Cavco Industries, Inc. (CVCO) Q2 2023 Earnings Call Transcript

Good day, and thank you for joining us for Cavco Industry's Second Quarter Fiscal Year 2023 Earnings Conference Call. During this call, you'll be hearing from Bill Boor, President and Chief Executive Officer; Allison Aden, Executive Vice President and Chief Financial Officer; and Paul Bigbee, Chief Accounting Officer. Before we begin, we'd like to remind you that the comments made during this conference call by management may contain forward-looking statements, including statements of expectations or assumptions about Cavco's financial and operational performance, revenues, earnings per share, cash flow or use, cost savings, operational efficiencies, current or future volatility in the credit markets or future market conditions. All forward-looking statements involve risks and uncertainties, which could affect Cavco's actual results and could cause those actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of Cavco. I encourage you to review Cavco's filings with the Securities and Exchange Commission, including without limitation, the company's most recent forms, 10-K and 10-Q which identify specific factors that may cause actual results or events to differ materially from those described in these forward-looking statements. This conference call also contains time-sensitive information that is accurate only as of the day of this live broadcast Friday, November 4, 2022. Cavco undertakes no obligation to revise or update any forward-looking statements, whether written or oral, to reflect events or circumstances after the date of this conference call, except as required by law. Now I'd like to turn the call over to Bill Boor, President and Chief Executive Officer. Bill?

Welcome, and thank you for joining us today to review our results for the second quarter of 2023. I want to start off by saying that we were fortunate that our employees who were close to the areas hit by Hurricane Ian were all safe. Damage to our manufacturing and retail locations was minimal, and the entire team did a great job preparing and then responding to the situation. Most impressive was the way they shifted their attention to providing relief and supplies to the more heavily impacted areas following the storm. Our thoughts go out to those who have been more severely affected, 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. 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 turn rates. Buyer interest remains healthy as evidenced by retail traffic, online leads and quotes which have not dropped off in recent months. However, interest rates, inflation and shorter lead times have made prospective home buyers more patient and, frankly, more cautious. So wholesale orders net of cancellations are down, resulting in the declining backlog. Our backlog is down 35% sequentially to $651 million, equating to approximately 17 to 19 weeks at current production levels. While a clear picture of near-term demand is clouded by ongoing set-up challenges and retail inventory adjustments, we're very confident about mid- and long-term demand. The industry is cyclical in the near term for all the reasons I've touched on. However, the need for our products is undeniable. We're fortunate to have the financial flexibility to stay focused on our capital allocation and growth strategy while we manage the near-term dynamics. In that regard, production has commenced at both our new plants. Glendale, Arizona is focused on Park Model production, and Hamlet, North Carolina will be producing HUD-code homes. Both facilities are state-of-the-art, and equally important, they're both starting with model work systems and cultures as we continue our focus on employees in the workplace. Continuing the theme of investing for the future, last week we reached agreement to acquire Solitaire Homes, a strong manufacturer and retailer of high-quality homes sold in Texas, New Mexico, Oklahoma, and surrounding states. We have a lot of respect for what Pete Hogstad and his team have built at Solitaire, and we're very appreciative that they chose to join Cavco. Their operations complement our plant and retail system, and will significantly improve our capacity to provide quality homes. The addition of Solitaire's 3 locations and 4 production lines adds roughly 10% to our manufacturing capacity. And the addition of their 22 retail stores creates value as we fill out product offerings in stores across the combined company. As we previously reported, we expect to close this transaction early in the fourth fiscal quarter. I recognize the greatest interest today is about trying to understand near-term demand. However, the bigger story is how manufactured housing is differentiating itself from the broader home building segment in this market environment. While our industry is certainly subject to the impacts of inflation, higher prices for homes, higher interest rates, and other drivers of near-term demand, we're also a solution for families in need of affordable options. At the same time that retailers are adjusting inventories, communities are continuing with their high growth plans. The community operator demand for build-to-rent units is very strong. Rental homes provide a needed solution at a time when many families are unable to purchase a home, and this is a demand buffer unique to manufactured housing. Similarly, we know that because site builders have become less able to hit anything approaching a starter home price, people are taking a look at factory-built homes, an option they might not have considered in the past. What they're finding is that we're ready with attractive and significantly more affordable homes for them. Notably, manufactured housing shipments as the share of new home sales had been around 10 to 15% in recent years. In the last 6 months or so, that share has increased to the high teens and low 20s. This is indicative of how manufactured housing can weather the cycle better than the general housing market. Just to reiterate, prices and interest rates are high, so the monthly payment impact is clearly a downward pressure on near-term demand. This is offset by market share gains 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 undersupply of lower-cost housing we've been speaking about for several years, and that has recently only worsened. With that, I'd like to turn it over to Allison to discuss the financial results in more detail.

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

Thank you, Allison. When comparing the October 1, 2022, balance sheet to April 2, 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 logs. Prepaid and other assets decreased due to lower workers' compensation insurance, prepaid income taxes, and assets recorded for the loan repurchase option we have for delinquent loans that have been sold to Ginnie Mae. Property, plant, and equipment is up due to the purchase of the manufacturing facility in Hamlet, North Carolina and continued development of the Glendale, Arizona facility. Accrued expenses and other current liabilities 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 1, 2022, up 11.8% or $98.4 million compared to $830.5 million as of April 2, 2022. This completes the financial review, and I'll turn it back to Bill.

Thanks, Paul. I think this is a good opportunity to revisit our capital allocation priorities. We've consistently said that we will invest in organic growth, seek value-creating acquisitions, and utilize share repurchases to responsibly manage our balance sheet. On that last point, we've emphasized that share repurchases can be completed without hampering our ability to reinvest strategically. Taking a look over the last 6 quarters dating back to the beginning of fiscal 2022, we have invested $52 million in high-return capital projects to improve and grow our network of plants, including the Hamlet and Glendale projects. Additionally, we've committed $244 million to the acquisitions of Commodore and Solitaire, growing our capacity by approximately 35%. 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 the Solitaire closing, we had 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.

Our first question comes from Daniel Moore with CJS Securities.

Bill and Allison and Paul, maybe obviously we'll start a little bit with, as you guessed, we'll talk about the demand picture. And the decline in backlog, how much of it relates to dealers pulling back on inventories and how much of it relates to declines in end consumer demand? I know you said traffic is still up, 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, that's a straightforward question with a complex answer. The differences you're highlighting are challenging to distinguish. I’ve been considering how to explain the situation in the retail channel, and I’m not sure I will be very effective, but let’s look at it from the perspective of an individual dealer. In the past, dealers could sell any home they acquired, resulting in high turnover because they had plenty of inventory and long lead times. If they had a home available, they could sell it quickly. We have noted that setup constraints have historically limited the number of houses that could enter the market. Currently, though, in regions that have experienced a market shift, the effects of rates and other factors have made buyers more patient, slowing down sales. While current sales levels are not historically low, they are down from the recent highs. At the same time, manufacturers have increased production. Dealers now receive homes sooner than expected, which has prompted some to reconsider their inventory and associated costs. They might not need a home arriving sooner than anticipated, leading to cancellations. As dealers continue to experience these unexpected changes, our backlogs decrease, and they adjust their orders to manage their inventory efficiently. This situation is more about adapting to the varying rates of placing and receiving homes rather than simply destocking. Buyers are facing challenges from inflation and economic uncertainty, but they are still searching for homes, both in stores and online, indicating an ongoing need for housing. We must navigate through this transition, and as the market settles, we will understand the true demand. Although the economy adds uncertainty, we are optimistic over time. I realize I provided more information than you asked for, and I’m open to following up if needed.

No, 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, one. But number two, these higher rates, monthly payment goes up, talk about their ability to secure financing versus maybe their patience, if you will.

We have noticed an increase in cash buyers and have maintained a close connection with our mortgage lending operations, ensuring the quality of applicants remains high. We have not observed a decline in credit quality, as people are still qualifying for loans. However, individual decisions are influenced by current uncertainties and their understanding of what they can afford, which has changed significantly compared to previous times. Their purchasing process is adapting accordingly. Loans are accessible, and the credit quality of applications is still strong, along with more cash buyers. Overall, there has not been a decrease in available funding for these individuals.

Got it. With all that, what can you tell us about your expectations for shipment levels as well as factory-built housing revenue? Let's exclude Solitaire for now on a comparable basis over the next two quarters compared to what we observed in fiscal Q3 and fiscal Q2.

I'm going to stick to our usual policy and not provide guidance. However, I mentioned earlier that there are regional differences to consider. Our backlog is currently between 17 to 19 weeks, but it varies across different areas. Some regions have maintained their backlog well without seeing a rapid decline, while others have experienced a quicker drop and are further along in that adjustment. Specifically, Texas and the Southeast are seeing lower backlog levels, although Florida in the Southeast still has some of our longest backlog times. Overall, Texas and the Southeast are experiencing the most significant declines. We anticipate needing some days to balance production with wholesale order levels in these regions, which may lead to some market downtime, though we do not expect it to be extensive. We will not come to a complete halt. I hope this provides some context, albeit without specific numbers.

Fair enough. I'll ask one more in that genre, if you will, which is from a margin perspective, you 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 over the next quarter or 2 with all the puts and takes?

Thank you for your question. We had strong margins for the quarter. Historically, predicting gross margins is challenging, but a few factors contribute to fluctuations. Pricing is one, and the cost of materials is another significant factor. As Bill mentioned, we are noticing more obvious pressures in pricing, especially in regions like Texas and the Southeast, excluding Florida. Additionally, we are experiencing pricing pressures in other areas as well. Regarding material costs, we've previously indicated that we expect most non-commodity prices to rise. The movement in non-lumber and OSD commodities has been unpredictable. It's essential to monitor how lumber and OSD pricing evolves. Just a reminder, it typically takes a couple of months for commodity prices for lumber and OSD to fully reflect in our cost of goods.

Our next question comes from Greg Palm with Craig-Hallum.

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

Yes, that's clearly a challenging question. It's one I expected, but it remains difficult. I'm not sure I can provide any meaningful insight on that. The reason is that my attention is primarily focused on the speed of getting houses out in the field and our production rate. I think we might be looking at a few more quarters for everything to stabilize, but I certainly can't specify an exact timeframe.

Yes. That's fair. I know there's a lot of uncertainty. I mean if we think about what's going on outside of the retail channel, which seems to be where you're seeing the most impact, can you just give us maybe a little bit better sense on what 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 we tend to focus on our main concerns, and communities are a real positive here. I mentioned this in my opening comments. Communities are still strong and have the capital to invest in their essential asset, the land. They are less affected by fluctuations in mortgage rates, and we have observed that communities are consistently planning for significant growth. This represents a true strength for the industry right now, with no signs of negativity. Additionally, communities are open to purchasing homes for rental purposes, which helps to make those assets work, especially for those who cannot afford to buy a home at this time. Overall, this is again a source of strength.

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

It's pretty consistent over time. It's about 30% to communities. Now if they're going to grow in the near term more quickly, that might shift up or would shift up a bit. But over time, we're pretty consistent with the industry, and I think that's a fair estimate for the industry, 30% to 1/3, right in that range.

Okay. And then on financing, obviously, good to see that the availability hasn't changed all that much. Can you comment 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, absolutely. We're not going to say that we're unaffected by the impact of interest rates on short-term demand. The significant shock has been the rapid increase in rates. If you look at this over time, the current rates are not particularly high in a historical context, but it's the adjustments people are making that are important, especially given the high home prices. This has led to a pause as people reassess what they can afford. Currently, the rates for manufactured housing land home through the GSEs are about 9.5%, which factors in points, fees, and costs, making it effectively around 1% higher than traditional land home non-manufactured housing loans. Interestingly, right now, non-GSE rates for land home sold to investors, credit unions, and banks are slightly lower than GSE rates, which is unexpected. Typically, we would expect a premium for non-GSE loans, which means these loans are favored and slightly below 9.5%. To round it off, home-only rates are around 9%. It's important to note that home-only rates don't closely correlate with land-home rates, as they operate in their own market and usually remain more stable compared to the constantly fluctuating mortgage rates. Did I cover everything, Greg?

Our next question comes from Jay McCanless with Wedbush.

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 figure you guys put up this quarter? Or does it look higher actually because you're taking some lower-cost markets out of the mix?

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

I wasn't sure if there would be a significant difference, particularly since Commodore might be offering a slightly higher-priced product. I wasn't sure if there would be a notable change in the price mix compared to three or six months ago when there were more homes sold in the Texas market or Southeast excluding Florida, but it seems that there isn't.

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. Yes, that's what I was trying to discuss. You have 19 weeks of backlog, which is essentially about 1.5 quarters of units waiting to be shipped, not considering Solitaire yet. Considering your average plant and the current state of orders, could you provide insight on what percentage of orders might be down compared to last year? This information would help us understand the potential order declines we should anticipate once you clear through this backlog and return to a normal 4- to 8-week backlog.

I'm not sure I have a quick answer for you. One thing that is often overlooked in our discussion of market dynamics is that orders are still being placed. Since the pandemic began, we frequently compare our current situation to 2019, which was before the pandemic and represented a relatively balanced year for the industry. We seem to be returning to that type of balance, although not necessarily in aggregate order rates. Seasonality is starting to come back, so the month-to-month changes are beginning to align with our expectations from a seasonal standpoint. I realize it's a tough question to generalize, but we don't anticipate orders dropping to the point where our backlog disappears in the near term. We remain confident in the pace of order placements and the underlying demand for the product. I know I'm not providing the specific numbers you're looking for, but I'm trying to find the best way to convey this.

No. I mean everyone is trying to understand right now, whether you're building with sticks or manufacturing, how orders are going to turn out, especially with Zillow indicating that real estate activity may decline by 25% to 35% in the fourth quarter. I'm just trying to share that perspective with you and the rest of the industry. So the next question I had --

I don't see that kind of an impact here. When they're discussing this, another factor in the general home market is that people who have refinanced at a 3% rate cannot afford to move. This leads to resale activity being quite different from the need for new homes due to undersupply in the market. I don't see anything of that level, especially for manufactured housing, for the reasons I mentioned earlier. I believe we provide a solution during these times. We have had some plants take a day off here and there this last quarter to maintain balance in our backlog. However, I am quite confident in the ongoing demand for our homes in the near future. People are still actively looking for homes.

Got it. So your – one of your public competitors earlier this week talked about the lack of floor plan availability, and I know that you guys have floor plan, at least for the – for your own locations. But is there an opportunity maybe near term to do a little bit of floor plan lending to some of the independents and help out for some people who might need – 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 the credit risk of dealers being a negative at all right now. They’re still running a good business with good flow. So we review them on an individual basis. We’re not necessarily tightening up in general. We’re just kind of looking at their situation. And in some cases, over the last couple of years as prices of homes have gone up, we’ve extended more credit. So I think that floor plan market per se, if you’re an independent dealer is still there for you.

Right. 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 didn’t know if that was an opportunity for you – for Cavco to expand the dollars that they’re putting into the market.

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

Okay. And then just what are you seeing in terms of set crews? And is that getting any better in the field? Or is that still a pretty big bottleneck in terms of getting homes sold and out of the plant?

Yes, it’s still a challenge. I think that’s kind of an ongoing challenge. And even if you put all these short-term dynamics aside, the industry is shipping more homes than it was. So there’s more of a load on the under-resourced set of crews that are out there. So in regions – 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, then they’d be taking more homes on. So it really – the degree to which set up is a challenge is going to differentiate by region. If it’s a region where volumes are coming off a little bit, then it’s not going to be a bottleneck, but in some regions, it remains one. Overall, through time, I think it’s an issue for the industry to not have set up via constraint when people are buying a lot of homes. I guess I’d say it’s not the biggest problem, but it’s still something that people are bumping into.

Our next question comes from Daniel Moore with CJS Securities.

Just wanted to ask a little bit more about Solitaire. The types of homes they're building, how do the ASPs compare to yours? And then in terms of manufacturing or operating synergies, the ability to streamline production across the 2 manufacturing footprints.

Yes. Thank you for the question. We're quite enthusiastic about this. I mentioned that they contribute around 10% to our overall system. To recap, they operate a production facility in Deming, New Mexico, which specializes in multi-section homes, and they have a cross-border facility in Ojinaga, Mexico, right across from Presidio, Texas, focusing on single-section homes. They have also recently reopened their facility in Dunkin, Oklahoma, which again targets multi-section homes. The average selling prices do not seem significantly different. Their product is well-regarded for its high quality at competitive price points; they construct quality homes. From a modeling viewpoint, considering the 10% contribution, I don’t think their average selling price or gross margin is markedly different from ours. Regarding their backlog, I believe it aligns with what we're observing in those markets. They have a backlog that they're managing, and they will fit right into our operations. As for the value creation of deals, yes, we are still benefiting from our acquisition of Commodore. That serves as a great example where the exchange of best practices and skills in a deal like this genuinely adds value. I expect Solitaire will be similar; we can bring some best practices to them, and we will learn from them too. Thus, the manufacturing advantages should be beneficial, and we will gain significant value from it. One clear advantage of this deal, which I briefly mentioned, is that their 22 retail stores exclusively sell their product, which is excellent and targets a niche area that complements our offerings through our retail network. There’s a strong opportunity to introduce some of our products into their stores, expanding their product range and enhancing what our retail stores sell. Overall, combining our stores will yield considerable benefits, which is something we are very excited about, and it will create genuine value.

Helpful. Very helpful. Last for me, Allison, just maybe talk about your expectations for working capital and free cash flow generation to the extent that production does pull back here for another quarter or 2 with some of the inventory rebalancing.

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

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

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