.
Rental homes provide a needed solution at a time when many families are unable to purchase a home.
And this is a demand buffer unique to manufactured housing.
Similarly, we know that because site builders have been have become less able to hit anything approaching a starter home price.
We're taking a look at factory built homes and option they might not have considered in the past.
What they're finding is that we're ready what's attractive is significantly more affordable homes for them.
Notably manufactured housing shipments as a share of new home sales had been around 10% to 15% in recent years and the.
Six months or so that share has increased to the high teens and low twenty's. This is indicative of how a manufactured housing can weather the cycle better than the general housing market.
Just to reiterate prices and interest rates are high so the monthly payment impact is clearly a downward pressure on near term demand.
This is offset by market share gains for manufactured housing at price points site builders simply can't hit anymore and aggressive community growth plans, which are less sensitive to the recent rate changes.
Our strong confidence in mid to long term demand is based on the extreme under supply of lower cost housing. We've been speaking about for several years and that is recently only worsened.
With that I'd like to turn it over to Alison to discuss the financial results in more detail.
Thank you Bill net revenue for the period was 577 4 million up 66% or $217 9 million compared to $359 5 million during the prior fiscal year second quarter.
The <unk> acquisition contributed $102 7 million of this increase.
Within the factory built housing segment net revenue was $559 6 million up 63, 6% or $217 5 million and <unk>.
The $342 1 million in the prior year second quarter.
This increase was driven by a 42, 1% increase in the number of homes sold and a 15, 1% increase in average revenue per home sold.
The increase in average revenue per home sold was due to product pricing increases.
As Bill mentioned factory utilization was approximately 80% during the quarter.
Q2, 2023 utilization was lower than Q1 2023 due to some days lost of hurricane in and scheduled market downtime.
Solid utilization levels continued to be driven by product simplification.
Sustained production headcount levels in general process efficiencies.
Financial services segment net revenue increased 2% to $17 8 million from $17 5 million.
This year over year increase was due to a higher number of insurance policies enforced and loan sales in the period.
These increases were partially offset by lower interest income earned on the previously acquired consumer loan portfolio.
It continues to amortize as expected.
Consolidated gross profit in the second fiscal quarter as a percentage of net revenue was 27, 3% up from 25% in the same period last year.
This year over year increase in gross margins was driven by the factory built housing segment, which rose to 46, 7% in Q2 of 2023 versus 24, 1% in Q2 of 2022, primarily due to pricing.
Q2, 2023 factory built housing segment gross margin.
Six 7%.
It was 230 basis points higher than the Q1 2023 level of 24, 4% due to decreased material cost per module as lower lumber prices flowed through our cost of sales.
Gross profit as a percentage of revenue in financial services increased to 44, 6% in Q2 of 2023 and <unk>.
43, 7% in Q2 of 2022, primarily due to higher home loan sales volume.
There were weather related events and lower unrealized losses on marketable equity securities in the current period.
Selling general and administrative expenses in Q2 of 2023 was $66 9 million or 11, 6% of net revenue.
<unk> to $45 4 million or 12% of net revenues during the same quarter last year.
SG&A dollar increase was due to the addition of Commodore greater incentive wages and improved earnings.
Increased legal expenses related to the SEC inquiry.
Cost of third party consultants assisting with the energy tax credit project.
Net other income this quarter was $2 3 million compared to $4 7 million in the prior year quarter.
This decrease was primarily driven by a $3 3 million nonrecurring gain that was previously reported associated with the consolidation of a joint venture.
Pretax profit was $92 8 million up 89, 4% or $43 8 million compared to $49 million.
Our year period.
The effective income tax rate was 21% the second fiscal quarter.
Year to 23, 1% in the same period last year.
Energy efficient homes tax credit program was extended past calendar year 2021.
As part of the inflation reduction act of 2022.
As a result of this program being extended we recognized $2 7 million of tax credits.
Lastly, net income.
Some attributed to capital stockholders was $74 1 million up 97, 1% or $36 5 million compared to 37 6 million in the same quarter of the prior year.
And diluted earnings per share this quarter was $8.25 a share versus $4.06 a share in last quarters second and last year's second quarter.
Now I'll turn it over to Paul to discuss the balance sheet.
Thank you Allison.
When comparing the October one 2022 balance sheet to April 2nd 2022, the cash balance was $333 2 million up 36, 4% or $89 million compared to $244 2 million at the end of the prior fiscal year.
The increase is primarily due to net income noncash items and changes in working capital such as decreased inventories and increased accrued expenses, partially offset by repurchases of common stock and purchases of property plant and equipment.
Investments are slightly down from unrealized losses on securities held at the end of the period.
Inventories decreased due to lower raw material costs and a decline in inventory at the retail division locks.
Prepaid and other assets decreased due to lower workers compensation insurance prepaid income taxes and assets recorded for the loan repurchase option. We have for delinquent loans that have been sold the Ginnie Mae.
Property plant and equipment is up due to the purchase of the manufacturing facility in hamlet North Carolina and continued development of the Glendale, Arizona facility.
Accrued expenses and other current liabilities increased due to higher rebates payable more set up freight and foundation work and warranty reserves all related to higher sales.
Lastly, stockholders equity was approximately $928 9 million as of October one 2022 up 11, 8% or $98 4 million compared to $830 5 million as of April 2022.
This completes the financial review and I'll turn it back to Bill.
Thanks, Paul.
I think this is a good opportunity to revisit our capital allocation priorities.
We've consistently said that we will invest in organic growth seek value creating acquisitions.
And utilize share repurchases to responsibly manage our balance sheet.
On that last point, we've emphasized the share repurchases can be completed without hampering our ability to reinvest strategically.
Taking a look over the last six quarters dating back to the beginning of fiscal 2022, we have invested $52 million in high return capital projects to improve and grow our network of plants, including the hamlet and Glendale projects.
Additionally, we've committed $244 million to the acquisitions of Commodore in solitaire growing our capacity by approximately 35%.
Projecting forward to the completion of the Solitaire acquisition, our plant network will have grown from 20 production lines to 32.
And we have increased our retail network by over 50% in direct support of our core manufacturing focus.
During the same period, we returned $100 million to shareholders through stock repurchases.
After all of that excluding the cash allocated to solitaire close to the solitaire closing, we have a cash balance of approximately $240 million, which demonstrates our cash generation and ability to invest strategically while retaining ongoing strategic flexibility.
We've been very successful following through on our stated capital priorities and we continue to position the company to have an increasingly positive impact on the affordable housing problem.
With that Michelle, let's turn it over for any questions.
As a reminder to ask a question. Please press star one one on your telephone.
Please standby, while we compile the Q&A roster.
Okay.
Yes.
Our first question comes from Daniel Moore with CJS Securities. Your line is now open.
Good afternoon, or good morning out there and thanks for taking the questions.
Bill analysis Paul.
Maybe.
Obviously, we'll start a little bit with as you guests, who will talk about the demand picture.
The decline in backlog, how much of it relates to dealers pulling back on inventories and how much of it relates to you know.
The declines in consumer demand I know you said traffic is still up but but folks are kind of holding off on buying so I know that's a really difficult question, but if you could give us your thoughts that would be great.
Yes, let's see.
Simple question with a complex answer I guess and that's because.
The differences youre pointing out are hard to separate right.
I was thinking about kind of how.
How to describe what's going on in the retail channel and I'm not sure. This will be super effective that I saw we've talked about it on the level of an individual dealer.
Previously individual dealers can sell anyhow and they get their hands on and the turns were high because their their.
Their inventory people are showing up and they have long lead times, if they hadn't available home they knew they could sell it quickly.
And certainly we've mentioned that.
Over time setup.
As much as set up was as much a constraint how many houses can be pushed out to the market as anything.
Now we're in a situation in.
Probably be a follow up question, what if I wish I can hit on about regional differences, but in regions that have really seen a market shift.
The impact of.
Of rates and everything we've talked about has kind of caused the buyer to still be looking.
But they are a little more patient so the pace of those sales.
Slowed a bit.
Not not the levels by historical standards that are low but off of the crazy highs.
So at the same time.
Manufacturers have found ways to make more we got our feet under us and we've been pushing more homes.
The dealer on what that looks like to a dealer is a home that he might have thought it was going to show up in four months.
With plant, saying, Hey, we're going to put that home in production you're good.
And the dealer now is looking at it as inventory turn rate and the amount of spending for floor plant costs.
And he says wait a minute I didn't expect that house now I don't want it I can't take it I'll get it later.
We call that a cancellation.
And it goes out.
Is that dealer and the other dealers do the same thing on homes that are coming at them faster than they expected.
Our backlogs go down a bit.
And we call them about the house they thought it was going to show up six months from now.
And so suddenly you have more cancellations and <unk>.
Underlying demand or the end user demand is still there.
They've got this adjustment period to the different rates of placing homes out in the market and receiving homes from the dealers.
And so they are trying to manage their turn rates.
Yeah, and good business people they are trying to make sure that their floor plant costs are.
Preet.
And they slowed their wholesale orders in many cases.
So that's going to take a little bit of adjustment as we've talked in the past.
And whether thats characterizes these.
Destocking.
<unk> of it more as an adjustment to the different rates of sales and production.
The homebuyer has certainly been kind of put on their heels a bit by inflation economic uncertainty rates.
But they are still showing up to look for what they can do there's still there are still showing up at stores Theres still shopping online.
Still in Beijing.
And I've always felt that that is.
As a clear indication of this bigger picture backed debt.
People need homes.
So we got to get through this transition I think people the system will adjust to the rates going out in the rates coming in at retail inventories will be brought down a bit.
But I think once we settle in and we'll see what the true <unk>.
Demand is in.
A lot of that's uncertain with the economy, but over any meaningful period of time, we're pretty confident about it.
So that was a mouthful again that was a lot more than you asked I don't know if I can.
Hit their points and if I didn't I'm happy to kind of follow up.
You certainly did what can you say about those folks that are showing up their ability to secure financing.
Are you seeing more cash buyers wanted but number two at these higher rates monthly payment goes up talk about their.
Our ability to secure financing versus maybe their patience if you will.
Yes, we have seen more cash buyers and we are also.
We stayed pretty close it's great to have a mortgage lending company, because we stayed pretty close to the quality of applicants as well.
And we haven't seen that go down we've seen good credit so people are qualifying for loans.
They are just in a period, where their individual decision is affected by it.
The uncertainty and also kind of getting a feel for what they can afford and what they can afford today is so different than what they could have afforded in previous periods and so thats just their individual buying process, suggesting.
But ones are available credit quality on applications is still pretty good.
More cash buyers.
So that's kind of where we're at as far as availability. It has not been a reduction in available funding for folks.
Got it.
With all of that what can you tell us about your expectations for you.
Shipment levels as well as factory built housing revenue.
Let's take solitaire out of the picture for now.
On a like for like basis over the next two quarters relative to what we saw here in fiscal Q3 fiscal Q2.
Yes, I am going to give you our standard answer that we don't provide guidance.
I touched earlier and this is not directly at your question I apologize, but I touched earlier on regional differences.
Sure.
And this is giving more color maybe just addressing some questions are yet to come.
Our backlog, we talked about a 17 to 19.
Thanks.
Differential now.
We definitely have seen some regions that have held up very well and have not seen a rapid decline in their backlog and then we've seen others that have gone down more quickly and are further along in that adjustment, perhaps those regions that are a little bit.
Lower on their backlog or on the lower end of weeks in the backlog really or Texas and the southeast.
As I say the southeast you really got to take Florida out of that.
Florida has got some of our longest.
Backlog still.
So.
What we're seeing at the front end of this is Texas and the southeast plants and the biggest drop off.
We expect to have.
Some days of balancing production to wholesale order levels in those regions. So there will be some market downtime.
But at this point, we're not expecting it to be.
Huge were not going to come to a stop.
I don't think that gives you a little bit of color, but short of giving you numbers I guess.
Fair enough I'll ask one more in that genre, if you will which is.
From a margin perspective.
Your you put pass through a ton of price in the last year or so.
And raw materials have pulled back a little bit just talk about pricing.
And your expectations or outlook for gross margins relative to this quarter.
For the next quarter or two with all the puts and takes thanks.
Yes. Thanks for the question of had very healthy margins for the quarter.
As we've seen historically, it's really hard to speculate on gross margins, but there are a couple of elements that drive the fluctuation.
The first is pricing and the second is costs largely the price of materials.
Pricing as Bill mentioned, we are seeing regions, where the pressures are becoming more apparent and starting.
You see some competitive pricing in regions, such as Texas, southeast and when I say, the south Acis, excluding Florida and elsewhere, where it really seen pricing pressures at this point.
Yeah on the material costs as we shared before.
We expect that basically everything but commodities will most likely go up and the movement in those <unk>.
<unk> has been volatile and hard to predict so we have to kind of see where and how lumber and OSB pricing plays out.
As a reminder, commodity lumber and OSB costs. It takes a couple of months that level to the level that <unk> seen in the market to really flow through our cost.
The goods.
Okay.
Thanks, Allison I've I've got more but ill pass it off at least for now thank you again thanks.
Thanks, Dan.
Please standby for next question.
Our next question comes from Greg Palm with Craig Hallum. Your line is now open.
Thanks, just wanted to dig into.
That's the sort of demand environment, a little bit more if I could so.
In terms of whether you want to call it the excess orders or the excess inventories. However, you want to characterize it I'm just trying to get a sense. So what's your best guess on.
How this how long this will take to better normalize.
Yes.
Obviously, a tough question expected warm, but a tough one.
And I don't even know how to give any useful perspective on that I think and the reason is because I'm. So much more focused on what I talked about as far as the pace of getting houses placed out in the field and the pace of production.
I think we're probably and this is just kind of.
Going out there I think we're probably looking at a couple more quarters, where things are settling out, but I'm sure as hell can't pinpoint it.
Yes.
It's fair I know, there's a lot of uncertainty if we think about what's going on outside of the retail channel, which seems to be.
Youre seeing the most.
Impact can you just give us maybe a little bit better sense on on.
Either order levels or deposits some other metric.
On the community side of things just to see on a relative basis, how things are holding up.
Yes, I appreciate that question because I think we all start focusing on the area. We're most concerned about in commodity or communities. I think are real positive here and I touched on that in my opening comments.
It's been consistent communities are still strong they've got money to put to work. So that they can if they are they're real asset the land working.
So they've got available capital, there or a little less.
Incentive to the.
Mortgage rates type changes that are going on and we've really seen communities to be very consistent with large growth plans.
So it's a real source of strength for the industry right now really no change to the negative that I've seen.
It does tie in Greg.
That ties in the comments I made about rentals right.
These are.
Very open to buying homes to rent as a way to get that asset working as well and.
That's the offset to people not being able to afford to buy.
Now so again source of strength.
And remind us I mean do you have a good estimate of the mix of of your homes that go into the community channel versus retail.
It's pretty consistent over time, it's about 30% to six communities.
Now if theyre going to grow in the near term more quickly that might shift up or would shift up a bit but over time, we're pretty consistent with the industry and I think thats a fair estimate for the industry, 30% to a third right in that range.
Okay.
And then on financing obviously good to see that.
The availability has changed all that much can you comment on on what rates are.
And is there a maybe a larger risk if you see an increase from rates here that that could cause maybe another further adjustment versus what you're currently seeing now.
Yes, I mean, absolutely we're not going to claim that we're immune to.
The rate impact on near term demand right.
Hi.
It's the I think it's been the shock of the increase of rates as much as anything because.
Lot of people.
If you sit back and look at it over time these rates by themselves on a spot basis are not exorbitant historically, but it's the adjustment people are making and it's piled on top of those frankly high home prices right. So that's what's that's what's caused a pause in the readjustment people recalibrating what they can afford.
But to give you a sense of rates.
For manufactured how.
Housing land home.
Through the Gse's.
We're about 95%.
That includes wheat, we adjust these to factor in points in fees and costs. So it's kind of an effective rate.
It's about 1% higher than the GSE.
Traditional land home non MH.
So theres about 1% premium for manufactured housing.
The.
This is maybe more confusion, but it's interesting I'm going to throw it out there the interesting thing thats been going on for a few quarters is that.
Non GSE rates, so land homes sold to <unk>.
Investors, the credit unions banks and others.
That's actually a bit lower than the GSE rate right now and Thats, a little bit upside down and you expect to see a little bit of a premium for non GSE.
So those ones are really the favorite ones and they are a bit lower than the 95% or so.
Just to complete the story.
Home only rates are kind of in the nine range and I always tell people I remind people that.
The home only rates do not highly correlate to land home rates theyre kind of in their own market tend to be.
Relatively stable compared to mortgage rates, which are constantly moving.
Okay.
Gregory.
No.
That's helpful.
I think I'll leave it there for now I appreciate that thanks, guys and best of luck.
Thank you.
Please standby for our next question.
Okay.
Our next question comes from Jay Mccanless with Wedbush. Your line is now open.
Hi, good afternoon, everyone and thanks for taking my questions.
The first one I had bill talking about how Texas and southeast ex Florida is down I guess, if you think about what that does to the price mix of the backlog does the price mix of what you might be delivering over the next couple of months look fairly similar to the 109 that you guys put up this quarter.
Or does it look higher actually because youre, taking some lower cost markets out of the mix.
And I understand the question around the lower cost markets.
I'm not sure I would differentiate the selling price across the regions necessarily im looking around the room and see if you guys feel differently, but I'm not sure a regional difference.
Is going to shift.
Average selling price.
Pricing in the backlog on homes that were previously sold.
Pretty solid right.
So I don't anticipate that kind of dropping.
Basically gone through a period, where.
In the last quarter or so pricing at a local level has drifted up but it has slowed as far as the rapid increases and then as Alison pointed out in the regions that have seen the backlog has dropped more quickly.
Seen it.
Some price competition, but not a whole lot, but some.
So feel like I'm rambling around your question, which I don't intend to do.
That's correct me if I'm not.
No just I didn't know if there was enough of a difference with especially with Commodore maybe selling a little more expensive product I didn't know if there was going to be a marked difference in the price mix of what you have now versus say three months ago or six months ago. When you were selling a lot more homes.
The Texas market or southeast ex Florida, but it doesn't sorry and ideas.
Yes, I would say regionally I don't expect the regional shifts to cause that kind of a change in the price that you see.
Okay.
I was trying to get thank you.
And then if we think about you've got 19 weeks of backlog so basically.
And a half for just under a quarter and a half of units to get shipped and not thinking about solitaire, yet, but if I think about your average plenty out and where orders have gone I guess, maybe on a percentage basis could you talk about how what percentage of orders might be down versus last year. So we can start thinking about once you've sold through the <unk>.
Backlog back to a normal four to eight week type of backlog than what type of order declines should we be think considering.
Okay.
Yes, I'm trying to look at some things here to see if I can get your question.
So you are asking.
Sure.
I mean, we're looking at the length.
Backlog and then you want to understand the pace of orders relative to production rates how that backlog.
Yes.
Just trying to think about if you didn't have a still very healthy backlog to deliver and we think about where orders are going now is at negative 5% negative 10%. What are you seeing on average when you talk to the plants right now because that's I think solitaire is a good thing it's going to it's going to give you. Some volume that you didn't have in the previous year, but I'm.
I'm just trying to think about cab COVID-19 business now with these higher rates with the dealers having to back off some what would if you were.
Stick builder, you were putting up an order number what would that order number looked like I guess, that's what I'm trying to get out.
Yeah, I'm not sure I have.
And a quick answer for you I mean.
One thing I think gets lost even in how I've talked about the market dynamics is that.
There are still orders being placed out there and.
Since the pandemic began we compare a lot of times that 2019.
Because that was before the pandemic and it was kind of a relatively balanced year for the industry, where you had.
Our year end balance.
We are kind of probably returning to that kind of not not aggregate order a part that kind of balance.
We're seeing seasonality come back in so month to month changes are starting to make sense to us from a seasonality perspective.
So I know I'm not getting added its a tough question to generalize but.
We're not expecting.
<unk> orders to drop to the point, where youll see our backlog just disappear in a very near term, we still have confidence in the pace that people are showing up.
Underlying demand for the product.
Jay I know I'm, not giving you the numbers that you're looking for I'm trying to think about the best way to characterize for you and I'm not coming up with it.
Does that mean this is I think.
Everybody is trying to figure out right now regardless of whether youre stick builder or manufacturer.
Our orders are going to shake out, especially when you see.
Hello for example talk about real estate activity is going to be down 25% to 35% in the fourth quarter, just trying to read that through to you guys and to the rest of the industry.
The next question I had.
Hey, just on that I don't see that kind of an impact here I mean, when I say when theyre talking about that the other dynamic going on in the general Homebuilders are not building the general home market is.
People that are in our house with their refinanced 3% rate can't afford to move so that kind of resale activity as a whole different things and the need for new homes because of the under supply in the market. So I really don't see anything of that magnitude, particularly for manufactured housing for the reasons I talked about where I think.
We represent kind of an answer in these kind of times.
We'll have areas and we've had plants. Even this last quarter that took a day down here a day down there to try to keep the balance and the backlog.
But I'm pretty confident about just the basic need for homes, even in a reasonably short period of time people are still showing up looking for homes.
Got you.
So.
Youre one of your public competitors earlier this week talked about the lack of floor plan availability and I know that you guys have for plan at least for the one for your own locations, but is there an opportunity maybe near term to do a little bit of floor plan lending to some of the independents.
Help out for some people who might need have the houses sold but just need a little excess room on that credit facility.
Yes, we work we do as you identified we do floor plan lending for dealers for independent dealers.
We manage those on a file by file basis.
We feel like we've got our ear to the ground in that market pretty well.
The one thing I would say to kind of answer your question is that.
We don't see that.
Credit risk of dealers being a negative at all right now there is still running a good business with good flow.
So we review them on an individual basis, we're not necessarily tightening up in general we're just kind of looking at their situation and in some cases over the last couple of years as prices of homes have gone up we've extended more credit.
So I think that I think that floor plan.
Market per se, if youre, an independent dealer is still there for you.
Alright, well I just didn't know if you guys had aspirations of getting bigger during this period when based on the way your competitor described it it sounded like there were some people pulling back on floor plan financing and I Didnt know if there was an opportunity for <unk> to expand the dollars that they are putting into the market.
Yes.
Probably less satisfying answer, but not with a macro strategy, but individually and we will look at every situation. If there is a reason to.
To give more floor plan credits given independent dealer because we're confident in them then we'll do it.
Okay.
Then.
Just what are you seeing in terms of set crews.
Is that getting any better in the field or is that still a pretty big bottleneck in terms of getting homes sold in.
Out of the plant.
Yes, it's still a challenge.
I think that's kind of an ongoing challenge.
Even if you put all these short term dynamics aside the industry's shipping more homes and it was so theres more of a load on the.
Under resource setup crews that are out there.
So in regions I.
Yes, I guess I would say, Florida for example, we've touched on Florida, a couple of times, Florida.
Our backlogs are very strong.
And you would kind of say that the constraint to a great extent in Florida would be set up capacity, if they could get more homes set than they would be taken more homes on.
So it really the degree to which set up as a challenge is going to differentiate by region. If it's a region where volumes are coming off a little bit then it's not going to be a bottleneck, but in some regions. It remains one overall through time I think its a issue for the industry to.
So not have set up the constraint when people are buying a lot of islands.
Got you great. Thank you.
I guess I would say, it's not at the <unk>.
<unk> problem, but it's still something that people are bumping into.
Gotcha, Okay. Thanks Kim.
Thank you.
Reminder, to ask a question. Please press star one one on your telephone please standby for next question.
Okay.
Our next question comes from Daniel Moore with CJS Securities. Please go ahead.
Thanks, again, just wanted to ask a little bit more about solitaire.
The types of homes, they're building how does the asps compare to yours.
And then in terms of manufacturing or operating synergies the ability to streamline production across the two manufacturing footprints.
Yes, thanks for bringing it up it's something we're pretty excited about.
So I mentioned that they add about 10% to our overall system. They are located.
Just to rehash, a little bit <unk> got a production facility in.
Then in new Mexico that focuses on multi section homes <unk> got one.
The cross border facility, essentially those two lines and urgent AGA Mexico.
Great across from Presidio, Texas and.
That that operation focuses on single section homes, and they've recently reopened some quinoco Duncan, Oklahoma, which again is multi focus.
Asps.
I don't think there are markedly different their product.
Is really known for being.
High quality.
The price points they hit they really build a good home.
From.
From a modeling perspective, if you want to go there I wouldn't say that was it being 10% that dramatically think of them being that different from us on average selling price or gross margin and just to go. Another step is obviously, it's a topic of the day I think our backlog is right in line with what we're seeing in those areas. So they still have the <unk>.
Backlog, but they are working from.
And they will fit right in as far as I think you asked about value creation in that deal as well Dan.
Yes.
Were come in and just say coming off the Commodore were still.
Still.
Getting used to and fully benefiting from Commodore and that was a great example, where.
Truly I mean, this isn't something we just say, but truly best practices and skills trading across both directions in a deal like that really contributes value.
And I think solitaire is going to be similar I think there are some best practices, we can bring to them and we're going to learn a bit from them as well so that that manufacturing benefit I think is real.
And we'll get good value from it.
Touched on in my comments, but it was kind of a passing comment.
I think one of the clearest.
Benefits of this deal is that they are 22 retail stores sell exclusively their product.
And the products great it's in a certain niche.
Niche area.
It happens to be a niche area that compliments.
The product that we sell through our network, which isn't the same broad area right. Our network of retail stores. So I think there is a really good opportunity to put some of our product into their stores that will really benefit those stores, giving them a full product mix and their products are going to add complementary.
Into the portfolio that our retail stores so.
So all of the stores on a combined basis are really going to be.
We're really going to benefit from this something we're pretty excited about and that'll be real value.
Helpful. Very helpful. Last from me Allison just maybe talk about your expectations for working capital and free cash flow generation.
Sent that production does pull back here for another quarter or two with some of the inventory rebalancing.
Yes, I mean, just if we go back and think about it.
Dovetails into our capital allocation strategy.
The business model, we have at those levels.
Cash flow that Bill mentioned, which is about.
<unk> 40 after after.
After the acquisition, we have available to us still the ability to.
Be able to generate organic growth and investments in our facilities continue to look at M&A strategy.
We still have the 100 million share buyback.
So I will say to us.
So we continue to evaluate that this quarter, we were clearly out of the market and the information that we had on the SEC settlement and on the acquisition.
Something that we've looked actively pursued in the future.
Makes sense appreciate the color. Thank you again.
Thanks, Dan.
At this time there are no further questions I would now like to turn the conference back to Bill Boor, President and Chief Executive Officer for closing remarks.
Thanks, Michele again, its great to report on a good quarter.
As I worked closely with our operations I'm really confident catheters readiness for the near term market shifts we're discussing.
Cross manufacturing retail lending and insurance.
Our operations are performing very well.
We have strong margins still healthy backlogs and business leaders, who understand how to be nimble and seek opportunities throughout the cycles. Our teams have demonstrated their ability to get results and they are ready for the near term dynamics, but they're really focused on the bigger picture and.
And that's making a difference in our customers' lives.
With our homes loans and insurance.
And we know there is a fundamental and very dire need for what we do so I want to thank everyone for your interest in <unk> and we look forward to keeping you updated.
This concludes today's conference call. Thank you for participating you may now disconnect.
The conference will begin shortly.
As Johan during Q&A, you can dial star one one.
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