Cavco Industries, Inc. Q3 FY2026 Earnings Call

Good day, and thank you for standing by. Welcome to the third quarter fiscal year 2026 CAPCO Industries Inc. Earnings Call Webcast. At this time, all participants on listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press Star 1-1 on your telephone. You will then hear an automated message if your hand is raised. To withdraw your question, please press Star 1-1 again. Please be advised that today's conference is being recorded. I'll invite the conference over to your first speaker today, Mark Fessler, Corporate Controller and Investor Relations. Please go ahead.

Good day, and thank you for joining us for Capco Industries' third quarter fiscal year 2026 earnings conference call. During this call, you'll be hearing from Bill Boer, President and Chief Executive Officer, Allison Aden, Executive Vice President and Chief Financial Officer and Paul Bigby, Chief Accounting Officer. Before we begin, we'd like to remind you that comments made during this conference call by management may contain forward-looking statements. Forward-looking statements include statements about our future or expected business and financial performance and are not promises or guarantees of future performance. They are expectations or assumptions about CADCO'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 CAPCO'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 CAPCO. For a discussion of material risks 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, January 30, 2026. CAPCO undertakes no obligation to revise or update any forward-looking statements, whether written or oral, to reflect events or circumstances after the date of this conference call, except as required by law. Now I'd like to turn the call over to Bill Boer, President and Chiefs Officer.

Bill? Thanks, Mark. Welcome and thank you for joining us today for our third quarter results for fiscal 2026. There are a lot of moving parts in our Q3 results, mostly due to the closing of the American Homestar deal and its impact on the quarter. Later in my comments, I'll discuss the integration activities and our solidifying view of the deal synergies. But I'd like to start by framing the discussion that Allison and Paul will fill in around the profit and EPS results. The year-over-year EPS decrease is best dissected starting from the bottom of the income statement. Our tax rate was considerably higher than a year ago, partly due to declining tax credits from the phasing out of the Energy Star program and partly due to non-deductible deal costs. Moving up the P&L to SG&A, the increase this quarter was mainly the result of bringing American HomeStar overhead costs into the company and the aforementioned one-time transaction costs. These SG&A and tax rate items represent a considerable part of the year-over-year EPS difference but not all of it so now let's get into the underlying business environment and results based on HUD shipment data industry shipments slowed in October and November those two months were down 13 percent from the calendar 2024 period we don't yet have the December data point to round out the quarter we were not immune to the overall decrease excluding the volume pickup we got from American HomeStar, our volume was down about 4% compared to last year and 6% sequentially. From an operational perspective, we took some additional down days around the holidays where it made sense, but we deliberately maintained our daily production rate or floors per day so that we could stay positioned for opportunities in the spring selling season. While we're all looking to see how orders shape up in the weeks ahead, the bias in our plants generally is to hold pace and go up from here whenever orders and backlogs allow. As part of staying poised for market opportunities, we utilized about a week of overall backlog, similar to what we did last year in the third quarter. And we finished this quarter in the four to six weeks range. Early indications are that backlogs are stable and It could increase, or if we pick up production pace, be maintained at this level heading into the spring. Last quarter, I referenced some relative slowdown in the southeast region of the country compared to other regions. I said at the time that we didn't see any systemic reason for the variation, and sure enough, the southeast stabilized and saw higher volume in Q3 versus Q2, while most all the other regions had declining shipments. Regarding channels, communities represented most of the reduced volume we experienced. Retailers remained steady quarter to quarter. A positive indicator of underlying demand continues to be average selling price, which grew sequentially despite the volume drop-off. After considering the impacts of product mix and retail integration, both of which pushed average selling price upward, single-section home prices were roughly flat and multi-section pricing was up. We have seen the trend toward multi-section homes for a while now, both in the HUD data and our results. It's difficult to pinpoint any one reason. However, it seems fair to conclude that affordability at the lowest price levels is increasingly strained. In other words, households that are seeking to become homeowners of the lowest priced homes seem to be increasingly priced out, or they're lacking the confidence to purchase in this environment. Sequentially, our gross margin dropped in the quarter despite the average selling price increase. While usually the primary factors driving movement in factory-built gross margin are manufacturing costs, those period-to-period changes roughly netted out. We saw some compression between retail and wholesale prices in our retail operations, which drove the bulk of our gross margin decrease. And to be clear, those retail comments are based on our pre-Homestar network, not due to the addition of the acquired operations. And it's worth noting that our retail operations remain primarily centered in the South Central region. We don't believe that price compression is either an indication of the broader market or that it represents a meaningful shift over time. I know the focus is rightly looking forward and trying to figure out where the industry will go from here in the coming quarters while the uncertainty remains the tone we're picking up in both our operations and in the market is optimistic the leading indicators such as quotes and retail traffic remain healthy notably policy discussions are increasingly focused on affordable housing and specifically on increasing supply of first-time for first-time buyers affordable housing is one of the highest voter priorities heading into the November election, and policies to increase supply, remove barriers, enable innovation, and help buyers are all supportive of factory-built housing. It will be interesting to see the proposals shape up in the coming months. It's important to comment on financial services, where the trend continued with another strong quarter, driven by our insurance operations. Our lending operations have been less of a contributor in recent periods. However, we've been making progress identifying buyers of our loans and I expect the originations and loan sales to pick up in the coming quarters. Both of these operations are important strategic contributors to the integrated value of CAVCO and our ability to provide complete solutions for our home buyers. Now I'd like to take a few minutes to talk about the American HomeStar integration. First, we had a solid integration plan heading into the combination and both organizations have come together, really hitting the ground running as one company. We're right on that plan with impressive execution from HR benefits and payroll to finance, IT, and operations. Now that we've been together for over a quarter, our view of synergies is starting to firm up. What I'd like to share today is our view of the most tangible cost reduction synergies. We spoke previously about this deal offering meaningful purchasing, labor, and SG&A cost savings. Our total view of these tangible and measurable synergies is now above $10 million on an annual basis, and we estimate that about half has been achieved in the run rate as we entered Q4. The positive impact didn't show itself in Q3 because the gains were achieved as the quarter progressed, and they were offset by integration costs that will decline going forward. I thought it important to provide this information at a time when we're well into our integration work and can provide a more informed view. It's good news that the current picture is significantly higher than our pre-deal internal estimates. Additionally, there are a number of areas where precise quantification is difficult, but where we know value is being created. Areas like the ability to optimize product within and across plants as the system grows and the ability to fill out company store offerings with Capco product from various plants are examples of the very real ways in which the strategic benefits of a combination like this show. Again, these are very real synergies and are not included in the tangible cost savings I laid out. And finally, we continued our share repurchases during the quarter with another $44 million used to buy back company stock. with this return of capital and the significant use of cash for the acquisition in the quarter our unrestricted cash balance at the end of q3 was a healthy 225 million dollars now i'll turn it over to allison to give more details on the financial results thank you bill net revenue for the third fiscal quarter of 2026 was 581 million up 59 million or 11.3% from $522 million in the prior quarter.

Sequentially, net revenues increased $24.5 million, driven by the addition of American HomeStar, which contributed $42 million and an increase in average revenue per home sold, partially offset by a reduction in base business units sold. Within the factory billed housing segment, net revenue was $558.5 million, up $57.6 million or 11.5% from $500.9 million in the prior year quarter. The increase was primarily due to the addition of American HomeStar and an increase in base business average revenue per home sold, partially offset by a decrease in the number of base business homes sold. The increase in Bayes business average revenue per home was largely due to a higher proportion of homes sold through our company-owned stores, more multi-wise in the mix, along with product pricing increases. Financial services segment net revenue was $22.5 million, up $1.3 million, or 6.2%, from $21.2 million in the prior year quarter and sequentially up $1.1 million. These increases were due to the addition of American Home Star Financial Services and higher insurance premium rates, partially offset by fewer loan sales and fewer insurance policies in force. In the third fiscal quarter, consolidated gross margin as a percentage of net revenue was 23.4%, down from 24.9% in the same period last year. In the factory-built housing segment, gross profit was 21.7% in the third quarter, down from 23.6% in the prior year quarter. The reduction was broadly due to higher per unit costs. Financial services gross margin as a percentage of revenue increased to 65.2%. in the third quarter for 55.5 percent in the prior year quarter. This increase is primarily due to lower weather-related claims, the growing impact of rate increases, and underwriting changes on policies. Selling, general, and administrative expenses in the third quarter were 81.4 million or 14 percent of net revenue compared to 66 million or 12.6 percent of net revenue during the same quarter last year. Expenses rose primarily due to the addition of American HomeStar which contributed 6.9 million in operating costs and 2.9 million in deal related expenses along with higher year-over-year compensation. The American HomeStar operating costs are expected to decline as we realized projected synergies. Interest income for the third quarter was $3 million, down from 5.4 million in the prior year quarter, primarily due to lower cash balances after the purchase of American HomeStar at the beginning of the quarter. Pre-tax profit was down 16.9% this quarter to 57.6 million from 69.3 million for the prior year period. The effective income tax rate was 23.5% for the third fiscal quarter, compared to 18.6% in the same period in the prior year. This increase was driven primarily by a reduction in tax credits and non-deductibility of certain American Homes SAR deal costs. Net income was $44.1 million, compared to net income of $56.5 million in the same quarter of the prior year, and diluted earnings per share this quarter was $5.58 versus $6.90 in last year's third quarter. Before we discuss the balance sheet, I'd like to take a minute to talk further about capital allocation. During the quarter, we repurchased just over 44 million of common shares under our board-authorized share repurchase program, leaving approximately $98 million under authorization for further repurchases. Additionally, we've closed our acquisition of American Homestar. Our capital deployment will continue to align with our strategic priorities, which include enhancing our plant facilities, pursuing additional acquisitions, and consistently assessing opportunities within our lending operations. Shared VIVACs will then serve as a mechanism to responsibly manage our balance sheet after considering these initiatives. Now I'll turn it over to Paul to discuss the balance sheet.

Thank you, Allison. In the quarter, we had a decrease in cash and restricted cash of $157.5 million, bringing our balance to $242.5 million. Cash provided by operating activities was 66.1 million. Cash used in investing activities was 179.7 million, primarily related to the American HomeStar acquisition. And cash used in financing activities was 43.9 million, primarily due to share repurchases. As you would expect when we compare the December 27, 2025 balance sheet to March 29, 2025, several of the balances increased from the addition of American Home Star, including inventories, notes receivable, property, plant, and equipment, goodwill and intangibles, accrued liabilities, and deferred income taxes. Based business, accrued expenses, and other current liabilities increased from higher volume rebates and warranty accruals. And finally, treasury stock increased due to stock buybacks executed in the period. For this, I'll turn it back to Bill for closing remarks.

Thanks, Paul. Before I turn it over to questions, I'd like to briefly comment on our continuing brand and market strategy progress. I know everyone's focused on the numbers this call, but I think this is really important, and it reflects a long-term strategy that's been unfolding really nicely for us. Over a long period, you've heard me talk initially about a redesign of our digital marketing infrastructure. We then rolled out dramatically improved websites, not only for our operations, but microsites for our retail partners. Last year, we talked about rebranding 19 manufacturing brands to one under the CAFCO name. And most recently at the Louisville show just a couple weeks ago, we unveiled our product line framework that organizes every home made across our system under defined lines that we can then market locally and nationally. This is a huge milestone in a long-term strategy aimed at helping a potential home buyer more easily find their best-fit Cavco home and helping our retail partners with more and better leads. A lot of very impressive teamwork continues to be exhibited to transform our go-to-market strategy all the way from concept to customer conversations across the system. And, you know, I believe we're really well positioned to be a great partner for retailers and to get more deserving families into quality homes. So I imagine there may be a couple questions. So, Marvin, go ahead and open up the line.

Thank you. At this time, we'll conduct a question and answer session. As a reminder to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by or compile the Q&A roster. And our first question comes from the line of Daniel Moore of CJS Securities. Your line is now open.

Bill, Allison, Paul, good morning or good afternoon. Good morning to you, but thanks for taking the questions. Let me start with utilization. It obviously ticked a little bit lower than I think some people expected. Last quarter, you talked about keeping production steady overall. Where did you see maybe some pockets of weakness that caused you to pull back a little bit or take some more, you know, days of downtime? And I guess probably more importantly, how should we think about production as you see the world in Q4 relative to Q3?

Yeah, it was interesting. I mean, October and November were kind of the downtick. And like I said, for the industry, it was pretty sizable. As I commented in my opening remarks, we talked quite a bit about the Southeast last time because I just wanted to point out that it was standing out relative to the other as kind of struggling or just not as much pickup there as in other regions. That really reversed. And to be honest, Dan, I could kind of tick through them, but the Southeast was the strongest quarter as far as holding volume and gaining a little bit this quarter. And as you can imagine, I mean, there's really talk about seasonality. I think the drop-off in October, November was more than you would expect from seasonality, but everything across the north is going to slow a bit going into that quarter. But yeah, you picked up. I'm trying to make it clear to folks that increasing production in a plant is tougher than pulling back production because you've got to have the teams in place. You've got to have a level of training. And so our tactical decision, very similar to what we talked last year, even when you expect the third quarter to possibly be a little bit slower. We, at our plants, really held production rate. We held our staffing. We held production rate. And where we had to, which wasn't across the whole system, in fact, while logs were just too lean, those plants just took a little extra time at the holidays and down days. And that's how we balanced the market. If we had done it the other way, we would have probably not been as well positioned now for the possibility of a nice increase in the spring season. So, you know, that's how we try to position ourselves. We don't, maybe frustrating to some people on the calls, but we don't do a lot of predicting and forecasting. We do a lot of making sure we're able to adjust accordingly upward and downward when necessary. And our plants right now, because we maintain that production rate, are just in a really nice spot to be able to continue moving up if we get the spring selling season we're hoping and expecting. I think people might get tired of us saying it this time of year, but when you're at the Louisville show and when you're talking to our plants and operating reviews and when you're talking to customers, there is not a feeling of gloom. People are generally optimistic and we'll see how it develops. We started off the quarter. I'm jumping behind your question, Dan, and I'll apologize if I'm going too far. That's great. Thank you. Yeah, we, as everyone knows, the weather here in the beginning of the calendar year has been a bit challenging, and so that's, you know, likely to show is in January as straining some traffic and also delaying some shipments and setting of homes. But the way I think about that is it's early in the quarter and those sales don't go away. So our plants, even ones that had to miss some time due to the recent weather, we've got a number of plants, not a small number of plants that are running this Saturday because they want to keep up. And so that's a good indication of their optimism going into the spring.

Very helpful. I'm going to maybe just pull on that string a little bit more and go back to the comments you made in the prepared remarks, which is, you know, we're in position, I think, if I heard correctly, to hold, in general, hold production here with backlogs potentially taking higher, you know, unless we decide to increase production, you know, in which case they might stay flat. So, you know, net-net, it feels like, you know, flattish sequentially and maybe a little upside to that is where you're seeing the world for fiscal Q4, but tell me if that's wrong.

Yeah, you caught me. I slid in a little bit of an update there, mid-quarter update, right? Because what I was trying to convey, and I didn't mean to be too subtle about it, what I was trying to convey is that as we sit here today, we're pretty comfortable that our backlogs are holding. And if we get the uptick, you're almost inevitably going to get an uptick from the spring selling season. But we'll have kind of complete control and choice about whether to increase production rate and let the backlog kind of sit where it is or let the backlog move up a little bit for us. And, you know, four to six weeks is not a bad place to be if you feel like it's stable. So, yeah, that's a little bit of a mid-course update on the first quarter that, you know, we're not feeling like that backlog is falling out from under us.

Really helpful. Shifting to gross margins, factory-built gross margins, you mentioned higher per unit costs. Wondering, Allison, if we can just tease that out a little bit. I mean, the questions I'd have is, is there any lingering impact in acquisition accounting, and how do we think about the impact of kind of lower utilization versus, you know, mix and poor?

Yeah, thanks for that. On a year-to-year basis, I think is what we'll just kind of reflect on. There was no – consistent with what we foreshadowed last quarter in our statement, there really was no impact to gross margins from the acquisition. And when we think about margins year over year, they were down due to increases in input costs. And just in summary, prices were stable and they were resilient, even less so in forward markets. And it really speaks to, you know, kind of a consistent underlying demand. But the reality was that prices did not increase enough to offset the input cost. You know, this is a little unusual, particularly when we reflect on the retail side, but we don't see that as a systematic change.

And as you mentioned, the retail margin was a little lighter, and I assume that flowed through there as well.

That's correct.

Okay.

Yeah, that was like a little bit of, you know, we haven't seen that historically. And while we wanted to call it out to help explain where we saw some of the downward impact on gross margin, at the same time I'm going to encourage people to listen when we say that, you know, our retail operations still are, even as we've expanded them, They still are largely concentrated in Texas and surrounding states in the South Central. And so, you know, I just wouldn't want people to project that retail margins across the country for independence or the industry in general necessarily solve the same thing. It was one quarter where they kind of compressed, you know, their cost of buying a home and then their cost of selling it. But it's localized, and we also don't think in Texas we're reading a whole lot into it at this point. But it was a factor that was more significant than we've seen in the past on gross margin.

Helpful. In terms of mix, is retail slightly lower margin than producing homes, or is it not necessarily the case?

Typically, we don't see that as the case.

Last for me, we'll jump out. Deal-related costs, I think you said $2.9 million. in, are those largely behind you, and can you quantify at all the impact of integration plan spend in the quarter and what that kind of looks like in fiscal Q4 and beyond?

Yeah, the deal cost would have concluded in the third quarter when the deal was closed. And when we think about integration costs, we also, as Bill mentioned, absorbed a good bit of integration cost this quarter, which kind of, you know, tends to mute the uptick that we saw from early synergies. I would say that both as the synergies begin to take hold and we see an uptick there, we'll also see the integration cost continue to decrease slightly as we go forward.

It felt like an investment quarter to kind of get us positioned with American Home Star. I mean, some of those deal-related costs are things that, you know, things like advisor fees that are contingent on success of the deal that can't be capitalized. So a lot of those, obviously, they're paid and they're behind us. So, you know, this quarter kind of got all the negatives out of the way on that. And I think going forward, we'll see the positive synergies really come to the front. Fantastic.

Thank you. One moment for our next question.

Our next question comes from the line of Greg Palm of Greg Hallam. Your line is now open.

Yeah. Hi, thanks. I guess just digging in a little bit more about activity by channel. Phil, I think you mentioned that, you know, you saw maybe relative weakness or underperformance. I forget the term you used in communities versus retail. So can you talk a little bit about what you're seeing from some of the REITs in the community in general and as a whole?

Yeah, no, you heard me right. I mean, when we look at the volume decrease that we saw, which, you know, well, I'll just stop there. When we look at the volume decrease we saw, it was pretty focused on the community side. And we went back and looked over quarters, and I will tell you that communities can be pretty volatile, right? You can look quarter to quarter, and what we're looking at actually is our revenue by channel. That can move up and down quarter to quarter, sometimes without explanation. As we come to the end of the year, I think there could be a lot of reasons for it. Things like, you know, they have allocations to various suppliers. We did pretty well earlier in the year. It could be a little bit of evening out there. Even their capital management as they come to the end of their calendar year, I think, can play into our third quarter being down at times. What I haven't heard and did kind of go out to try to listen and see if it was a factor, I'm still not hearing communities with pessimism or a feeling that if they set another house, they won't be able to find either a buyer or a renter for that house. They're not concerned about the end consumer, and they're not – you know, we talk – sales to communities to larger REITs really occur at different levels. We talk at higher levels about their overall plans for the coming year and years at times, and then the actual sales happening actually on a plant-by-plant basis. At those higher-level discussions, I'm not hearing any bearish tone about slowing down their plans for the coming year or years. So it's an observation that communities were probably the biggest part of the weakness in sales this quarter. And I feel like I say this to you guys on a lot of things. I want to call it out. It's something we're watching, but I don't know that we should call it a trend at this point.

Yeah, I understand. Good. And are you able to, I know you mentioned October, November a few times, but are you able to comment on kind of what you saw in December, just from the standpoint that I think you sort of hinted that October was maybe trending a little bit better and so on, but at the same point, you mentioned or alluded to that really bad production data. So I'm just trying to figure out kind of how December went and what, how sort of the cadence of activities played throughout the quarter.

Yeah, my comments about October, November were only called out because that's the industry data that's available. I wasn't trying to not talk about what happened internally in December. So, as you know, I mean, we're all still waiting for the December shipments data. But I'm doing this off the top of my head. I think, you know, through the year, through the calendar year, we saw seasonally adjusted rates of shipments. In the early part of the year, it was pretty strong, up 106-ish, 106,000 or so. October, I think it dropped to – I'm just pulling up the data – to 96,000 seasonally adjusted rate. In November, it dropped to 93. So those were significant moves down, no denying it. And we just wish we had the data before this call to report on the industry data in December. The shape, I would say, because we have told you guys in some quarters the shape of how the quarter shaped out. I would actually tell you that this was lower October through December. And I don't feel like the market, even though that November seasonly adjusted rate for the industry was down compared to October, I don't know that internally we felt like we were on a steep downward slope during the quarter. It was a holiday quarter. All right, so you always have to figure that in, but it didn't feel like things were falling apart incrementally month to month.

Yep.

So, thank you. Yeah. No, that's helpful.

And on the gross margins, you talked about, you know, what a little bit of compression at retail. And I'm just wondering, was this a some sort of company specific strategy? Because you said it was not an industry thing. It kind of sounded like it was more, I don't know, certain geographies within your footprint. But I just wanted to better understand exactly what you meant.

Yeah, I don't know if I can capably comment on other people. So I can't tell you whether that same dynamic was at play for others. Yeah, I'll tell you, I mean, just to be very frank about it, our volume in retail was pretty strong compared to the market they're operating in. And I still, sometimes I talk about our retail as if it's still just Texas and that area. It's broader than that now, but a lot of our retail results are still driven by Texas. So we saw a quarter where our volume was strong relative to what we were seeing in the market, and we had that compression. So we're going to be looking at it and trying to figure out if we were under the market, to be frank. But I think it's that kind of a tactical discussion. It's something that I think from everything we can tell is isolated, and we'll jump on it and figure it out.

And just to be clear, there were no, you know, purchase accounting, you know, inventory step up impacts in gross margin in the quarter. And is there a meaningful difference in Homestar gross margins versus Capco?

So no, there was no real impact on the consolidated gross margins, gross profit due to any purchase accounting associated with the acquisition, as we had experience in previous acquisitions. I think that's consistent with comments that we also shared last quarter. So, you know, in general, as we've mentioned, when we look at the acquisition, their margins tend to be broadly in line with Capcom margins.

That's at both retail and manufacturing.

Yes, within the company.

The other thing we've commented on last time people had asked questions about it was, you know, they're more integrated on average. They were about 60% selling their homes through their stores versus previous Cavco was in probably a 22% range. So while they're small relative to the rest of the system, just directionally, that means that, you know, those integrated sales are upward pushing on the gross margin. So if anything, you know, we have a little bit of an upward push from I'm bringing American Home Store into the company.

Yep. And by the way, this last one on that, do you have a metric for – or an updated metric on the home sold through company-owned stores, both as a – what it was in the quarter, including Home Star, and maybe, I don't know if you have it on a like-for-like or same-store basis, if you exclude that impact since they sell a lot more through company-owned than you.

Yeah, Greg. Like American Homestar was 343 homes. Total. Total, yeah. Not just through retail. Not just through retail, right. So this quarter, our company-owned store was 1,339. And the prior year quarter is 1,075. So it's up 25%.

And that would be, I think, consolidated with American-owned store. Okay.

I'll run the math and maybe follow up offline.

Thank you.

Thank you. One moment for our next question. Our next question is from the line of Jesse Letterman of Thelman Associates. Your line is out open.

Hey, thanks for taking my questions, and I appreciate all the callers thus far. I wanted to dig in a little bit more on kind of the cadence through the quarter, maybe into the beginning of the year here. appreciating you don't have national industry shipments yet for December, you know, are you able to comment on, you know, internally maybe your progress, how things might feel if you're not willing to share specific numbers going from November to December and then December to January and maybe your outlook for the spring selling season?

Yeah, you know, December, if everything's equal December is going to be a holiday month and everything is going to slow down right so if you think about it on a seasonally adjusted average rate which I find helpful just and let's just think conceptually on that basis of was December a drop-off considering that it's always going to be a relatively slow month rate I don't think December felt like it was a drop-off from November just as far as looking at our data and kind of the tone of what was going on in the industry. So I don't know if that's helpful because I can't be real quantified lacking the industry data. But, you know, if I had to guess what the industry data is going to come in saying for December, it's probably going to be similar seasonally adjusted rate to November, and we'll see if I'm right. But it didn't feel like it was slowing down. I guess you're also asking for the, you know, a sense of how we're doing so far this quarter. The one thing that we have talked about already in this call is that we're pretty comfortable that backlogs aren't dropping off for us. So that's a positive. And the thing that makes it really hard to give an update, even to the extent we're willing to share, Jesse, is that, man, the weather. I mean, we're just a few weeks in, and that storm really is going to kind of shake things up for the month. but it'll be muted by the time we get to the end of the quarter is my expectation. So I wouldn't expect people to overly react to that comment about the January weather when you're thinking about what Q4 might look like because, again, those sales don't go away and our plants are already actually running Saturdays and doing things like that to make up for that lost time. So over time, you know, that just moves activity from one week or one month to another, not something that we're really concerned about. So I apologize if that's not as complete as you'd like, Jesse, but that's kind of my reaction to the question. No, that's really helpful.

I appreciate the comments there. When you say backlogs aren't dropping off, it seems they've kind of stabilized in the near term. Is that at a similar utilization that you ended the quarter with, or have you slowed things maybe just a touch, you know, quarter to date, maybe given the weather, given some other trends you've seen?

No, we haven't slowed things. I mean, think about our production rate in two pieces, right? It's how much we make a day across the whole system and then how many days we operate. We have not slowed. We didn't slow in the third quarter as far as production rate. and we haven't slowed you know i'm giving you the update but we haven't slowed here early january however we have lost operating days due to the storm and that's where i said we're doing things to try to recapture that time so we're not you know we're not in the mode at this point of feeling like we gotta pull back our daily production rate in the plants and instead we're trying to make sure we hold it and we're ready to go up okay that's great to hear what is your sense from conversations maybe at the Louisville show or from communities or other dealers that's driving some of the optimism for the spring selling season that makes you think

that you could, you know, see an increase in backlog or perhaps an increase in capacity utilization? Are there any early indicators that you're hearing or you're seeing or you're looking for that give you that confidence?

Yeah, well, the tone is a show, and I actually wasn't able to go, but I'll tell you, I talked a lot with people that did go because it's always a great interest, and our team was actually pretty jacked up about the show, frankly, which made me feel really good. They were happy with how we showed up, but they were also happy with the discussions they had with our customers, the dealers in the communities about their prospects for the new year. And I think we all look at similar things. You know, traffic, I look at quotes, which I think is a bit of a directional long lead indicator. If we see quote activity drop off, then that makes me think about what are our orders going to be like in a month or two. We have not seen them drop off. They've been actually pretty healthy. So, you know, I think everybody kind of hits the Louisville show, you know, excited about what spring could offer, so that's just the nature of our attitudes and our mindsets, but then, you know, the more tangible measures around traffic and quotes and activity like that still seems to be pretty strong, so that's what we're reading at this point, and we're real anxious. We get to this point in the year. It's always interesting when we have our conference call because it's a little early, even for us to have a feel for how early spring is shaping up, right? We're not there yet, but we get pretty anxious this time of year to look at even weekly sales activity because it gives us an early indication of the spring. We're just not there yet.

Got it. Okay. Two more for me. One is from inventory level perspective, is there any evidence maybe across your captive retail that you're aware of that there's any evidence of de-stocking that could pressure near-term orders even if end demand is recovering a bit?

You're saying de-stocking or are you worried about overstocking?

Overstocking, sorry.

Yeah, yeah. No, I actually think that, you know, from the time when we had that big problem now feels like at least a year and a half, two years ago, people have been pretty disciplined. I don't stocking up. And there's a reason for that. I mean, let's think about just the dealers, right? They can order a home and because backlogs are where they're at, it's not a long wait to get that home. So they're not jumping back in line with multiple orders because they're worried about the pace at which they can receive a home. So that causes them to really stick very close to whatever their individual store target inventory is. So I really don't think we've seen any build up there.

Okay, that makes a lot of sense. And the last one for me is a little bit more high level, given you have, you know, great exposure in Texas, particularly boltering that with the American Homestar acquisition. We're aware of some legislation that's been passed that's set to be effective in the middle of 2026, just statewide to level the playing field a little bit more, at least as it pertains to zoning for manufactured homes relative to single family homes. I'm quite frankly surprised we haven't heard much about that or even other statewide legislation reform over the last few years. What are your thoughts on that? Why maybe have we not heard of it? Is there optimism surrounding it? Any clarity there would be great.

Yeah, I read your note on that, and you also cited Kentucky, which is a big market, and Kentucky's changes are a little bit more sweeping, possibly more impactful on a local basis. So I don't know why we haven't heard more about it. I thought it was good that you covered it. I think maybe people just aren't keeping tabs on what's going on in those legislatures, but it's a great example of that slow progress, but definitely progress that the industry is going to make over time about zoning. Having states actually put legislation in place to either encourage or actually push local municipalities to open up a little bit to these solutions is a great development. So I think we should be excited about it. I don't know if the next obvious question is how big of an impact do we think it's going I don't have that for you, but man, it's something that we should be looking at and you put a spotlight on it. Awesome. Thanks so much, Bill.

Appreciate it, as always.

Thank you. One moment for our next question. Again, as a reminder to ask a question, you will need to press star 11 on your telephone. Our next question comes on the line of Daniel Moore of CJS Securities. Your line is now open.

Thanks, again. Just a couple more. You covered a lot of ground. but maybe any color on sort of bucketing the the updated and upgraded synergy targets I think you said 10 million how do we kind of think about the you know where those are coming from and you mentioned roughly half uh action or you know we should see starting in in the march quarter how do you think about the cadence there going forward as well.

Do you want that one?

Go ahead.

I'll go for it. So we talked, Bill talked about leading on an annualized rate of 5 million into the quarter and ultimately being at like a $10 million level, right, which would be about 2.5 a quarter. So as we think about the next quarter ahead of us, if we've exited at the third quarter at Code 5 on an annualized basis and puts us at perhaps like a 1.25 million positive uplift to profitability in Q4. If you think about it, the areas that we've talked about as far as where the synergies would hit on the geography of the P&L, when we first talked about the acquisition so consistent and today is we look to have purchasing savings and optimization. We also look to have direct labor savings at the college level. And certainly through the course of time, we've proven that we're very effective and efficient in driving synergies through our shared services, which is our SG&A area.

So those would be broadly the buckets that we would quantify the 10 million. perfect um on the asp front you know jumped to 107 000 during the quarter how do we think you know how much of that is is mix from american home star um which obviously includes a higher percentage of homes through you know captive retail um and is that a number that we think is sustainable as we move forward here yeah dan this is mark so it increased a little bit as due of the high, you know, proportion of homes sold through company-owned stores, but it was about $1,000 increase of the sequential increase that you saw.

Due to American Home Star. Due to American Home Star, yeah.

Kind of had a lot of things, you know, we talk about all these variables that make our average selling price so hard to dissect. This was a period where a lot of things were kind of pushing it upward. American Home Star pushing it upward mostly because of their integration with between manufacturing and retail. I know I'm using integration in different ways on this call. The shift overall, even in our previous business toward retail a little bit, we had that going on. Definitely a product mix shift moved toward multi, which we've seen for a number of quarters. And then I think I commented about the, what we think is the best proxy for what is a given product selling for now versus a previous period, that was up a bit. So, this was a quarter where everything was kind of pushing the price up.

Got it. We talked a lot about the, you know, the fact that the factory built gross margin in Q3, kind of any thoughts about, you know, factory built gross margins looking at Q4 and how we should expect relative to Q3 over the next quarter or two?

But I think Allison commented that I think on the commodities, if you just look at them, there's some movement up. I mean, lumber's starting to move. Some steel increases have been announced, and we'll see how they flow through.

So, Allison, you might have more color, but I think directionally there is going to be some cost of goods. their bill of materials focus on building materials there's going to be some materials movement right yeah I mean and to build on a little bit you know we haven't touched on it yet but let's introduce it here right we know that tariffs are having an upward impact on our cause it is getting really difficult to precisely estimate the impact but you know if we think of it as a discord our best estimate overall that cause was impacted by about three million this quarter and you know the reason for the challenge of really being able to project that going forward which to your point would fall with the manufacturing the challenges that just simply put the suppliers ability to pass through tariffs it's also partially a function of the level of demand for the products thanks so for example if the demand for lumber or steel starts to heat up we're likely to see the full impact of tears so that's sort of this that's the area that we'd be on watch watching for as far as pressure on the margins helpful last one the tax rate I appreciate you kind of delineating some of those pressures this past quarter what do we think about you know where that should settle out in fiscal Q4 and and how much is transitory how much is kind of permanent yeah no thanks for the question I think it's high level it's reasonable to use the Q3 rate of 23.5 that we experienced in Q3 and then subtract out of that the non-recurring item of about 1% which hit the tax rate or increased the tax rate and that was really due to the non-deductibility of the American Home Start Deal cost so that won't reoccur in Q4 or so, you take that 23.5% down by 1%.

All right. That's it for my follow-up. Thank you again. Thanks, Dan.

Thank you. I'm showing no further questions at this time. I'll now turn it back to President and CEO Bill Boer for closing remarks.

Yeah, I'll be brief. We've talked a lot here in this one, but happy to have follow-up calls. We're looking forward to the coming months. I think we're positioned well to execute when the market improves. Part of that positioning is just having the ability to adjust quickly to near-term conditions, and I think we've shown our ability to do that. Over time, you know, we don't get too nervous because we know that factory-built housing is the primary solution to the housing unit shortage in the country, and that's what we're working every day to step up to that challenge. So I really do appreciate everyone's interest in joining us for the call, and we'll look forward to keeping you updated.

Thank you. thank you for your participation in today's conference this is complete the program you may not disconnect