Cavco Indus achieves 9.7% revenue growth and strong operating profit, despite regional disparities in demand and cautious market outlook.

OPERATOR - (00:00:25)

Good day and thank you for standing by. Welcome to the second quarter fiscal year 2026 Cavco Industries Inc. Earnings Call Webcast at this time all participants are in a listen only mode. Please be advised that today's conference is being recorded. After the speaker's presentation there will be a question and answer session. To ask a question, please press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. I would now like to hand the conference over to your speaker today. Mark Fustler, Corporate Controller and Investor Relations, Cavco Industries Inc.

Mark Fustler - Corporate Controller and Investor Relations - (00:01:01)

Good day and thank you for joining us for Cavco Industries SECond quarter fiscal year 2026 earnings conference call. During this call you'll be hearing from Bill Bohr, President and Chief Executive Officer Allison Aden, Executive Vice President and Chief Financial Officer and Paul 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 expected future business and financial performance and are not promises or guarantees of future performance, their 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 Cavco's actual results and could cause its actual results to differ materially from those expressed in any forward looking statements made by or on behalf of Cavco. For a detailed discussion of material risks and and important factors that could affect our actual results, please refer to those contained in our filings with the SEC, which are also available on our Investor relations website and at SEC.gov. this conference call also contains time sensitive information that is accurate only as of the date of this live broadcast, Friday, Oct. 31, 2025. CABCO undertakes no obligation to revise or update any forward looking statements, whether written or oral, to reflect actual 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 Boer, President and Chief Executive Officer.

Bill Bohr - President and Chief Executive Officer - (00:02:50)

Bill thanks Mark. Welcome and thank you for joining us today to review our second quarter results for fiscal 2026. We saw focused execution across our operations that led to the strong overall results we're reviewing today. Revenue was up 9.7% year over year and flat. Sequentially. Our operating profit was up about 27% over last year's Q2 and up 3% over last quarter. All operations contributed to these results as I'll touch on, I want to start by discussing the general market as there were some notable regional differences using published industry data. Year to date national shipments are up over 3% through August in many regions, mainly across the northern US year to date shipments are up double digits. Recent months continued to show strong year over year shipment comparisons in those states and regions. In contrast, last quarter we spoke about the Southeast showing some volume risk and clearly the region did slow in the quarter. Shipments in the area bounded by the Carolinas and Tennessee down to Louisiana and East are down about 4% year to date and down 10% in July and August compared to last year. The point being, industry shipments are currently showing significant regional differences. Shifting to our operations in recent quarters we have pushed production across our system knowing we can adjust back if needed, and we did need to slow our southeast production in Q2 and the plants reacted well. That reduction was accomplished through a combination of extended downtime during the fourth of July holiday and production rate reductions where plant backlogs were low. Across that Southeast region, we're operating our plants just above last year's pace while all other regions maintained elevated production rates from Q1 to Q Q2 and at a significantly higher pace than last year. Pointing out these regional differences is not intended to be alarmist in any way. Sitting here at the end of October, we've seen backlogs in our plants that serve the Southeast stabilize and edge up over the last month. There's nothing systemic we can point to that explains the regional shifts, and we'll keep monitoring and adjusting production to manage appropriate backlogs. On the subject of backlogs, overall we remained at about five to seven weeks. Unit backlog was up slightly quarter to quarter and as explained that was the result of selectively pulling back on production. Overall, wholesale orders were down just slightly, turning to average selling price, and I want to really make it clear here that my comments are sequential, not year over year. Our consolidated average selling price was up this quarter when we separate the various drivers, wholesale prices were essentially flat. Pricing did hold up across the board, including in the Southeast, with what I consider to be basically insignificant variation by geography. The significant upward movement in reported ASP was primarily the result of a higher percentage of recognized units from retail and to a lesser degree, a mix shift toward multi section homes. We've seen a few quarters where multisection homes increase relative to single sections after a string of quarters where it went the other way. We aren't reading too much into that variation at this point. I spent a lot of time noting the relative strength across the northern US in comparison to the Southeast. Because the divergence is noteworthy during a period with continuing market uncertainty, we're making no prediction about forward demand in the Southeast at the moment. The market seems in balance with manufacturer production and frankly there are scenarios that it strengthens and others that it weakens from here. We're comfortable operating in this environment because we've demonstrated the ability to closely monitor and adjust as we did this quarter. I don't want to miss the opportunity to highlight the continuing strong performance in financial services. In the first two quarters, revenue is up about 5%. However, operating profit is up $14 million from a loss last year to an $8 million profit this year. This has been driven by our insurance business. Weather has played a part, but the majority of the increased profitability has resulted from aggressive actions taken to par unprofitable policies and changes that were made to underwriting and claims management. I want to really acknowledge the insurance operation for the great job they've done and it's clearly showing in our results. As previously announced, after Q2 ended, we were able to close the American OwnStar acquisition after almost a month together. Integration is moving quickly and very well. Thanks to the people from both companies who took advantage of the time between the announcement and closing to plan all aspects of integration. The combined company is off to a great start. The commitment to the smooth transition by the American Homestar leadership has been very apparent and it's made all the difference. And finally, while I have the floor, I can't help but touch on capital allocation. Allison will cover it in more detail. We continued investing in our existing plants. We closed on the American Homestar acquisition immediately after the quarter using cash on hand, and we were able to repurchase $36 million of our common shares. All of this, of course, was enabled by our strong balance sheet and cash generation. And this balanced capital allocation approach will continue going forward. So now I'll turn it over to Alison to give more details on the financial results.

Allison Aden - Executive Vice President and Chief Financial Officer - (00:08:45)

Thank you, Bill. Net revenue for the second fiscal quarter of 2026 was 556.5 million, up 49 million or 9.7% from 507.5 million in the prior year quarter. Sequentially, net revenues decreased 0.3 million, driven by a decrease in homes sold, partially offset by an increase in average revenue per home sold. Within the factory built housing segment, net revenue was 535.1 million, up 48.8 million or 10% from 486.3 million in the prior year quarter, the increase was primarily due to a 5.4% increase in homes sold and a 4.4% increase in average revenue per home sold. The increase in average revenue per home sold was primarily due to a higher proportion of homes sold through our company owned stores with more multi wides in the mix and product pricing increases. Factory utilization in the second fiscal quarter was approximately 75% versus 70% in the prior year period. Financial services segment Net revenue was $21.4 million, up $0.3 million or 1.4% from $21.1 million in the prior year quarter and sequentially up $0.2 million. These increases were due to higher premium insurance rates partially offset by fewer loan sales and fewer insurance policies. In the second fiscal quarter, consolidated gross profit as a percentage of revenue was 24.2% up 130 basis points from 22.9% in the same period last year. In the factory built housing segment, gross profit was 22.9% in the second fiscal quarter of 2026, flat with the prior year quarter. Financial services gross profit as a percentage of revenue increased to 55.6% in the second quarter up from 21.8% in the prior year quarter. This increase was primarily due to fewer claims from storms in the insurance business. Selling general and administrative expenses in the second quarter was 72.2 million or 13% of net revenue compared to 67 million or 13.2% of net revenue during the same quarter last year. The increase in these expenses was primarily due to higher incentive compensation and deal costs from the recently announced American Homestar acquisition. Interest income for the second quarter was $5 million, down from 5.7 million in the prior year quarter primarily driven due to lower interest rates on our invested cash balance. Pre tax profit for the second quarter was $67.3 million, up $12.3 million or 22.4% from $55 million in the prior year period. The effective income tax rate was 22.1% for the second fiscal quarter compared to 20.3% in the same period in the prior year. This increase was driven primarily by a reduction in expected tax credits partially offset by benefits from stock based compensation. Net income was 52.4 million compared to income of 43.8 million in the same quarter of the prior year and diluted earnings per share this quarter was $6.55 per share versus $5.28 per share in last year's second quarter. Before we discuss the balance sheet, I'd like to take a minute to talk further about capital allocations. Shortly after the close of the second quarter, we completed the American Homestar acquisition. During the second quarter, we also repurchased just over $36 million of common shares under our board authorized share repurchase program. And we have approximately 142 million under authorization for future repurchases remaining. Our capital deployment will continue to align with our strategic priorities, which include enhancing our plant facilities, pursuing additional acquisitions, assessing opportunities within our lending operation and continuing to buy back shares. Now I'll turn it over to Paul to discuss the balance sheet.

Paul Bigbee - Chief Accounting Officer - (00:13:14)

Thank you, Allison. In the quarter, we had an increase in cash and restricted cash of 31.6 million, bringing our balance to $400 million. Cash provided by operating activities was $78.5 million. Cash used in investing activities was $12.4 million. And cash used in financing activities was $34.5 million, primarily due to share repurchases. When we compare the September 27, 2025 balance sheet to March 29, 2025, the increase in accounts receivable is related to organic growth in the factory built housing segment, with unit shipments up 2% in the period over the prior year end inventories increased from higher finished goods at company owned retail stores. The decrease in prepaid expenses and other current assets is a result of lower prepaid insurance and prepaid taxes. Property plant and equipment increased from continued investments in our existing manufacturing facilities. Deferred income tax change from an asset to a liability, primarily due to acceleration of certain expenses that were previously capitalized and bonus depreciation, both due to changes in new tax law. Crude expenses and other current liabilities increased from higher volume rebates and warranty accruals on increased sales. And finally, treasury stock increased due to. Stock buybacks year to date. As a reminder, we closed on the American Homestar acquisition after quarter end. Therefore, the cash balance does not reflect a reduction for the purchase price, which is 190 million before certain customary adjustments and funded with cash on hand. With that, I'll turn it back to Bill.

Bill Bohr - President and Chief Executive Officer - (00:14:59)

Okay, Josh, can we open it up for questions?

OPERATOR - (00:15:03)

Yes. As a reminder to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. One moment for questions. Our first question comes from Daniel Moore with CJS Securities. You may proceed.

Daniel Moore - Analyst at CJS Securities - (00:15:24)

Afternoon, Bill. I should say good morning out there. Thanks for the color and taking questions.

Bill Bohr - President and Chief Executive Officer - (00:15:29)

Thanks, Dan.

Allison Aden - Executive Vice President and Chief Financial Officer - (00:15:30)

Thanks.

Daniel Moore - Analyst at CJS Securities - (00:15:31)

Let me start with Bill. I'm trying to just. Really good color. Obviously, regionally and what you're seeing backlog held up nicely despite 5% growth in shipments. Maybe just talk a little bit further about how orders are trending thus far into fiscal Q3 and where you expect to be able to maintain current levels of production as we enter seasonally slower periods, perhaps in some of the northern states ahead of next spring selling season.

Bill Bohr - President and Chief Executive Officer - (00:16:04)

Yeah, I know I threw a lot at you with the regional stuff and it's interesting because a lot of times people ask about the regions and I kind of just wave it off because I don't see any significant differences. But it's kind of, you know, I might have beat it to death in the comments. It's pretty, it's a pretty marked difference between that isolated southeastern area and part of that message though it really should be also how strong it is elsewhere. I mean, we really do have double digit growth in a big part of the US geography right now. And the question about orders, our wholesale orders were down just a little bit in the quarter. That's probably not unusual. The summer can be that way. And as far as our view going forward, I won't speculate too much, but I'd say this is a quarter that's interesting. October can be pretty strong and then you kind of get into the holidays. So it comes in strong and tends to slow down through the holidays. Overall seasonality, while we can measure it over long periods of time, a lot of years, it's really more about the general strength in the market that drives the direction of orders quarter to quarter. I'm not sure I said that well, but the seasonality can be overshadowed just by market strength and market weakness shifts. Right now it still does feel like a balanced market in many ways. I said earlier, even in that southeast that I'm pointing to a lot, I feel like we're in balance. We had to pull back a little bit in the summer on the shipments that we had in our plant serving that area. But as I indicated, given a little bit of an update through the early part of this quarter, we've seen our backlog stabilize and grow a little bit there. So we're kind of in a nice balance. And like I said, I don't know how to speculate and call whether it's going to strengthen from here, which is very possible, or whether we continue to see some cracks there. So it'll be an interesting quarter, I guess. But right now we're feeling pretty comfortable with a nice balanced market. Does that address?

Daniel Moore - Analyst at CJS Securities - (00:18:17)

Right now it does. If I heard correctly, your production rate's staying relatively steady. You ticked them down a little bit in the Southeast, but kind of holding from here for the interim and waiting to see. Is that the best way to describe it?

Bill Bohr - President and Chief Executive Officer - (00:18:32)

Yeah, I was probably focused in that comment about the Southeast that we're feeling in balance with where we've adjusted to the other parts of the country. We have plants that are looking to try to bring on a little production right now. So it's really a very differential situation in operations. I feel like we've been at a high level. The last several quarters have felt like this. You know, it hasn't been flowing and going, but it's been pretty healthy. And you got it. You got to keep your eye on the ball because at a given plant it can move on you one way or the other. So not intending to be evasive, it's more that we're just seeing all conditions across the country. And outside of the Southeast, we have plants that are still edging it up. We did have a number of our plants outside of the Southeast that from quarter one to quarter two, increased production.

Daniel Moore - Analyst at CJS Securities - (00:19:24)

Very helpful. Texas is obviously a big market for MH and bigger now with American Homestar for you, how would you describe that market? We've seen numbers all over the board in terms of the HUD code shipments. So what are you seeing in that market?

Bill Bohr - President and Chief Executive Officer - (00:19:44)

Yeah, well, you guys can see the HUD code stuff. I'm looking here year to date. It's almost flat, right? Year to date, cumulatively. And you know, in the early summer it was down just a little bit in Texas. But I'll tell you what we're feeling. Our retail is primarily based in or centered in Texas. That's starting to not be the case as we've expanded, but it's still the core of our retail business. And we had a really, really good quarter in retail. So the market's there. Our retail guys are doing a great job of going and getting it, which pulls through our production. So we're feeling pretty good about Texas in general. I'd say right now.

Daniel Moore - Analyst at CJS Securities - (00:20:22)

Really helpful factory built gross margins ticked up slightly on essentially flat revenue sequentially. Just talk a little bit about your expectations for the next quarter or two. We see a little more input, cost pressure, tariffs, other running through cogs or the levels that we just saw. This quarter, reasonably sustainable. Allison?

Allison Aden - Executive Vice President and Chief Financial Officer - (00:20:46)

Yeah, I'll give the tough questions to Allison. Now. Thank you for the question. And I think when we think about the margins, it's always hard to project forward. But let's touch on a couple of elements that we typically do look to the strength of our business model, particularly with the backdrop of the tariffs, I think really shine through of how we focus very much on keeping as much variable cost up and fixed costs low as far as margins in total. You know, we think about the asp and I think we've done a good job. Bill's done a good job of kind of addressing where we are and perhaps, you know, different alternatives of where we can go. But let's talk about the cost component in tariffs because I think that's probably the focus of what's ahead and what investors want to know. We estimate that the impact of tariffs in Q2 was approximately 2 million of additional expenses that hit our cost of goods. If you Remember, during our Q1 press release, we shared an estimate that the projected overall impact could reach, and this is over the course of the out quarters, 2 to 5.5 million a quarter if the total tariffs that were being discussed at that time were fully implemented. So post our Q1 last quarter earnings release, the Canadian lumber contravailing duties have been increased from their long term 14.5% to 35%. And that actually happened at the very end of July of this year. And then subsequent to that, the duty it's also been announced is an increase of 10% tariffs placed additionally on top of that, you know, these tariffs obviously are fully implemented and we've seen the back and forth, you know, that's been going on for the last several months. So we stay close to it. Obviously these would have a meaningful impact on the cost of our homes by increasing the price of lumber for framing, for floors, for roof, not unlike other home builders. So we continue to stay focused on it, continue to really lean into our the efficiencies and effectiveness that being a manufactured builder of affordable housing provide us. And the obvious focus is our ability to pass these costs through in pricing will be very dependent upon local market conditions, as we've consistently said. You know, a positive is the decision that came about in recent weeks to really kind of kick out the China tariff increase out of here. You know, that will help us reduce our estimate probably to the lower end of the range that we provided. It will clearly avoid some increases that we were anticipating to the electrical and plumbing that we purchased from China through intermediaries. So I went a little long on that just to kind of, instead of piecemeal it to you all, just kind of keep it all inclusive. So all of those are what we're factoring in. Obviously, as we talked about, the largest component that we use are the commodities of lumber and osb. As all builders, we all have access to that, as you can see in the spot market. And basically the rates and levels that you see when you look at the commodity markets in general, we can think about those factoring through our cost of goods at about 60 to 90 days. Does that help a bit?

Daniel Moore - Analyst at CJS Securities - (00:24:23)

It does. That is great color.

Bill Bohr - President and Chief Executive Officer - (00:24:26)

One more and I'll jump out. I just add a couple comments. Dan. Yeah, when you're looking at Q2 specifically, you might remember that in Q1 we saw like product price increases. So we had a good, good beginning to the quarter coming out of Q1 with prices up. And then on the cost side, you know, a lot of these tariff risks are concerning and we're really keeping our eye on it. But in the quarter on the cost side, we've actually continued to see lumber really at a pretty low cost. It almost defies logic when these Canadian softwood lumber tariffs have been tariffs and duty increases have been put in place. We're still seeing lumber at a pretty low level right now. So that really contributed to the nice gross margin this quarter. And a lot of what we're going to be focused on going forward is some of these risks.

Daniel Moore - Analyst at CJS Securities - (00:25:23)

Very good. No, that's super helpful. Last one, turn attention to American Homestar. I guess first off, the numbers that you gave back when you announced the deal in July, how are they trending relative to those? I think it was 194 million revenue, 18 million EBITDA. Any change there, good or bad? And second, how do we think about potential impact of maybe acquisition accounting? That's been something we've discussed in the past with some of the others for the first quarter or two out of the box.

Bill Bohr - President and Chief Executive Officer - (00:25:58)

Yeah, good questions. I mean, we've had them for a month, so I'm not sure I have a huge update on kind of trends, but I do just. I mean, they're going to fold in. It's two more plants in a system that now has 33 plants. So that's pretty much pro rata, you know, they'll fall right in line there. They are heavier than our concentration before the deal on the retail side. So we'll get considerable impact from the retail side. But from a business perspective, they're folding right in as part of the business. Not better or worse than the rest of the operation. I do think, and I know we didn't put it out there with synergies, but I do think my comments about integration over time we'll kind of pretty likely, we'll kind of tell you guys how integration is going and I think we're going to be able to add some meaningful value to the deal on top of them. So it's not just a complete bolt on, it's a bolt on that I think will be lifted over the next several quarters. Appreciate the question on the purchase accounting. I am going to let someone else answer it because they'll do it better. But it's an important one and we've.

Allison Aden - Executive Vice President and Chief Financial Officer - (00:27:01)

Looked at it from the acquisition accounting perspective. We think about the potential impact on the consolidated gross margin level. It's probably going to be pretty small. And the reason for that. The reason for that is if we look at this particular acquisition, there is really a high marketability to their type of product. So we'll be able to get to market faster, be more successful out of the gate. Also, in addition to that, their inventory levels are extremely rational. So if we compare and contrast this to say the previous acquisitions, what we've done, but we have had an impact to the consolidated margin. We believe that in this particular acquisition that will really be very low and pretty non eventful.

Daniel Moore - Analyst at CJS Securities - (00:27:55)

Really helpful. Okay, I'll jump back with a couple follow ups. Thank you.

Bill Bohr - President and Chief Executive Officer - (00:27:59)

Thanks Jeff.

OPERATOR - (00:28:01)

Thank you. Our next question comes from Greg Pong with Craig Hallam. You may proceed.

Greg Pong - Analyst at Craig Hallam - (00:28:09)

Hi. Thanks. I wanted to maybe go back to the market or the industry growth or I guess lack thereof. I'm pretty sure the industry reported or will report, I guess, declines on a year over year basis in units for the recent quarter. But you know, you've continued to outgrow the industry by a pretty meaningful amount, sort of quarter in quarter out for the last year plus. So maybe you can just better sort of highlight what are you doing right? What are you doing better? What's allowing you to outgrow the industry to that sort of magnitude?

Bill Bohr - President and Chief Executive Officer - (00:28:52)

Yeah, I appreciate the recognition. I know that there is volatility in market shares from quarter to quarter. So I'm always a little bit hesitant to declare victory. But we've talked about things over time that we've done that I do think are really settling in a tremendous amount of work over frankly a couple years where we initially really moved forward in digital marketing. And that really didn't completely take hold until we followed that with the rebranding that we did earlier this calendar year. And the rebranding again coupled with digital marketing, I think our ability to generate good leads, customers, consumers that are educated on our products, has just stepped forward in a dramatic way from those changes. And we're probably at the beginning of really realizing that I think that was a strategy that unfolded. It took literally a few years to get to where we are, but I think now it's time to make hay with that. We've also talked about structurally we were certainly different than the other large players in the fact that we always talk about. We treat this as a very local market. We put a lot of decision making and accountability on our local operations. And we didn't have a national sales team until the last several years. And the work that's been done by that group to just bring better training and accountability to sales teams across our organization I think is starting to gain traction. And it also has improved our selling approach to communities and developers because a lot of those communities and developers, when they're larger organizations, they need to have contact at various levels in the organization. And frankly, we had a gap and so I think we've closed that gap. I could go on and on. I think our product team has done a really good job of innovating product design. So all these things are focused at trying to not just stay with the market but to try to gain a little share. And I certainly believe that that's impacting the results.

Greg Pong - Analyst at Craig Hallam - (00:31:10)

Okay, yeah, that's helpful. Color and then shifting to the mix in the quarter. You mentioned more homes from company owned retail. Do you have that percent for the quarter and how that compares to both your ago periods as well as sequentially. And just curious what you're seeing thus far in October as it relates to the most recently completed quarter.

Allison Aden - Executive Vice President and Chief Financial Officer - (00:31:39)

Yeah, yeah, I can take that, Greg. So this quarter we're about 22.9% that were sold through our retail channel and that's up sequentially 4% from 18.9% this last quarter. And then year over year the percentage was 21. So we're up about 1.9% year over year.

Greg Pong - Analyst at Craig Hallam - (00:32:02)

And any color on, you know, at least from a high level, what you're.

Bill Bohr - President and Chief Executive Officer - (00:32:06)

Seeing in October, I think continuation in general. I mean, I wouldn't say any discontinuity. I think retail has been, as I mentioned earlier in answering one of Dan's questions, retail in Texas has really been outdoing themselves. They've been doing a great job. So I think they're continue on that path. And the market in Texas is at least supportive enough for them to dramatically improve the results. I don't think some of the percentages Mark just went through are really. They're essentially same store comparisons. The system, while we have grown the system over time, I think if we went back and looked, we'd Been at kind of that 80 retail store level going back through that comparison period of last year. So it really is same store, same footprint improvement on the retail side. And yeah, October, not trying to get too much into it, but October really hasn't been a discontinuity with that.

Greg Pong - Analyst at Craig Hallam - (00:33:08)

Okay. And just remind us as it relates to Homestar, I mean, presumably that number maybe even goes up a little bit more. All else equal because of the proportion of homes that that Homestar was going through company owned stores.

Bill Bohr - President and Chief Executive Officer - (00:33:21)

Right? That's right. I mean they'll bring. With the Homestar deal we go from 31 to 33 plants and we go from approximately 80 to 100 in round numbers on the store side. And I think I'm right on this. I think their degree of integration through their retail is around 60%. So 60% of their manufactured homes were going through their company owned stores. So it will shift that. It will have an upward effect on that percent integration.

Greg Pong - Analyst at Craig Hallam - (00:33:52)

Okay. All right, thanks. Lastly, you know, I'm going to throw a broad question at you because there's a whole bunch of different things going on on the regulatory front, you know, whether it's, you know, chassis removal or some of the financing stuff, zoning. But just curious to get your high level thoughts on, you know, the potential of some of that and obviously the longer term impact if some of that stuff goes through.

Bill Bohr - President and Chief Executive Officer - (00:34:18)

Yeah, one thing that happened is the HUD code got updated and we feel really pretty positive about that. I mean HUD code updates were few and far between for a long time. And I've talked in the past about the relationship between the industry and hud. It's not like, you know, they regulate us, but it's a positive working relationship. So getting the HUD code update I think is a positive. Some of the good things that come out of that are duplexes up to, we call them fourplexes. Being able to build more than one family units. That's now part of it. Eliminated a lot of the bureaucracy that goes with some of the more typical. We used to have to get specific letters to allow some deviations from what was in the code and they fix a lot of those problems in the code so that the bureaucracy is down on letters. It also added some cost items that I think the industry generally supports. An update to the electrical code that requires us to put more GFI and more tamper resistant. Outlets. Also they kind of lowered the strength value rating on Southern Yellow refine. I'm going into a lot of detail here. I guess it's not necessary, but Those will add some marginal cost to the homes, but I think they were legitimate and valid cost increases. More broadly in regulatory, we've talked before, Cassie is getting a lot of notoriety and support both sides of the aisle. It's a matter of how do you attach those kind of things to a much larger bill that actually gets through the gauntlet. But I think we're pretty optimistic at an industry level that we will get the chassis removal. It'll open up a lot of innovation. We're trying to get HUD identified as the sole regulator so that we can avoid some of the dysfunction that happened with the Department of Energy over the last couple years. And also working some things to make sure that all forms of ownership for communities are given an equal opportunity to provide more homes. So there's a lot going on in D.C. those bigger items, I'm always kind of interested because I get involved in it to figure out, okay, how do you actually like you can have confidence one of these things is going to get done. But the actual route it takes is a lot of times uncertain. So we'll just have to stay tuned on the timing for some of that. But those changes, like the HUD that was passed in the Senate as part of the road bill, so now it's in the House for consideration.

Greg Pong - Analyst at Craig Hallam - (00:37:01)

Okay. Appreciate all the color.

Bill Bohr - President and Chief Executive Officer - (00:37:03)

Thanks.

Greg Pong - Analyst at Craig Hallam - (00:37:04)

Yeah, thanks, Greg.

OPERATOR - (00:37:07)

Thank you. Our next question comes from Jay McCandless with Wedbush. You may proceed.

Jay McCandless - Analyst at Wedbush - (00:37:12)

Hey, Jay. Hey. Yep. So I guess the to take the price question a little bit further. You said American Home Star, 60% of their sales go through retail. So at least something more than that, 23% going forward. I mean, have you guys even tried to plan out or get an idea internally of what that split could look like?

Bill Bohr - President and Chief Executive Officer - (00:37:37)

Yeah, I haven't done the algebra, to be honest. I'm ashamed to say that because it's pretty straightforward question, but I haven't tried to figure out apples to apples. If nothing changes how much that would lift the percentage. But again, you could pretty much ratio it, Jay, that you know, our plant ownership's going up and I would just at this level to get an estimate, I would assume that their plants operate typical to our average plant. So that's 2 divided by 30 increase on that side. And then you know, you've got the 20 stores added to what was previously an 80 store retail system. And then with the 60%. So I apologize, I haven't done it. But I think we could probably get there pretty quick. That's fine.

Jay McCandless - Analyst at Wedbush - (00:38:19)

I didn't know if there was a stat Y', all, it had ready for the call. I guess the second question is nice to hear a little more multi section business this quarter. Is that something you think continues? Is it what you're seeing in the backlog right now for the plants?

Bill Bohr - President and Chief Executive Officer - (00:38:35)

Yeah, I commented that, you know, we're always watching that and we're always interested to see if we're seeing trends. We saw quite a few quarters where it was a small movement the other direction. So this is kind of swinging back a little bit. I'm not sure that we've really got a theory that it's a trend. You know, we've got two, I think two quarters now that multi increase as a percentage, but I don't think we're ready to declare that a trend. It kind of seems a little bit more like normal variation right now. Got it.

Jay McCandless - Analyst at Wedbush - (00:39:10)

And then one last question on pricing. Could you talk about, you know, you identified the southeast region versus other regions, especially up north, I guess. How big of a pricing delta is there and are there some modular units running through those northern. Northern markets that may up the ASP a little bit as well.

Bill Bohr - President and Chief Executive Officer - (00:39:33)

I have to come back to make sure I understand the second part, the pricing difference. I mean, what's been interesting is that when you look at the change in pricing, because obviously our plants across the country make different products, so it's not apples to apples on like a dollar amount of pricing. But the change has held up very strong. And what I was trying to point to is for all the discussion about the drop off in volume in the Southeast, the Southeast did not give up any pricing. So pricing is holding across the country right now. You asked a question about the Northeast and modular that I'm not sure I captured.

Jay McCandless - Analyst at Wedbush - (00:40:12)

No, I guess let me ask it a better way. If you think about a standard like for like single section home that you sell in your northern markets versus your southern markets, I would assume that there's a price differential just from higher cost markets, etc. Is that something you guys have identified or talked about before?

Bill Bohr - President and Chief Executive Officer - (00:40:32)

I think that's. That's directionally correct. I mean, some of them are modular and yeah, even the coding can be different up there. That can drive some costs up. So direction. I think you're right.

Jay McCandless - Analyst at Wedbush - (00:40:45)

Okay. Are you kind of trying to figure out if that's a driver, you know, if the mix of non southeastern plants, the southeastern plants, is a driver of the ASP increase?

Bill Bohr - President and Chief Executive Officer - (00:40:58)

Yes, that's. That's exactly where I'm going for. Yeah, I think, I think directionally it probably is. I don't know that I feel it's that significant, I guess is where I'd say I think, I think it couldn't be argued that it's not an upward driver, but I'm not sure it really shows up in the calculations as a significant driver.

Jay McCandless - Analyst at Wedbush - (00:41:17)

Okay. All right. Well, thank you, Bill. And then the last question I had just kind of talking about where chattel rates now what type of is there anything that's that I know the Senate passed their version of the bill. I guess we have to wait for the government to get back open for the House of Reps to pass their side of it. But yeah, if you could talk about where chattel rates are right now and what type of anything new or interesting on the mortgage side we need to.

Bill Bohr - President and Chief Executive Officer - (00:41:44)

Be watching on the just trying to touch the regulatory side of it. A lot of discussion. You know, I've been one that's really pushed hard in D.C. for Congress directing the GSEs and to actually follow through on their duty to serve plans that involve doing some chattel lending programs. I wouldn't say that. I feel like. The discussion is right, but I'm not sure there's anything imminent on it, I guess is my sense of that. So I'm not. I wouldn't hold your breath that we're going to see something coming out of D.C. but we keep working on it. But then on your actual race discussion, I think Mark has the information.

Mark Fustler - Corporate Controller and Investor Relations - (00:42:27)

Yeah. Yeah. So on rates, they've been trickling down just a little bit these last three months or so about down 70 basis points, about 8.5%. So mid 8% range now.

Jay McCandless - Analyst at Wedbush - (00:42:38)

Okay, that's great. Thanks. Thanks. Appreciate it taking my questions.

Mark Fustler - Corporate Controller and Investor Relations - (00:42:43)

Yeah. Thanks, Jay.

OPERATOR - (00:42:46)

Thank you. Our next question comes from Jesse Letterman with Delman and Associates. You may proceed.

Jesse Letterman - Analyst at Delman and Associates - (00:42:53)

Hey, thanks for taking my question and nice job on the quarter. Bill, I remember a couple quarters ago when you talked about on the financial services gross margin specifically we had a long discussion about what you were trying to do there in terms of making sure the underwriting and what's actually being covered is more appropriate. So nice job that that's come to fruition.

Bill Bohr - President and Chief Executive Officer - (00:43:17)

Thanks, Jesse. Thanks for the good memory.

Jesse Letterman - Analyst at Delman and Associates - (00:43:22)

I have a question for you, Bill, on kind of the political discourse. Of course there's been a lot of public chatter between FHFA director Pulte and Trump with the larger public site built homebuilders regarding affordability and increasing production and things of that nature. Was wondering if you've been involved in any conversations where you may be or they may be coming to you in terms of manufactured housing or factory built housing generally being a solution for affordable housing in this country, have you been able to kind of input yourself, yourself or manufactured housing into those conversations at all over the last couple of months?

Bill Bohr - President and Chief Executive Officer - (00:44:06)

I think absolutely. And I'm not speaking just on behalf of myself. I'd more say that the industry and the industry association has done a really good job. And literally you can compare and contrast from just a few years ago when manufactured housing was kind of on the outskirts of people's consciousness sometimes in D.C. and now we're part of every conversation. So I think tremendous ground has been taken as far as just highlighting what the industry can do and both sides of the aisle, House and Senate. You know, I've testified a couple times up there, manufactured housing is front and center in people's minds. Now. The challenge, I think, is that there are certain things the federal government can do that would really have a big impact. And we've talked about some things like the HUD code definition of removable chassis, things like encouraging the GSEs, things like removing some of the dysfunctional bureaucracy that happens at times. And I think they're working on that. Where it's harder for them to impact directly are the things that are more function at the state and local level. And that's where you really see the zoning challenges that limit the supply of what we do. So I'm not saying the federal government can't do anything, but their ability to directly impact that may be a little bit less than we'd like it to be. And we really have to do the work at the state and local level. At the industry association, we've really been focused on that strategically trying to make sure that industry association is working really closely with the states because I think that's where those battles need to be won. So I feel great about, like I don't feel like we're missing any share of mind or being left out of any good discussion in D.C. about affordable housing at this point.

Jesse Letterman - Analyst at Delman and Associates - (00:46:00)

Great. It's good to hear. Thanks for the color on that Next one, I think is for Allison on the gross margin. I just maybe want to clarify some things. So it sounded like encouragingly, the tariff impact was at the low end of the 2 million to 5.5 million range in the fiscal second quarter. But given since you gave those numbers last quarter and you've had some incremental garif increases on Canadian lumber, so it sounds like going forward you'll be maybe toward the middle to higher end of that two to five and a Half million dollar per quarter range. That's kind of how it sounded. But then I think you made a comment about being encouraged by some other aspects of what you're seeing that it might be toward the lower end. So just kind of hoping for some clarification on the.

Allison Aden - Executive Vice President and Chief Financial Officer - (00:46:49)

Yeah, let me clear. Thank you for that opportunity to clarify. So the range that we gave last quarter was 2 to 5.5 million. And that to us is the range that if take, if you remove any. New. Canadian lumber tariffs and anti dumping increases, that range still holds. And if you think about that range, a good data point for us is that the China tariff increase kind of got pushed out. So that keeps us a little bit less to that range. Now take that range and add to it what we're just now, what we're recently learning about the increase to Canadian lumber from a terrorist perspective and an anti dumping that's not within that 2 to 5.5 million a quarter range. We're not quantifying that increase or the impact from Canadian lumber because there's still quite a few elements that are churning. And so as those unfold, those elements around, there has been an increase to 35% that was done at the very end of July to the Canadian lumber and then just recently, literally in October, discussions around another 10% increase. And if you take a step back and think about those recent articulations of what could be coming, it's at this point I feel like it's too early for us to put a box around that range. And so we'll continue to watch that. But those would be incremental costs to that 2 to 5.5 million a quarter range. That help?

Jesse Letterman - Analyst at Delman and Associates - (00:48:33)

Yeah, that's very helpful, Allison, thank you, I appreciate that. A couple more I think on last quarter's call, Bill, you talked about kind of the secondary market. You were maybe holding a few more loans on balance sheets, some fewer loan sales. Have you seen any shift since then in the secondary market's appetite for chattel loans?

Bill Bohr - President and Chief Executive Officer - (00:48:59)

Yeah, a lot of good discussion and we're working pretty hard to generate some partnerships there to free up additional lending capacity because as we said a lot of times we are willing to hold these loans to a point, but we really prefer to have buyers of the loans we originate. So there's been a lot of discussions. Not really an update that I could provide as far as anything that's broken at this point broken through. And I think, you know, I guess your question partly too is appetite. I think there is an appetite out there for these loans. It's a hard process. A lot of the people that are talking to originators like us are folks managing insurance money, which is a really good fit, frankly, from a tenure perspective. And it's a complex process to get to an actual agreement with those folks. So they're showing a lot of interest, but the deals are a lot of work to get done.

Jesse Letterman - Analyst at Delman and Associates - (00:50:00)

Okay, thank you for that answer. Two more for me. One on the Southeast. You mentioned that you didn't really give up any pricing in the Southeast, which obviously is encouraging. But on the other hand, how do you think through maintaining price, albeit at kind of lower order rates and shipment rates, versus perhaps giving up a little bit of price and trying to stimulate some more demand or some more orders to increase capacity a bit?

Bill Bohr - President and Chief Executive Officer - (00:50:28)

Yeah, it's a good question. Gives me a chance to probably put a different point in here in the discussion about the Southeast, because I knew when I was talking about it that much, I might heighten people's sensitivity to it. Just trying to draw the contrast, for the most part, the capacity utilization, at least in our system, and I think it was probably more general statement for the industry is not at a terrible level. I mean, plants are operating, they're making money in the Southeast. And so, you know, every plant has kind of this ongoing decision every day about pricing strategy. And right now, I think it's far from a doomsday situation. So people feel like they're getting appropriate orders. And there hasn't been a motivation at this point to really aggressively compete on price. A lot of what our plants do, and this is a general statement, is they go out and look at our product compared to other product that's in their local markets and make sure that they're priced accordingly. And that's unsure how the other competitors do it. And at this point, no one's at a state of concern about the direction of the Southeast, where they've kind of said we're just going to drop price and try to win market share that way. So I like that. I think it means that there's stability even though it's lagging the rest of the country from a market demand perspective. And that allows us to kind of stay the course and adjust as we need to going forward.

Jesse Letterman - Analyst at Delman and Associates - (00:52:00)

That's helpful. Yeah, I guess it sounds like giving the great commentary on the Northeast that's particularly strong, I guess, has made it sound a little worse than it is in the Southeast on a relative basis.

Bill Bohr - President and Chief Executive Officer - (00:52:14)

Yeah. And just to clarify that real quick, Jesse, I mean, the strength is across the entire North. You just go right across the entire northern part of the US and pretty much where you're outside of that localized southeast area that I talked about, things are pretty strong. Great.

Jesse Letterman - Analyst at Delman and Associates - (00:52:32)

And then last One on the CapEx, roughly 10 million this quarter, about 9 million last quarter. You noted there was investing in the plants. Can you maybe give a little color on the progress of those investments? What you're actually doing in the plants or those AI, you know, are those automation initiatives? Maybe just a little color on how that will come to fruition. Thanks again.

Bill Bohr - President and Chief Executive Officer - (00:52:55)

Yeah, absolutely. We're really happy with some of the project opportunities we've had in our system. And even through the period a couple years ago when we were dealing with really a slowdown, we were still consistently investing in these projects. And I would characterize them. We can look at a plan and we've got some outstanding resources. On the engineering side, frankly, people that came to us through the Commodore transaction, this has been one of the value adds of that transaction several years ago. We've got folks that I think when we announced that transaction, we talked about some manufacturing technologies where they were really able to do some things other companies hadn't figured out, like lasers, floor gantry systems for fastening that are very safe and efficient CDC machines. And so we've been seeing opportunities throughout our system to modernize using some of those technologies. I would characterize the investment, any one plant to probably be between 2 to 5 million dollars. And every one of those projects is just feeling like a home run because they not only get us a little bit of additional throughput, and when you add several of those together, you've added a meaningful amount of capacity, but they also all seem to have very good safety and quality improvement aspects to them. So we're going to keep doing this and that elevated. I think the question was asked last quarter about whether that was a new level of sustaining capital. No, you're seeing investment capital in that number for sure.

Jesse Letterman - Analyst at Delman and Associates - (00:54:33)

Thanks again, Bill and Allison. Really appreciate the time and the answers.

Bill Bohr - President and Chief Executive Officer - (00:54:37)

Thanks, Jesse.

OPERATOR - (00:54:40)

Thank you. And as a reminder to ask a question, please press star 11 on your telephone. Our next question comes from Daniel Moore with CJS Securities. You may proceed.

Daniel Moore - Analyst at CJS Securities - (00:54:52)

Thank you again. Wanted to just ask one or two more on drilling down, and we talked about a lot of, you know, some of the potential legislation, but they get a lot of questions recently about chassis specifically. So, you know, what's the average cost of a chassis and roughly what percentage of your home shipped come with the chassis today?

Allison Aden - Executive Vice President and Chief Financial Officer - (00:55:14)

Yeah, we estimate roughly about 1,500 per floor. So, yeah, obviously, if you have multiple sections, you'd multiply that out.

Bill Bohr - President and Chief Executive Officer - (00:55:23)

Perfect. Yeah. I think your point is. Yeah, we would basically recycle as much like they do in modular construction.

Daniel Moore - Analyst at CJS Securities - (00:55:29)

Right.

Allison Aden - Executive Vice President and Chief Financial Officer - (00:55:30)

You use a cart essentially to get the floor to the site and then you can bring that back. Yep.

Daniel Moore - Analyst at CJS Securities - (00:55:38)

And whether what are HUD codes or chassis homes? You know today that as a percentage of your overall production, roughly. Oh, HUD versus modular in our system. Yeah. Really just percentage with chassis that are left on site, if you know what I mean.

Allison Aden - Executive Vice President and Chief Financial Officer - (00:55:59)

Yeah. Well, I can give you a break of HUD versus modular and that's probably a pretty good rate for what you're asking. We're probably about 80% HUD HUD code homes and 20% modular. Okay.

Daniel Moore - Analyst at CJS Securities - (00:56:12)

And if it did pass, how would you think about that savings kind of dropping to margins versus maybe passing it on to the consumer? I know that's one or two steps down the road, but passing on the questions that I'm getting from investors.

Bill Bohr - President and Chief Executive Officer - (00:56:30)

Yeah, we'd probably find a middle ground. I think some of it would go to our bottom line and probably some would be passed through as a savings to the customer. I'm kind of, I guess my not hesitation. The reason why I hesitate at all is because I haven't really thought about chassis as much as a cost driven thing as I think about it as an innovation driven thing. But to your question on the hard numbers, I think there would be some middle ground where a good portion of that would drop to our bottom line.

Daniel Moore - Analyst at CJS Securities - (00:57:00)

Yep, makes sense. And then lastly, obviously great work as detailed on financial services, contributing $5 million operating profit, I guess $4 million average, last two quarters. Would you consider those to be above the mean in terms of profitability when you sort of average out the business and what expected claims are? This was a little bit of a softer quarter. But how do we think about sort of average profitability, you know, at this stage going forward?

Bill Bohr - President and Chief Executive Officer - (00:57:36)

Yeah, I'm going to take a shot and you can tell me if I'm answering your question. We have benefited from lower than typical weather events and claims for sure. But as I said, and I know I'm not giving you specifics, the improvement we've dissected, the improvement between how much we attribute to improved weather versus how much we attribute to the changes that we've made. And well over 50% of the improvement is due to the changes we've made. So I think we're at a new level of profitability in a typical weather environment. We've got a little bit of boost over the last six months from the weather being very friendly for us. Does that help?

Daniel Moore - Analyst at CJS Securities - (00:58:22)

It is. Yep. Thank you again. Thank you.

Bill Bohr - President and Chief Executive Officer - (00:58:28)

Thank you. I would now like to turn the call back over to Bill Bohr for any closing remarks.

OPERATOR - (00:58:32)

Yeah, just real quickly. I know we're coming up on the top of the hour. Executing and shifting markets is really what it's all about in this industry. And we continue to tell you all that from a market perspective. There's uncertainty out there, but I think this quarter kind of showed the nimble approach that we've embedded in our operations and we're making real time adjustments as consum conditions shift. That's what I think we're focused on here because we know the conditions will change and we just want to react to them very well. As we've discussed over time, in addition to managing the day to day challenges, we've undertaken an upgrade to our ERP system. We rebranded it, as I talked about, that improves the customer experience. We've executed the string of modernization projects we just touched on. We completed the large American Homestar transaction. And it's really exciting to see the entire organization rise to all of these kind of extra challenges which by the way are the things that position us for better performance over the long term while at the same time, you know, the organization is really delivering the kind of results we discussed today. So really want to thank everyone for your interest and for joining us and we look forward to keeping you updated. Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.