Cavco Industries, Inc. (CVCO) Q2 2027 Earnings Call Transcript

Ladies and gentlemen, thank you for standing by. Welcome to the second quarter fiscal year 2027 CAFCO Industries Earnings Call Webcast. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session, and to ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advised and your hand is raised. And to withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would like now to turn the conference over to Mark Fusler, Corporate Controller and Investor Relations. Please go ahead.

Good day, and thank you for joining us for Capco Industries' second quarter fiscal year 2027 earnings conference call. During this call, you'll be hearing from Bill Boer, President and Chief Executive Officer, Allison Aiden, Executive Vice President and Chief Financial Officer, and myself. Before we begin, we'd like to remind you that comments made during this conference call by management may contain four looking statements. Four looking statements include statements about our expected and future business and financial performance and are not promises or guarantees of future performance. They are expectations or assumptions about CABCO'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 CAFCO'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 CAFCO. 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, October 30, 2026. CAPCO undertakes no obligation to revise or update any forward-looking statement, 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 Chief Executive Officer.

Bill? Thanks, Mark. Welcome and thank you for joining us today to review our second quarter results for fiscal 2027. In the first quarter, we reported unit shipment and revenue records, and now in the second quarter, we were able to better those records. I'll stop short of implying the market is strong. It isn't. However, this quarter orders continued to exceed our pace of We're entering the winter months and orders are slowing as they typically do. At the same time, across the system, the end-of-quarter backlog averaged a healthy 8 to 10 weeks. Overall, we're shipping more than last year. Orders are slowing but are well above last year's levels, and our backlog is 63% higher. Heading into winter, we're in good position to lean in on production where backlogs allow, knowing we can respond to changing markets as needed. And to provide some context about orders, on a same-plant basis, we were up high single digits compared to last year,

and down sequentially from a very strong Q1.

In the second quarter, we shipped a record 5,972 homes. Last quarter, revenue exceeded $600 million for the first time, and this quarter, it was up another 7.6% to $656 million. And year-over-year revenue was up about 17.9%. Our capaculization was about 75%, still well below levels we're able to sustain. So, from a longer-term perspective, there remains significant room to reach higher volumes, which I think is important given the regulatory momentum and the continuing affordable housing supply deficit. Factory-built gross margin increased 30 basis points from last quarter. This was a good outcome given ongoing materials inflation. While differential across operating areas, we saw product pricing increase enough to offset the negative margin impact of growing materials costs. And to be clear about consolidated average selling price, the overall increase was from both single-section and multi-section homes selling at higher prices, rather than driven by changes in product or distribution mix. It's important we discuss the increasing role being played by data center workforce housing in our orders, shipments, and backlogs. Data center orders and shipments increased significantly during the quarter. Like any other channel, we don't intend to specifically break out the units and orders, but I want to talk through how this dynamic impacted the quarter. First, because we had healthy backlogs going into the quarter, there was not a net meaningful impact In other words, had we not seen these workforce housing orders, we had plenty of other business and would have shipped a similar overall volume. Regarding price, these units are generally single sections and they have a higher price than typical single section homes. So, there was an upward effect on average selling price. But having said that, my earlier comments about sequential product price increases still hold true for the base residential units. Workforce housing shipments added to what would have already been an increase in product pricing. Shifting to margin, the pricing is higher on workforce housing mainly because the material cost of a unit is significantly higher. Generally, these units are built with six or seven self-contained living spaces with in-room toilets and showers. Taking all of this into account, there was no meaningful impact on our percent gross margin resulting from the workforce housing shipments. Higher price, higher cost, neutral impact on gross margin percent. The big positive of these incremental workforce housing orders is that they're adding to the backlog, thereby enabling us to lean in on production despite heading into the winter months and with continued economic uncertainty. Overall, this is a developing opportunity, and frankly, we don't have a clear view about how much this will grow, how susceptible the orders may be to delays or cancellations, or how long we'll see a meaningful level of remote data center projects. Switching gears, I want to acknowledge the contribution our financial services operations continue to make. There's not a lot to discuss here except the continuing strong performance. Overall, Pre-tax profit was up a couple percent over a very good quarter last year. Insurance had another in a string of strong quarters with low claims. We're also benefiting from reduced reinsurance costs due to both the general reinsurance market improving and our dramatic improvement in claims performance the last couple years. Country place mortgage continued to ramp up originations after securing new investors for loan purchases, which we've mentioned in previous quarters. And shifting According to capital allocation, we repurchased $30 million of company stock in the quarter. Since initiating our repurchases just over five years ago, we've returned $642 million to our shareholders through buybacks without hampering any strategic growth investment in our plants, greenfields, acquisitions, or otherwise. In Q2, we surpassed cumulative repurchases of 20% of our shares over that time, and we We finished the quarter with a healthy $272 million of unrestricted cash. Now I'll turn it over to Allison to give more details on the financial results.

Thank you, Bill. Net revenue for the second fiscal quarter of 2027 was $656.4 million, up 18 percent compared to $556.5 million during the prior year period. Sequentially, net revenues increased $46.4 million, driven by a higher unit sold and higher average revenue per home sold. Within the factory-built housing segment, net revenue was $633.5 million, up $98.6 million, or 18.4% from $535.1 million in the prior year quarter. This increase was primarily due to the addition of American HomeStar, an increase in legacy homes sold, and an increase in legacy average revenue for homes sold. The increase in legacy average revenue for home was primarily due to product pricing increases, partially offset by a lower proportion of homes sold through our company-owned stores and more single-wides in the mix. Financial services segment net revenue was $22.6 million, up $1.2 million, or 5.6 percent, from $21.4 million in the prior year quarter. This increase was due to higher loan sales in our mortgage division. Consolidated gross margin in the second fiscal quarter as a percentage of net revenue was 22.5 percent, down from 24.2 percent in the same period last year. In the factory-built housing segment, the gross profit was 21.1% in Q2 of 2027, slightly down from 22.9% in Q2 of 2026. The reduction is due to higher input costs, partially offset by increased product pricing. Financial services gross margin as a percentage of revenue increased to 60.2% in Q2 of 2027 from 55.6% in Q2 of 2026, driven primarily by improved underwriting margins. Selling, general, and administrative expenses in the second quarter of 2027 were $77.7 million, or 11.8% of net revenue, compared to $72.2 million, or 13% of net revenue, during the same quarter last year. The increase in these costs was primarily due to the addition of American HomeStar, along with increased compensation in employee benefit expense. These expense increases were partially offset by a $7 million one-time return of premiums related to additional D&O insurance that was purchased back in 2019. Interest income for the second quarter was $3.6 million, down from $5 million in the prior year quarter, resulting from lower cash balances after the purchase of American HomeStar. Pre-tax profit was up 9.1% this quarter to $73.4 million from $67.3 million for the prior year period. The effective income tax rate was 24.4% for the second fiscal quarter, compared to 22.1% in the same period of the prior year. The increase in the effective rate was primarily driven by lower tax credits compared to the prior year quarter. Net income was $55.4 million versus $52.4 million in the same quarter of the prior year, and diluted earnings per share this quarter was $17.17 compared to $6.55 in last year's second quarter. During the quarter, we repurchased $30 million of common shares under our board-authorized share repurchase program, leaving approximately $158 million under authorization for future repurchases. Now, I'll turn it over to Mark to discuss the balance sheet.

Thanks, Allison. In the quarter, we had an increase in cash and restricted cash of $31.7 million, bringing Comparing our balance to $297.9 million. Cash provided by operating activities was $96.4 million. Cash used in investing activities was $33.8 million, primarily related to plant improvements and related equipment. And cash used in financing activities was $30.9 million, primarily due to share repurchases. Comparing the September 26, 2026 balance sheet to March 28, 2026, accounts receivable increased from greater homes sold, inventories increased from raw material purchases in anticipation of increased cost, prepaid expenses and other current assets decreased from expected tax refunds, property, plant, and equipment increased from investment in the new El Mirage facility in addition to other plant improvement projects, Accrued expenses and other current liabilities increased from higher customer deposits, volume rebates, and warranty accruals on higher sales. And Treasury stock increased due to stock buybacks executed in the period. Now I'll turn it back to Bill.

Thank you, Mark. With this report, we've hit a year since joining forces with American HomeStar, and thus far that acquisition has exceeded expectations, With higher than assumed tangible synergies and rapid increases in productivity, a lot of hard work has gotten us to this point. A couple weeks ago, I was able to spend several days with the plants and stores that came to us in the acquisition, and the teamwork and focus on making the right products for the market has been tremendous. As we move into comparable periods, we won't be specifically highlighting the operations going forward, so I want to take a quick opportunity to really thank everyone involved in such a successful acquisition and integration. On another note, since our last earnings call, we showed the first off-chassis home at HUD's Innovative Housing Showcase in Washington, D.C. Earlier this week, HUD Secretary Scott Turner and U.S. Congressman Eli Crane visited our Phoenix plant to discuss CAFCO's readiness to provide innovative products that are being enabled by the Road to Housing Act. I can tell you my message was we're ready, so let's figure out how to get these things out there. But while we manage the near-term business, we're also working very Thank you.

As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. And to withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. And our first question comes from Daniel Moore with CJS Securities. Your line's open.

Good afternoon, or I should say good morning, Bill, Alice, and Mark. Appreciate all the color. Just the components of growth. You ship 15% more homes year over year in the quarter, you know, compared to HUD code shipments in the low single digits. Can you just kind of break out organic versus the contribution from American Homestar?

Yeah, we had – yeah, thanks, Dan. So, we did have the increase in our legacy brand as well, so kind of the low single digits.

Yeah, one thing it is going to be – I know there's going to be a ton of interest, as there should be, in workforce housing. One thing I'll point out to folks is that, again, we're early in this. We're trying to figure it out. We're going to try to share information as we can on the magnitude and all that. One thing that's probably going to be a little bit of a complication as people interpret the industry is that the vast majority of those units will not be HUD code. So, when you're looking at HUD code and then comparing any participants' shipments and sales, there's going to be a little disconnect due to that gap. But, you know, I'd characterize it. As I said, like, from a shipment's perspective in the quarter, and I think this is relevant to your question, Dan, we had a good backlog going into the quarter. And if we hadn't shipped, you know, workforce housing units this quarter, we would have worked on our backlog that we had in kind of the normal single family residential units. So from my perspective, looking back at the quarter, it was going to be about in that same range regardless. Does that make sense?

It absolutely does. I think you're reading my sheet of questions as it relates to the workforce housing question here, so you're jumping ahead of me. All right. I'll hold back. No, all good. All good. Taking another 10,000 feet up, it seems like, and maybe workforce housing is skewing it a little, but if you look at growth relative to certainly site-built, it seems to be diverging even more. You know, so are you seeing more, whether it's opportunities community by community, maybe more early impact of road to housing? You know, do you see that? Are we seeing evidence that we're sort of breaking away from the overall housing market, if you will?

Well, it certainly seems like in the near term, there's a divergence, and we've talked over time that while we're subject to a lot of the same macro effects and macro forces, the business models are clearly different, and the customer base is clearly different. I'd hesitate to say we're seeing the early effects of road to housing because I think it's too early. We're pushing to try to work with HUD and others to figure out how we can really put that law into action with things like, you know, the products we can make off chassis. But at this point, you know, I wouldn't attribute much of any deviation there. I've tried to keep up on the site builders as they've announced and as folks like you have had comments on their performance. It really is different. I mean, my understanding is they've had some level of spec building that now they're trying to ease back on. We don't have that in our industry. You know, our industry is kind of a pool structure where a customer has to make an order and it flows back to us and we make it. So we're not having those kinds of headwinds that I think they have. The other thing in my view, and I'm trying to think through this just like you guys are, in my view, our customers, you know, many of them are just trying to find the time when they can get approved for a loan and buy a house. And so they've been out there. We've told you for a long time that traffic has been healthy. People are out there trying to find the opportunity to buy a home. So there's quite a bit of, like, I don't know, pen up or demand that's sitting on the benches. It's waiting to come forward. And we've kind of, you know, I think we've kind of seen that come forward a little bit recently. And maybe that's different. I don't, you can be the judge. Maybe that's different than a site builder where their buyers might, especially if it's a They might have a little bit more discretion and thought about when they pull the trigger. So, you know, I don't know if I can simply explain it, but those are some thoughts about the differences between the two businesses. And, you know, I know they're struggling because they've offered incentives for quite a long time, and as much as they try to get off them, they're having difficulty doing that. A lot of those factors just aren't part of our business model, and I think we're showing a little bit more of a steady road right now because of that.

Super helpful. One or two more, I'll jump out. Just given the increase in backlog, are we thinking about holding production relatively steady, kind of going into the winter months? There's usually some seasonality, but at the same time, in the last few quarters, you've been saying, we're going to lean into this increase in orders and re-increase production. So how are you thinking about the next quarter or two here?

Yeah, it probably always drives you guys crazy because I say it's kind of plant dependent, but I will say that we have fewer and fewer plants that don't have the kind of backlog where they can consider increasing production. I mean, we're pretty healthy across our system with just a couple plants that have lean backlogs at the moment. So, yeah, the tug of war is that going into these winter months every year, you hear us say, well, we don't know what the winter is going to hold, and it's a little ways before spring selling season. So that causes, you know, our teams and our leaders to be hesitant. But as I said, one good, the big positive workforce housing is it's added to our backlog. And to your point, you know, I'm of the mindset and I think all of our leadership is of the mindset that that gives us the ability to push a little bit. And we do that with confidence because we've seen our organization know how to adjust if they have to. So, yeah, Mike, you know, our tone in the company is let's work on this backlog. Let's not let it, you know, in one scenario, you don't want it to run away from you and get big. That would be wishful thinking and hopeful. But let's not let it get big. Let's push production, even though we're heading into the winter months.

That is really helpful. Last one, maybe Allison, but just factory-built gross margin, you know, slight improvement sequentially. Obviously, raw material, general inflation is not going away. So, just expectations regarding kind of trajectory from where we were this quarter over the next baby quarter to return.

Yeah, sure. Appreciate that. In our last quarter, I think we indicated that, you know, material costs were increasing. And we said that the bigger unknown was really the extent to which the industry orders and the capacity utilization would enable, you know, price increases to offset the pricing costs. And in Q2, we, in fact, were fortunate and price increases were available. So that's how our, you know, margin was able to grow by 40 basis points. And just to kind of, you know, focus on the point on material escalation, steel, which is up almost 150%, if you will, since the beginning of the year, separate from the gross margin discussion, there's obviously availability risks that we're also managing. So as we think about Q3 and forward, you know, we're in the same position as we were last quarter. Material inflation seems more of a probability and a risk. And just on the price side, there's also areas where price we can't take increases, but it's a local-by-local event, as we've always said. And as winter months hint, we can't be sure if continued price increases will be available or if the ASP will fully offset what's likely to be continued material inflation. So, you know, as we always talk about consistently, it's a little hard to project the gross margins, and really what we stay focused on is the business model, and that's our ability to really leverage our variable costs and continue to take pricing increases where we can.

All right. I promised I'd jump out. I'll circle back to those follow-ups. Thank you. Thanks, Dan.

Thank you. And our next question will come from Greg Palm with Craig Hollum. Your line is now open.

Yeah, thanks. I am going to try to beat a dead horse here and ask a few on workforce housing, even though it doesn't sound like you want to quantify much. But I guess first, I'm curious, like what types of structures are you building for the industry and what exactly constitutes a unit?

Yeah, that's an interesting question, and I'm learning a lot real time, to be honest, but I can share what I believe to be the best understanding on that. There's really, and others might correct me on this, but here's what I know, Greg. Think about it in three buckets. One bucket is when a project's in construction, they need what's really temporary, you know, construction worker, construction office-type structures. And, you know, we provide some of those. That's probably over time, that's going to be a relatively small part of what gets built, and those structures may move to the next project, right? They're just kind of temporary. Then there's another relatively small component that is, and, you know, where we're getting opportunities really is remote data centers, right? We're not getting opportunities to build housing in cities where there are some data centers. But where it's remote, the kind of leadership team, those kind of people need housing. And those, I would tell you to think of as kind of a single-family residential unit. Looks very much like we make typically. What we're finding out is that while you hear that data center employment might be relatively low, there actually is a large need for people to maintain, clean, keep the facility updated, and that's where I think we're going to see the most sizable component of workforce housing. And the things that the units we're making come in different shapes and sizes for sure, but think of a single wide that if you look at it like head on the long side of the single wide, you see six or seven rooms that have their own bathroom facility, their own shower. But there's like six or seven lined up in a single wide. And then on site, those might be positioned with a corridor down the middle. So, that's where we're seeing a lot of the, probably the biggest component of the volume. And as I said earlier, you know, those units are not going to show up in the HUD code numbers. So, it makes it a little bit tough to track how companies are doing if this becomes a big component of overall demand. But does that give you a feel for it?

Yeah, and I guess specifically, I just want to make sure I'm understanding this right. So one single unit might have like six or seven rooms. So I guess what would the ASP on something like that be? Because I'm guessing that's way, way more than a traditional single wide.

Yeah, and there's a range about what we're seeing. I mean, we're seeing kind of generally under $100,000 wholesale, but kind of can be in the 70s to $100,000 wholesale. And that's what I tried to explain in the prepared comments, because now as I've described that, you know, seven showers, seven toilets, seven sinks, the material costs go up. That's why the pricing's up, and when you kind of net it all out, including labor and, you know, these things are running fairly well through our plants. Once you kind of get to, once your team gets a feel for how to make them, it's not really slowing us down significantly. So, when you have that higher materials cost, your gross margin effect is really not when you consolidate it with the rest of the company. It's kind of right in line.

Yep. Okay. In terms of, like, geographic, is there a certain region where you're seeing the most activity? And just, you know, overall, can you at least, you know, I know there's maybe limited visibility somewhat and things are happening on the fly, but, you know, presumably you have some sort of pipeline or contract you're working against, right?

Yeah, we've got a few different intermediaries, really. It's almost like selling through a dealer. We've got a few intermediaries, and we've seen a lot of volume in Texas area, but I wouldn't tell you that it's isolated to that. And over time, we're starting to see it spread out into other regions. So I don't think it's going to be an incredibly localized, but early on, some of the bigger projects we've been involved in has been kind of in remote areas of Texas.

Maybe just one non-workforce housing question, and then I'll hop back. But last quarter, you mentioned going back to the HUD code business, price competition. I think that was tied mostly to Texas. I don't know. Now it sounds like maybe you didn't mention that, so maybe it's lessened. But now maybe the industry is focused on this other sort of category, so maybe that lessens the risk going forward. But what are you seeing?

Tiny object syndrome, huh? You're tying back to the comments we made about retail, I believe, last quarter. Yeah, correct. Even as we talked about it, I was kind of getting shaky and nervous that people were going to really focus on it because we brought it up. We brought it up because it was a meaningful impact on our consolidated margins. We felt people needed to hear about it. But what I tried to say then is, you know, these markets are moving. And we were seeing increased wholesale pricing. And we focus on Texas in this discussion only because so much of our retail is focused there, right? That's not a statement necessarily about Texas. But we're seeing wholesale prices continue to rise in Texas. And we were seeing on the retail side, a lot of competition for the buyers that were out there. So their pricing wasn't going up commensurate with that. And I tried to frame that as, you know, I think this, we're explaining it, we think you need to know about it, but we also think this is a market in transition, a moment in time. If we fast forward to what happened this quarter, I think we've got some positive indications that it was a moment in time. However, like, what we've continued to see is the wholesale pricing is going up to our retailers. And for everybody's knowledge, when we sell an internal manufactured home from one of our plants to our retail, we do it on a market basis, an arm's length basis. So I think it really reflects what's going on in the market. So their invoice cost of that purchased home into retail has been rising. But we saw this quarter the retail price start to go up as well. And net-net, the margin was still kind of in the same ballpark in retail it was previously. But the fact that the prices are starting to move up, I think, is a good indication that this is something we keep our eye on, but we're not expecting it to be like an ongoing systemic issue.

Okay, understood. Thanks for the caller.

All right, thank you.

Thank you. And our next question is going to come from John LaValla with UBS. Your line's open.

Hey, guys. Thank you for taking my questions as well. You know, the first one is just in our conversations with folks across the industry, it seems like there's some market participants that have been, you know, at least somewhat less enthusiastic about participating in workforce housing. And it seems to us like the ASP is pretty solid. I guess I'm curious how the profitability compares. And also, is there any risk to just kind of damaging the brand by doing this type of product? I'm just trying to figure out why others would not be more inclined to participate.

Yeah, I'm not sure I could answer why someone might be less inclined. As we talked about, the gross margin is kind of right in our wheelhouse, so I'm not worried about profitability. You know, the one thing that I think we need to be careful about and are being very careful about is we're not just loading all these orders into one or a few plants to the point where they're not able to take care of their independent dealer customers or their community customers. So, you know, that would be a potential risk if a company just, like, kind of made all the rest of their business wait while they just focused on workforce housing. It's not to the magnitude, and we're being very mindful about trying to basically put these orders, spread these orders in our system smartly so that we're not hurting our independent dealer customers. From a brand perspective, I'm not sure I see it. We're still going to make a quality unit. It's obviously a very different application. It's not one that a customer is really going to be confused by. It's not going to be something that they're seeing in their neighborhood, for example. So I think it's kind of a nicely an opportunity. And this industry and CAFCO, through time and through history, we've done workforce housing for oil fields, as an example. And it's just, you know, in times like this, it's really welcome because it's added orders that give you that extra backlog.

Yeah, that makes sense to me. Next question is, you know, the 21st Century Road to Housing Act obviously received a lot of attention, but there was a recent executive order. It was called Decreasing Housing Costs for the American People that included provisions, many of which were aimed at increasing coordination across federal agencies, also support for innovation and standardizing some of the permitting for manufactured housing. Any thoughts on these initiatives and And how meaningful they could be for the industry?

Yeah, John, I'm kind of in a little bit of wait and see mode, and that's not any pessimism. But the executive order, by its very nature, is somewhat general. And like you said, it was directional for some of the government agencies in different areas. There were aspects of it that are on things like automatically eliminating mortgage interest when someone's equity gets to a certain level. You know, if there's an impact on us from something like that, it's not even secondary, you know, and I think directionally you can get on board with the idea of let's not have people paying out of their pockets for something that's not needed. But probably the most interesting one, but there's very little definition around it, is the task force that the president kind of assigned to HUD and I guess it was FHFA to co-chair to just look at opportunities in factory-built housing to make the regulatory and inspection and approval processes more efficient. You know, for my two cents, and I feel a little bit like I'm sticking my neck out on something I haven't learned enough about, but for my two cents, manufactured housing under the HUD code is kind of a model for that kind of efficiency. So, if that task force starts to look at other areas like modular or hybrid systems, I think that could be something that leads to some good outcomes for affordable housing in general. So, we'd be all for it. But it's still general, And so I'm not sure I have really a well-informed opinion about it at this point, John.

Got it. Got it. Last one from my end, and just going back to an earlier question on sort of the divergence between on-site and manufactured housing in terms of demand. I'm wondering if you could sort of pinpoint what the core buyer has looked like more recently. I mean, are these folks former renters? Are they just more rate-sensitive folks? Is there an average wage I mean, anything that might help explain, you know, the difference?

Yeah, we tend to think in broad strokes that we've got kind of two core customer groups. One is that first-time buyer, low-income, relatively low-income, and they need a good, affordable house, and they're trying to just figure out if they can get out of rent, right? So that's definitely a big part of the market. And the other tends to be actually kind of retirees, 55 and older people. Maybe they're downsizing. Maybe they're getting a second home for snowboarding, right? And that still holds true. And I don't think that we've identified or noticed any, like, structural trend about new customers. I think if there is one, and we've struggled to quantify this for ourselves and for you guys, if there is one, it's the buyer who historically would have only looked at site-built homes, and because site builders are unable to hit first-time buyer price points and they're actually moving up and away from those price points, some of those customers are finding their way to manufactured housing and they're liking what they see and they're buying from us. So if there's any trend that I would point to, and it's a little bit of an empty statement because I can't quantify it, I do think we're getting more opportunity at what we consider the high price points than a site builder considers the low price points. One thing I've noticed in the earnings releases over the last couple quarters with home builders is a number of them talking about we're going to skew a little bit away from what they call first-time buyers and a little bit more into first-time move-up. When I hear that as a manufactured housing person, that sounds like opportunity. It sounds like they continue to move up in price, and if we can get access to the locations that those buyers want to live, that's pure opportunity for us, and I think that's a shift out of all the customer dynamics you're asking about.

That's very helpful. Appreciate the thoughts.

Thanks.

Thank you. And the next question is going to come from Jesse Letterman with Zellman. Your line is open.

Hey, thanks for taking the questions. A nice job in the quarter. Thanks. Really exciting on the workforce housing opportunity. I wanted to ask a couple clarifying questions. One's for Mark on the low single-digit increase that he noted earlier on shipments. I wasn't sure if that was referring to the organic increase or if that was the American Homestar increase and then the remainder, which I guess would be like low double digits, would be the organic during the quarter.

Yeah, I was referring to the legacy. So, yeah, same plan. Same plan.

Yeah, if we go back to the consistent plant group.

Okay, so the organic, I guess, in other words, or legacy was up low single digits, and the rest is American Homestar?

That's right.

Okay. All right, that's helpful. Thank you. Another clarifying one on single-wides, Allison, I think you mentioned on the ASP, part of what partially offset the increase in leg-for-like pricing was perhaps more single-wides in the mix, Whereas I think we previously had discussed over the last few quarters really more of a shift to the multi-section homes. So I would love for any more commentary on kind of what the price point makes during the quarter and then also what you think is driving it and what your expectations for that is going forward.

Yeah, I think it's a little bit of what kind of Bill mentioned, too, is that some of the buyers that are coming in are looking, you know, at what they can afford. And so, we are seeing some go to the more single-wides. But still, the pricing is held. And I think our ability to really focus on our pricing structure that's allowing us to pass through the increase on the materials is really kind of the key element to focus on.

Okay.

That mix can bounce around. You're right. For a while, if I go back a little bit farther, for a while it was leaning towards singles, then it leaned toward multis, and now we've had a quarter or two where even when you take out the workforce housing, it was still leaning a little bit more towards singles. I don't have a really great answer for that, except in hindsight, when we see some of those movements and we look back over time, you kind of have to chalk it up to normal variation, to be honest. But the interesting thing this quarter with price, and I'm hammering a point we've already made, is we've had plenty of quarters where we've seen a little uptick in price that we've had to tell everybody, yeah, but it was really product mix and it was really degree of integration with our company stores. It wasn't really product price. And this quarter, it's the opposite. And I think it's important for people to hear that the single wides and the multi-sections are both selling at a higher price than they were previously.

Absolutely. I think that's a helpful distinction. What's your sense on that? Obviously, we know a lot of potential buyers and current renters who may want to buy are constrained from an affordability perspective and from inflation and all these different things. Your sense for the consumer's ability now at retail, like if retail is going to pass along those price increases too, what's the ability for the potential buyer to absorb any further increases?

Yeah, I think that's the point. I mean, from a business perspective, you know, when we're looking at it just in isolation, pricing sounds great, but to your point, it's making it harder for folks. So, yeah, we're very conscious of that, and, you know, your point's very well taken, and what's hard to understand is what would be the demand sensitivity to a small increase or a small reduction in price, but as I always point out, it's a local market, and so, you know, I think sometimes people think that there's some kind of pricing power where we can just decide to go raise or lower the price. I think these product markets are much more efficient than that. And right now, the price is going up, and it's making it harder for folks, for sure. If they get a little interest rate relief, that's huge, too, right? I mean, that can offset that effect pretty quickly. And I hesitate to say it because it's not a trend now, but in the last few weeks, we've seen a slight downward movement in interest rates that might offset their monthly cost effect of the price increase. Okay. That's helpful, Bill.

Thanks. One follow-up on the interest rate stuff. I know you've talked about the chattel rate being stickier, but presumably it does still kind of get benchmarked to some degree. Like over the last month or months, even before we kind of had this pullback, I would assume shadow rates grew because of what we were seeing on the 30-year mortgage rate. So what is kind of the timeframe through which the shadow, I know it's stickier, but like how quickly is it actually almost repricing up or down when the 30-year mortgage rate is moving, especially when there's such volatility as we've seen lately.

Yeah, my feeling is it's pretty sticky. I don't think it responds very quickly, and it'll move a little, and then it'll stay there for a while. So it's not very responsive. I think you're right that it's somehow correlated, but it is not an immediate reaction. Now, you know, we've talked a lot about, you know, what you need really for that market to The GSEs, you know, we're still trying our hardest to get the GSEs to take note of that and start buying home-only loans. Who knows if and when we'll ever get a breakthrough there. But the other thing, just like we've told folks that we've got investors that are new investors, probably more appropriate investors than we've had in the past for those loans, that's helpful too, right? If people like us, the country place, are out there finding flow-through investment money that's probably tied to insurance liabilities, so they can offset a similar term, then that helps the market become more efficient, too. So I'm kind of interested to see where this goes in maybe the coming years it might be, but maybe we're moving toward a more efficient market.

Got it. Yeah, we're eagerly watching to see what the GSEs do as well as it pertains to the the chattel rates. Last one from me, really appreciate all the help as always. It almost sounded like when you were talking about the backlog and you were saying, you know, if we didn't take the workforce orders, we kind of would have ended up in a similar place anyway, which kind of sounds like you maybe had some orders that you didn't accept because, like, You almost took the workforce housing orders in lieu of other potential orders or demand, so I just want to allow for you to maybe clarify if that's right and whether or not you're almost taking a step. You need to, for one reason or another, and it doesn't seem like you do. You're only, I guess, at 75% capacity utilization. Of course, a strong number, but still room to go. Just love your clarity on that.

Yeah, I'm glad you asked the question because I wouldn't have been sensitive to that possible confusion. Yeah, by no means are we not taking other orders. So my point was that, you know, we're at a healthy backlog level. We're not at a high backlog level where it's become a problem for customers. You know, if you go back in time and you're, like, pushing a year, that's an issue. But when we're at eight to ten weeks and heading into the winter months, we're still taking all the orders. The backlog just kind of helps us with that dynamic we talked earlier where a given plant's kind of concerned that they're going into the winter season. They don't know how strong orders are going to be. Obviously, if workforce housing adds a little to their backlog on top of taking all the other orders, it helps us lean in a little bit harder on production. So, yeah, by no means do I want people to feel like we're taking one order over the other. We're not in that mode at this point.

Okay. Thanks again. Really appreciate it, all of you. Thanks, Justin. Have a great weekend. You too. Thank you.

And our next question will come from Tyler Batori with Oppenheimer. Your line's open.

Hey, good morning. Thanks for taking my questions. First one for me, I'll continue the trends here on the workforce housing topic. Is there a lot of competition for this business? Are you mostly competing with other manufactured housing producers or with different types of temporary housing? And then from your perspective, what helps you win this business and what differentiates you from some of the others that might be trying to get into this space?

Yeah, it's an interesting, a good question. Yeah, I'm sure we're not the only ones getting workforce housing business, so I don't want that to be perceived. You know, it's competitive to some extent. There are, at this point, kind of intermediaries that are finding the opportunities with the projects and then kind of talking to the manufactured housing type companies to produce them. So, it's kind of a very natural market in that sense. And your other question, it's not my perception that for a given remote data center, they would be looking at some other form of housing. I think factory build is the appropriate housing or the appropriate construction method for that stuff. So I think it's in our wheelhouse as an industry, and I'm sure it's competitive. What's making the difference, I think, is as it is with any sale, right? It's an intermediary coming to us, and it's a pricing discussion. It's a when can you deliver discussion, and all the things that we would face if we were dealing with a land lease community or any other customer.

Okay, thank you. And then in terms of the order and demand commentary, I mean, obviously you have the workforce housing that's coming in. You talk about orders below last quarter's pace. Just how much of that deceleration is just normal seasonality? I just want to confirm that there isn't any sort of change in underlying demand outside of what's happening with workforce housing.

Yeah, it's the right question. Yeah, we talked about a drop-off, and it's really thinking sequentially, right, from Q1. And I'll remind people, sometimes when you have those comparisons, you think that the drop-off is saying something negative about the current quarter when you're comparing to a quarter that was pretty darn strong. And Q1 was strong. We had, I don't remember what we disclosed as far as the sequential uptake, but we had a couple quarters where we were, you know, significantly into double-digit increases quarter to quarter. So, a little bit of this is the comparison to a very strong Q1 in orders. And then, yes, absolutely, seasonality, we would typically see Q2 be a little bit slower than Q1 from a seasonality perspective. I guess to put it in some perspective, I'd say that orders this quarter are very much in the range of what we've seen the last couple of years. In the last couple of years, we've always prospectively been racking our brains trying to figure out where's this going because there's been a lot of uncertainty in the market. But when you look back, we've kind of been in a zone, and our second quarter orders are not out of line with that zone, so it's not like they've fallen off a cliff. And I'm talking about excluding workforce housing. So it's not strong, but the level of orders is still manageable. And as I said repeatedly, I think it's in a range that we're very able to adjust up or down from here. Okay, very helpful.

And then my last question, just the capacity addition that you have coming online mid-2027, just remind us how much spending is left there, and then help us think about just what the ramp-up looks like in terms of initial earnings contribution and when you really kind of get to a more stabilized level of production there.

Yeah, we haven't been out with actual capital numbers on that. The startup is still pretty much online for sometime like mid-calendar next year. You know, projects have risk there, but I think we've been able to manage this one more so far. We've stayed roughly on schedule. So, it's going to be a big – initially, it'll be one production line, but it'll be a sizable production line as far as capacity and throughput. So, you know, we haven't really put projections out to isolate that one production line to give specific numbers at this point.

Okay. Very good. That's all for me. Thank you.

Hey, Tyler, I'll make one more point on your previous question just because I'm looking at some of the data as I answered, And I think everything I said kind of put it contextually in the right place, but maybe one way to think about Q2 orders is that they were slightly up year over year. So even while we saw a drop-off from that very strong Q1 year over year, you know, this is definitely, we're not trying to tell people we've seen a drop-off a cliff here.

Thank you. And our next question comes from Catherine Leipy with Gabelli. Your line is now open. A little bit about 75.

Hello?

Oh, I'm sorry. Can you hear us?

Yes.

Can you hear me? Okay. Yes. Okay. Thank you.

Awesome. Thanks again for taking my question, and congrats again as well on the great quarter. Thank you. Could you talk a little bit about the 75% capacity utilization in light of the strong 8- to 10-week backlog? So I'm wondering what's holding up the capacity utilization and what would get that number to 80%, 85%, 90%?

Yeah, it's kind of that dynamic we've been talking about. I mean, we've been, if you look at the last year or so, we've been kind of increasing that number a little bit. You know, capacity utilization is not a perfect number, and so we do tend to round it off a little bit when we communicate it. And the other thing about it is that as we do projects, and we've been doing a lot of projects in our existing plant system, but we adjust up the denominator, right? So it's a moving target when you really think about the pieces and parts of it. So, we've been in that 75% range, but I think over time on an increasing view of total capacity, and that's why you have seen us increase the total amount we put out. What's holding it up is this whole dynamic. Well, two things I would say. One is I've definitely observed that it seems a lot easier to reduce product pace than it is to increase it. But usually when we're in the opposite mode, you can allow attrition to bring your staffing levels down, and you can kind of adjust down pretty rapidly. When you're going the other direction, it can be more challenging. Now you're hiring people, training them, and trying to go up. We're good at managing that, but that is a dynamic that always is at play. And then the other thing is that, yeah, backlogs have been increasing, and they're at a good, healthy level right now. But when you're heading into winter months, there's that question in a given plant of, is now the time to increase, or should we just kind of hang out at this level and wait for spring to decide when to increase? So those are the kind of plant-by-plant discussions we have, and every one of our plants is in a different place on that. We've got some plants that are basically producing relatively full. They've been at, you know, 80 plus percent for a while. We've got other plants that have a thinner backlog that haven't, you know, we haven't together decided to push production very hard yet, given their backlog and their market dynamics. So, it's all this tug of war between are we entering a slowing period? Is the backlog big enough to bridge it? You know, all that goes into the decisions about how hard to push the production.

Okay, great. Thanks. Just a quick follow-up on that. Would you say that the workforce housing orders are targeting a specific sector of plants? Like, are they closer to the plants that are already at that 80%, 85% capacity utilization, or is the location of the workforce housing going to help with some of the plants with leaner backlogs, or is it just pretty variable and hard to tell?

Yeah, it's a little bit variable. I mean, the projects are where they are. We probably have plants that can reach them, no matter where they are, because I think our system covers the landscape pretty well. But this kind of ties, Catherine, into some comment I made subtly earlier. I think that was, we're able to, and I think the guys are doing a great job at this, we're able to take in sizable orders and then think about where we're going We're going to produce them, even if we break that order up and make it in a couple plants. So it does relate to this capacity utilization dynamic, and if we've got a plant that's full, we're going to look to try to move those orders. You're still going to be relatively in the same region, but move those orders to where we've got more upside in the capacity utilization.

Great. Yeah, that makes a lot of sense. Thanks. Just one last question from me. I'd love to hear a little more on the breakdown of CapEx this quarter. Particularly, how much is attributable to El Mirage, and then how much is just kind of steady CapEx that we can expect in the future?

Yeah, I think if you look at this quarter and last quarter, you do see kind of a tick up from the last three, the previous three quarters, which represents kind of the maintenance level. So I think that just looking at it historically, while the increase would not be completely attributable to El Mirage because we always have several projects and some phase of capital improvement, but I think that direction kind of gives you an indicator of the investment that we're making. And I think the key is that when we looked at El Mirage, you know, we did what we do with all of our major product decisions, and that's go through a pretty labor-intensive, you know, return calculation. But at the end of the day, the capital spending per capacity for El Mirage is going to be right in line with historically the way that we've laid capital out for capacity

Allison, if you had to throw a number out for sustaining capital, it's probably eight, maybe as high as ten.

Between eight and nine, that's usually, and you can see that slightly over the DNA, so that kind of proves that what the maintenance capital has to be.

Awesome, thank you very much. That's super helpful.

Yeah, Allison's point, we've got projects going on in our plants, too. Individually, they're all relatively small from a total company level, but we've done so many of them that they're always sneaking into those numbers. Law, but important. Yeah. Thanks, Catherine.

Great. Thank you. Have a nice weekend.

You, too. Thank you. And the next question is going to come from Greg Gibbous with Northland Securities. Your line's open.

Hi, Bill, Allison, Mark. Thanks for taking the questions, and congrats on the results. You noted federal and state-level support, not only with the Road to Housing Act, but also other reforms that you expect to open. Exciting opportunities in the years ahead. I imagine that's in reference, you know, to zoning regulations, better financing access, but maybe to provide a little more clarity. I was wondering what you're most excited about and, you know, if there's any potential developments along those lines that we should keep an eye out for.

Yeah, good question. I'm excited about what's going on federally. Obviously, it's not over with the Road to Housing Act, and people are already talking about Road 2.0 and what might be involved in that. So, we continue to have momentum there, and I think we've talked a lot about that, but probably equally as excited about the trends we're seeing at the state level, where more and more states are passing state-level laws to try to even the playing field for factory-built housing to get into, you know, it's a zoning issue to get into areas we've really been kept out of in the past. So, I don't even know if I could put one ahead of the other. I think both of those are pretty much equally exciting, and both are equally important. The road to housing, at some level, is allowing us to make the products that fit into urban and close-end markets, and the state-level work is probably more where the rubber hits the road to give us access to those markets. We need both. We're getting good support in both areas, and that's what I think is going to really change the game. Makes sense, and good to hear.

You know, I was going to ask about workforce housing orders, but I think that's been addressed. So, you know, what are your plans maybe for other off-chassis HUD homes? You know, can you maybe speak to the demand or interest, how that's trended following the unveiling of the Grand Arbor, and kind of how the pipeline looks for future home designs?

Yeah, it's noticeably, from my perspective in my conversations with traditional developers, people that maybe are small in a certain location that have spent their careers doing site-built projects, they're perking up at the idea of, you know, maybe I should switch to manufactured housing, and if I can get low sets and two stories, you know, it really seems to have captured the imagination and attention of those kinds of projects. And we've had, I can tell you, since the law passed, we've had several projects that have come to us to learn and talk about whether that's the next opportunity, which is why it's so important to continue pushing on, like, let's get the rulemaking done if that's what it takes, or let's get some efficient alternate construction letter process in place so that we can start selling these things. But, yeah, I think that's what it's opening up. People are excited about two-story, officially made, you know, HUD code house and homes, and certainly ground set.

Yeah, good to hear. Thanks again. Appreciate it. All right.

Thank you. And our last question is going to come from Daniel Moore with CJS Securities. Your line's open.

I know you, after an hour and two minutes, wanted one more workshop question. You started us off. You're going to finish us off here. I'll make it quick. This is the first quarter we've heard about it in a more meaningful way. Can you talk to the number of intermediaries? Is that growing that you're interacting with or in discussions with over the last one, three, six months? It's just kind of trying to get a second derivative momentum, you know, idea of how this is kind of playing out in real time.

Yeah, and we haven't been hiding the ball. I mean, I'll tell you, it really kind of hit this quarter for us. I mean, this is a quarter that it was even really a thing as far as really tangible shipments and tangible orders. Yeah, I think the intermediaries are going to grow. I mean, we've worked with a couple in these early days, but I just think this is going to continue to unfold, And I don't think it's going to ultimately be just a few people that are intermediaries between the manufacturing housing companies and the data center projects. So we're wading into it. We've got some key relationships at this point. I think we'll expand that as we go forward. But as I said in my comments, it's very hard to predict how long, how stable, how big. So we're just going to have to keep our ear to the ground and try to be as helpful as we can to you guys understanding it.

Helpful. Look forward to seeing you out in Arizona with a few investors in a couple of weeks. So, appreciate all the call again. Yeah. Great.

Thank you. And I will now turn the call back to Bill Boer for closing remarks.

Yeah, for those who have hung in with us, thanks for hanging in with us. It's great that people are real interested, and I hope we're giving you good information to understand not only where we were this quarter, but where we're heading. And it's obviously great to be able to report such strong results amidst an environment that has high interest rates and continuing uncertainty in the economy. Going into the winter months, we've talked this. It's always a challenging point in the year. We know activity will slow with the weather and the holidays. But what's different this year is we're entering that period with the largest backlog since 2022-23 when interest rates ran up. So we really feel like we're well-positioned to react as needed to the markets. Thanks, everyone, for joining us and for your interest in Capco, and we look forward to keeping you updated.

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