Earnings Call Transcript - CVCO Q3 2022

Operator, Operator

Thank you for standing by. Welcome to the Third Quarter Fiscal Year 2022, Cavco Industries Earnings Call Webcast. At this time, all participants are in listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. To ask a question during the session, please be advised that today's conference is being recorded. I would now return the conference over to your speaker today, Mark Fusler, Director of Financial Reporting and Investor Relations. Please go ahead.

Mark Fusler, Director of Financial Reporting and Investor Relations

Good day and thank you for joining us for Cavco Industries third quarter fiscal year 2022 earnings conference call. During this call, you'll be hearing from Bill Boor, President and Chief Executive Officer; Allison Aden, Executive Vice President and Chief Financial Officer; and Paul Bigbee, Chief Accounting Officer. Before we begin, we'd like to remind you that the comments made during this conference call by management may contain forward-looking statements under the provisions of the Private Securities Litigation Reform Act of 1995, including statements of expectations or assumptions about Cavco’s financial and operational performance, revenues, earnings per share, cash flow, or costs, cost savings, operational efficiencies, current or future volatility in the credit markets, or future market conditions. All forward-looking statements involve risks and uncertainties which could affect Cavco’s actual results and could cause its actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of Cavco. I encourage you to review Cavco's filings with the Securities and Exchange Commission, including without limitation the company's most recent forms, 10-K and 10-Q which identify specific factors that may cause actual results or events to differ materially from those described in the forward-looking statements. This conference call also contains time sensitive information that is only accurate as of the date of this live broadcast, Friday, February 4th, 2022. Cavco undertakes no obligation to revise or update any forward-looking statements, whether written or oral, to reflect events or circumstances after the day of this conference call, except as required by law. Now, I would like to turn the call over to Bill Boor, President and Chief Executive Officer. Bill.

William Boor, President and Chief Executive Officer

Thank you, Mark. Welcome and thank you everyone for joining us today to review our results for the third quarter of fiscal year 2022. We're very happy to report another record quarter for revenues and earnings. Revenues increased nearly 50% year-over-year, and diluted EPS was $8.57 compared to $2.12 in the year-ago quarter. EPS included a large positive impact from non-recurring tax credits, which Allison and Paul will explain in more detail. It's really important to recognize it, even excluding that impact, EPS was up about 150% due to outstanding results from our operations. This was a quarter that showed operational gains resulting from improvements set in motion over a long period of time. And we expect to continue that momentum. Our plants achieved a higher production level, and we reached capacity utilization of approximately 80% this quarter. This is in line with our pre-pandemic utilization, and it was accomplished despite persistent labor challenges and supply inefficiencies. The improved throughput is a result of the focused effort across all of our plants to simplify their product offerings. And it's also the result of work underway for some time to improve staffing and retention. The combination of a more stable and higher skilled team and our rationalized product offering is paying off. Our backlog remained consistent with last quarter at $1.1 billion, which represents 36 weeks to 38 weeks of production. You might recall that this is down a few weeks from last quarter, which is purely a function of our higher production rate. The takeaway is that the backlog remains large with continuing strong orders and improving production to meet those orders. On a related point, strong backlogs exist across the industry. So we're not seeing any pressure on wholesale pricing. While our consolidated average selling price is down slightly compared to Q2, this is the result of a number of factors, including the mix of retail and wholesale sales, and the addition of Commodore. So on a same-plant basis, both volume and pricing continued to improve during the quarter. I'd like to come back to labor. It would be difficult to say one way or another whether the general availability of labor has really improved at this point; if it has, it's been a modest improvement. However, we have made significant progress which has directly enabled the operating improvements I've already commented on. While still below target levels, we've been able to increase plant staffing. The improvement we're now seeing is a result of long-term efforts in recruiting, onboarding, learning and development, investment in the workplace, and improved pay and benefits. It's been a holistic approach that started before the labor disruption of the last 18 to 24 months. Continued progress in staffing and retention will enable even higher levels of productivity. We expect to continue the recent momentum we've seen in our people strategies. Demand for our products remains strong as we've discussed for some time; demographic housing drivers and the large housing deficit built over the past 10 to 15 years provide a very positive demand outlook. These drivers apply particularly to manufactured housing due to the intensifying need for affordable homes. Of course, short-term economic factors impact the industry. However, when you consider the extraordinarily strong demand we've been experiencing for a number of quarters, despite significant home price increases and lengthy backlogs, it reinforces the growing housing shortfall that exists and the need for what we do. With regard to some of our larger growth investments, we remain on the same schedule previously communicated for starting up the new Glendale, Arizona facility, which will be in the second quarter of this calendar year. To remind folks, Glendale will double our park model capacity while freeing up a line at our Goodyear facility for additional HUD production. We're now one full quarter into the Commodore acquisition; we're very happy with how everything's going. The hardest work comes after a deal closes when transition activities require a lot from everyone involved, and this has certainly been the case over the last quarter. I want to express sincere appreciation to all the folks at Commodore and within Cavco who have worked so hard on various aspects of integration. They accomplished a lot in the transition while at the same time staying very focused on the work of getting homes to customers. Commodore's contribution to our volume has been right in line with our expectations this quarter, and their margins are improving as they work off lower-priced homes in their backlog. With that, I'll turn it over to Allison to discuss the quarterly results in more detail.

Allison Aden, Executive Vice President and Chief Financial Officer

Thank you, Bill. We're pleased to report that Cavco achieved record-breaking net revenue and net income results for the third quarter of fiscal 2022. Net revenues for the period were $431.7 million, up 49.5% compared to $288.8 million during the prior year's third fiscal quarter. The Commodore homes acquisition contributed $73.1 million of this increase. Sequentially from the second quarter of 2022, net revenues increased by 20.1% with Commodore's first full quarter of results being the main driver for the increase. Within the factory-built housing segment, net revenues increased 52.7% to $413.6 million from $270.8 million in the prior year quarter. The increase was primarily due to the full quarter of Commodore's operation and a 24.4% increase in average revenue per home sold. The increase in average revenue per home sold was driven by product pricing increases and a mixed shift to more multi-section homes. The total units sold increased by 22.8% to 4,424, up from 3,603 units in Q3 of 2021. Our factory utilization increased from 75% last quarter to 80% in Q3 of 2022, the highest level since the pandemic. This improvement in utilization is a result of an increase in factory labor headcount, coupled with a reduction in production hours per module. Our field operations continue to be successful in overcoming hiring challenges, unpredictable employee absenteeism, and building material supply disruptions. Financial services segment net revenues increased 0.6% to $18.1 million from $18 million due to a higher number of insurance policies and higher home loan sales compared to the prior period. In addition to year-over-year increases in revenue for the quarter, we also expanded our gross margin percentage; consolidated gross profit in the third fiscal quarter as a percentage of net revenue was 26.7%, up from 20.5% in the same period last year, driven largely by the factory-built housing segment. The gross margin for the factory-built housing segment increased to 25.2% in Q3 of 2022 versus 17.4% in Q3 of 2021. This was driven by pricing, operational improvements, and declines in lumber prices experienced last summer that continue to flow through cost of sales in the quarter. As Bill explained, though our average selling price on a consolidated basis was down slightly compared to quarter two of 2022, we still generated a 110-basis-point improvement. The acquisition of Commodore negatively impacted gross margin percentages from purchase accounting-related items, as no gross profit was recognized on the sale of homes from inventories that were acquired in the transaction. As required by GAAP, these assets were written up to fair value on the acquisition date. All acquired inventory has now been realized in net sales, and future periods will not be impacted. Additionally, we continue to work through sales of homes that were in Commodore’s backlog that were priced, protected, and therefore had lower gross margins. We are working our way through these homes, and gross margins improved as we progressed through the quarter. Gross margin as a percentage of revenue in financial services decreased to 61.2% in Q3 of 2022 from 68% in Q3 of 2021 due to higher weather-related events and lower realized and unrealized gains on marketable equity securities in the current period. Selling general and administrative expenses in the third quarter of fiscal 2022 were $60.3 million or 14% of net revenue compared to $35.4 million or 12.3% of net revenue during the same quarter last year. The increase is due to $8.7 million from the addition of Commodore homes, costs associated with third-party consultants to review the non-recurring energy tax credits, and greater incentive and commission wages on improved earnings. Net other income this quarter was $4.3 million compared to $2.2 million in the prior-year quarter. This increase is primarily driven by $1.5 million higher unrealized gain on marketable equity securities and higher interest income earned on our commercial loan balances. Pretax profit was up 147.4% this quarter to $58.9 million from $24.9 million from the prior year period. The effective income tax rate was a benefit of 35.1% for the third fiscal quarter compared to an expense of 23.9% in the same period last year. Our Q3 2022 income tax included a non-recurring benefit of $34.4 million for tax credits related to the sale of energy-efficient homes. Excluding this one-time item, our tax expense as a percentage of pretax income would have been 23.3%, consistent with prior period levels. Let me take a minute to expand on the non-recurring $34.4 million tax benefit recorded this period. Under the Internal Revenue Code, Section 45L, the company qualified for credits related to the sale of certain energy-efficient homes between fiscal year 2018 and the third quarter of fiscal 2022. These credits are available for manufactured homes that meet specific energy-efficient levels as established under the Federal Energy Policy Act of 2005, which was extended in the Consolidated Appropriations Act through the end of calendar year 2021. The company enlisted a third-party qualified expert to examine the information on manufactured homes sold and determine which units qualify for energy-efficient tax credits under the program. This federal program ended on December 31, 2021, and as such, the company will not benefit from these tax credits in fiscal 2023 unless the program is extended or modified by future legislation. In total, after considering the net tax credits and associated expenses, diluted net income per share for the three months ended January 1, 2022, was favorably impacted by $3.23 per share. Cash related to these credits will be received in the form of lower estimated tax payments, approximately $14.2 million for this year's tax return. Cash refunds related to previous periods are expected to be received through fiscal year 2024 as we amend the associated tax returns. Net income attributable to Cavco shareholders was up 303.1% to $79.4 million compared to net income of $19.7 million in the same quarter of the prior year. Net income per diluted share this quarter was $8.57 per share versus $2.12 per share in Q3 of 2021. Now I will turn it over to Paul to discuss the balance sheet.

Paul Bigbee, Chief Accounting Officer

Thanks, Allison. So I'm going to highlight some of the changes in the balance sheet from January 1, 2022, compared to April 3, 2021. The cash balance was $267.3 million, down $55 million from $322.39 million months earlier. The decrease was primarily due to cash used for the acquisition of Commodore, repurchases of common stock, and higher inventory purchases. These decreases were partially offset by net income adjusted for non-cash items, changes in working capital, and sales and collections on consumer loans. A number of accounts increased as a result of Commodore, including accounts receivable, commercial loans receivable, inventories, property plant and equipment, goodwill and intangibles, accounts payable, and accrued expenses. Consumer loans receivable decreased from principal collection on loans held for investment, and its now open cash. Prepaid and other assets increased from the income tax receivable related to 45L energy-efficient tax credits Allison just discussed. Accrued expenses and other current liability balances increased from deferred payroll tax payments under the CARES Act and higher volume rebates and customer deposits received due to greater order rates. And last, stockholder’s equity was $806.2 million compared to $683.69 million months previously.

William Boor, President and Chief Executive Officer

Thank you, Paul. Catherine, let's turn it over for questions.

Operator, Operator

Thank you. Our first question comes from Daniel Moore with CJS Securities. Your line is open.

Daniel Moore, Analyst

Thank you. Bill, Allison, Paul. Good morning out there and thanks for taking questions. Start with Commodore, I think you said it contributed $73 million, if I heard that right, in the quarter. How many units did they ship? Just trying to get a sense of what the organic shipment growth looks like.

William Boor, President and Chief Executive Officer

We're not going to go down the path of separating out Commodore shipments. But like I said in my comments, they were pretty well in line with what we expected when we talked in the acquisition that they add about 25% to our overall capacity and shipment expectations.

Daniel Moore, Analyst

Okay. Maybe obviously demand and backlog remained exceptionally strong. Just elaborate on that; I think you described a moderate decline in order rates. Is that just normal seasonality from your perspective? Or are we slowing beyond that? Any comments or color there would be great.

William Boor, President and Chief Executive Officer

I don't know where we said a moderate decline, to be honest, and the order rates continue to be very strong. I guess I feel like after a period of about 12 months from mid-2020 to mid-2021, which the order rates were unbelievably high. We've gotten back to where we are seeing a seasonal shape to the order rates, but they are still above 2019 levels which were strong. So we're still in a mode where we talk about backlogs and we talk about industry shipments and things, but we're still in a mode where we're turning away business at this point. So demand is holding up really well.

Daniel Moore, Analyst

That's helpful. Thank you. Talking about gross margin a little bit, there's some moving parts in there, how much of a benefit would you say you experienced during the quarter from timing of raw material, lumber purchases? Conversely, how much did selling Commodore’s price-protected homes in backlog impact margin in the quarter? Just trying to get a sense for what a really normalized gross margin would look like.

Allison Aden, Executive Vice President and Chief Financial Officer

Yes. Thank you, Dan. The lower lumber prices from late last summer continue to flow through our third-quarter cost of goods sold. The backlog is still supporting a strong price for homes. Costs, essentially of every input, including labor are increasing. The commodities remain volatile and unpredictable in the near-term. I think if we think back at just a high level and try to quantify what the impact in the quarter was from Commodore, the write-up, it's fair to say it was about 50 basis points.

Daniel Moore, Analyst

Okay. That was very helpful. Go ahead.

Allison Aden, Executive Vice President and Chief Financial Officer

Yes. Specifically related to the accounting issue.

Daniel Moore, Analyst

Right. Is that runoff in fiscal Q4 or we have another quarter or so to go?

Allison Aden, Executive Vice President and Chief Financial Officer

No, we were able to, as we shared with you last quarter, this quarter we did in fact run through them.

Daniel Moore, Analyst

Perfect. And then just one more for me. We are at 80% capacity utilization, obviously doing a great job despite some lingering headwinds of getting more through the plant. How do we think about unit growth sequentially into fiscal Q4 and maybe the first couple of quarters? Do we expect to see some modest pickup sequentially? Can we get a few more homes through just in terms of production capacity and utilization? Any comments would be helpful. Thanks.

William Boor, President and Chief Executive Officer

I feel really good about our direction. Over the last several quarters, I've compared our current performance to pre-pandemic levels, which serve as solid benchmarks. We've noted that despite a significant decrease in production employee hours, we've managed to increase our volumes. Now that we've returned to 80% capacity, even with ongoing labor challenges and supply inefficiencies, I'm confident that we can continue to increase production. I think we have the momentum to keep climbing.

Daniel Moore, Analyst

Very helpful. I'll jump back in queue with any follow-ups. Thanks.

William Boor, President and Chief Executive Officer

Thank you, Dan.

Allison Aden, Executive Vice President and Chief Financial Officer

Thank you.

Operator, Operator

Thank you. Our next question comes from Greg Palm with Craig-Hallum. Your line is open.

Gregory Palm, Analyst

Thanks. Congrats on the good results, everyone, and thanks for taking the questions here.

William Boor, President and Chief Executive Officer

Thanks, Greg.

Gregory Palm, Analyst

I'm curious, maybe if I can start with Commodore. Any initial thoughts on synergy capture there?

William Boor, President and Chief Executive Officer

Yeah. I mean, we didn't overstate or put too much out there about synergies to begin with. We do believe there are some; we think that in my opinion they come in two big forms that are more operational than cost-oriented. One is the opportunity to optimize our customer interface, and we talked about this with other transactions in the past. I remember Destiny, this was something we talked at length about, being able to work with dealers and customers that they brought to the company with and get more of our products into those channels and vice versa is always an opportunity. The other thing we've talked quite a bit about is operational improvements. Commodore has done some things with manufacturing technologies that I've talked about quite a bit before and after being together here for a couple of months, I feel really excited about the opportunity to bring best practices and thoughts to their operations, but certainly it's going to go both directions, and Commodore can really bring a lot to our broader system around technologies that improve quality, improve safety, and reduce labor content in the production process. Those are the things that we're most focused on. I think from a cost perspective and overhead, we could talk about those things, but for right now, similar to the transactions we've done in the past. We're just looking to stabilize things and figure out where we go long term. We're not wishing for any synergies of that nature.

Gregory Palm, Analyst

Got it. And the factory utilization number, was that driven at all by the inclusion of Commodore? If I recall, they had a pretty big utilization number, I think you had mentioned when you acquired it.

William Boor, President and Chief Executive Officer

Yeah, interestingly, they rate at the rest of the system. I would say it had no effect up or down; they rate in the 98% range as well.

Gregory Palm, Analyst

Got it. Okay. Given that, what are your thoughts on the appetite for new plant openings? The park model plant will be coming online soon; what about greenfielding? Can you remind us if you have any idle facilities outside of that, and what are your thoughts on increasing capacity outside the existing footprint?

William Boor, President and Chief Executive Officer

I think the industry frankly needs more capacity. So we're constantly looking at how we can participate in that. Glendale is a big move in that direction. We've got a couple of things that we're working through to try to figure those things out. We have one production line at our Plant City, Florida plant that many years ago was idled; calling it a production line probably is a little bit of an overstatement. It's a building that used to produce manufactured housing, but it would be a project to bring it back up. We're evaluating that currently. Not to belabor this or sound like this means that we won't be doing those kinds of projects. The near-term concerns about adding capacity from a physical perspective, you could get up pretty rapidly; that concerns our staffing and supplies. That's the only thing that gives you pause when you dig into those kinds of opportunities. We're working on things. As I said in my comments, there will be ebbs and flows due to near-term economic factors. I don't think we're of the mind that this is no longer a cyclical industry to a point, but the underlying demand is fantastic, the drivers of the underlying demand, so we're pretty confident from a demand perspective when we're thinking about kind of project decisions.

Gregory Palm, Analyst

I guess there, maybe dovetails into my last question about demand. I mean, do you have a sense? Like I've asked this question before, but where the demand is the strongest, either by channel, by demographic? What are you seeing out there in terms of buyers?

William Boor, President and Chief Executive Officer

There are several interesting dimensions to consider. Historically, much of the growth in this industry was driven by community business, which made up about 30% of total endpoint for manufactured housing prior to the pandemic. At that time, growth was concentrated in that area. Once the pandemic hit, most transactions in that channel came to a halt as orders were put on hold and a cautious attitude prevailed. However, dealers have been very active, and over the last several quarters, the demand from both channels has become difficult to differentiate, as they are both seeking more homes than we can produce. From a market perspective, the rise in prices has made manufactured housing more attractive compared to site-built homes in a cost-inflation environment. We are witnessing a significant gain in market share in the high-end segment where site builders can no longer compete. However, on the lower end, affordability has decreased, making it challenging for those who could afford single-module homes a couple of years ago to enter the market now. There is still demand in that segment, and we hope to find solutions to help those individuals access homes. Overall, there has been a shift towards more multi-section homes, reflecting the movement within the industry in recent quarters.

Gregory Palm, Analyst

That's helpful. And last one for me, I mean, everybody in the industry is facing the same capacity issues that you're talking about and the need to increase production rates. Would you talk about turning down orders? Where are those orders coming from? More importantly, where are they going? If everybody in the industry is sort of in the same spot. My guess or assumption is that there's even more pent-up demand out there that we don't even really know that's not really even showing up in the numbers in the orders in the backlog. Is that right or not necessarily?

William Boor, President and Chief Executive Officer

I completely agree with you. The industry shipments do not accurately represent demand, and orders likely underestimate the actual underlying demand. When we refer to turning away orders, it mainly involves dealers we haven't engaged with who are looking to place orders, and we're informing them that we're not accepting new points of distribution. This is one way we're turning down orders. Additionally, there is significant demand from community operators for projects with many homes in an order, but we have to let them know that we cannot accommodate that due to our backlogs. So, I feel confident in stating that backlogs and shipments do not accurately reflect total demand at this time.

Gregory Palm, Analyst

Interesting. All right, I'll leave it there. Thanks and good luck.

Operator, Operator

Thank you. Our next question comes from Jay McCanless with Wedbush Securities. Your line is open.

Jay McCanless, Analyst

Hey, good morning, everyone. So my first question on Commodore, if that was a 50 basis point drag this quarter, should we expect that to turn around and be a tailwind going forward, and maybe even a little bit more? I can't remember if you guys have broken out what Commodore’s gross margins look like versus legacy Cavco.

Allison Aden, Executive Vice President and Chief Financial Officer

We haven't broken it out specifically, but to focus on the write-up of the inventory that we assumed at the time of the acquisition of 50 basis points, we would see that having been gone through this quarter; it would not be there as a drag in the coming quarter.

Jay McCanless, Analyst

Okay. I guess the next question on that, and just looking at the gross margin you did in 2Q was 24% without Commodore and then you have a little bit of a drag. And I'd love it if you guys could break out the benefit of lumber if you have that for the third quarter. It just looks like moving up to this mid-20s gross margin is the natural path over the next few quarters. What do you guys think about that?

Allison Aden, Executive Vice President and Chief Financial Officer

So we won't think that making out the specific impact of lumber, but I think as we've seen from the last several quarters, it's hard to speculate from a margin perspective. The really good news is the backlogs will still provide the ability to price amidst cost increases while we've done a good job with that, but we don't really expect to see any relief on the variety of materials that go into our homes. We've seen, as we all have, a recent uptick in lumber commodities.

Jay McCanless, Analyst

Any chance you guys could give us the average backlog price or what you think the average price for this quarter that you're about to deliver? Just still trying to figure out the difference between Commodore's price and Cavco's product. I mean, we've done a rough number on it in our model. But if you guys would be willing to share some of that, that would be helpful as well.

Allison Aden, Executive Vice President and Chief Financial Officer

I don't think there's anything specific that we would want to achieve at this point between the differentiation in the pricing between the overarching network and Cavco carved out since the two are beginning to integrate very much.

William Boor, President and Chief Executive Officer

Our backlog, excluding Commodore, I think you can think of as all priced at current market. So it's a matter of them continuing to work through their lower-price backlog which has happened. I mean, as I think Allison said in her comments, they left the quarter with higher margins than they went into it with because they are working down that lower-price stuff; we're not going to be able to just specifically separate their pricing from the rest of the system at this point.

Jay McCanless, Analyst

Your competitor a couple of days ago had some very favorable comments about chattel rates staying low, as well as some new money potentially coming into the manufactured housing space I’m assuming for both chattels and land home deals. Would love to get an update on what you guys are seeing on that front and also just maybe an idea of where chattel rates are now and what you guys are seeing.

William Boor, President and Chief Executive Officer

Yeah. I generally agree with what Mark said. Chattel rates have stayed very stable since they took a big drop. I think of the timing; it's probably been a year and a half ago. Time flies, but they're in the high fours to low fives, low-to-mid 5% rate. And that really hasn't moved up over the last month or two. It's been very stable. While it's essentially a different market, we always say chattel rates are really not correlated to mortgage rates but are much more stable. If you compare that to land home rates at this point, I can't imagine it's ever been close to this tight. There's another discussion about the premium load manufactured housing, land home loans compared to site-built or what the GSEs call single-family, non-MH loans. I think that's been pretty stable too, and that's kind of been about a 50-basis-point range. That premium for an MH product. So chattel is very stable. MH land home is kind of just moving right up as mortgage rates are at this point. Was there more to your question? I might have missed something there.

Jay McCanless, Analyst

No. I mean, that was that, I mean, I'll ask you the same follow-up that I asked Mark. I thought it was very interesting that the FHFA projected the duty to serve submissions from the GSEs. I would love to hear what you guys are hearing, if anything, from the GSEs right now and would an expanded duty to serve be something that might help the manufactured housing industry?

William Boor, President and Chief Executive Officer

And we'd love to see it. Frankly, we and I'm not saying this with bitterness; we just haven't seen a lot come out of the duty to serve over time. I don't mean that in an overly negative or accusatory way, it's just the fact. Yet, capital is very interested in the MH lending space. So we're seeing really good interest from the investors we sell loans to and it really hasn't been an issue. If people are qualified, they're able to get good loans at this point in time. The GSEs really aren't driving much there.

Jay McCanless, Analyst

Got it. Great. Well, thanks for taking my questions.

Allison Aden, Executive Vice President and Chief Financial Officer

Thank you.

Operator, Operator

Thank you. Our next question comes from DeForest Hinman with Walthausen and Company. Your line is open.

DeForest Hinman, Analyst

Thanks for taking questions from shareholders. On the gross margin commentary, the 50 basis points, just so we're clear, is that the consolidated gross margin or is it the segment gross margin for MH?

Allison Aden, Executive Vice President and Chief Financial Officer

You are right. That's on the consolidated gross margin.

DeForest Hinman, Analyst

Okay. Thank you. And furthering the discussion on the credit side, the mortgage side, do you have any insights in terms of credit quality on the inbound from FICO scores? Any color you can provide there. Is the demand coming from quality customers that are going to be able to pay longer-term?

William Boor, President and Chief Executive Officer

We've generally been focusing on higher FICO scores in our lending business, as indicated in our filings. We've observed consistent strength in applications within this demographic. I don't believe there has been any significant shift suggesting that the lending industry is leaning towards lower credit applications at this time. The lending sector remains disciplined, which makes sense given the supply constraints in the industry. As a result, we haven't felt the need to pursue lower credit profiles.

DeForest Hinman, Analyst

No, that's very helpful. I'm glad you provided a lot of insight on this call because I think over the past few weeks there has been uncertainty in the market regarding rising rates and concerns about demand dropping significantly. It's becoming clearer to everyone that this is not the case. There appears to be a fundamental change in demand, and I appreciate you taking the time to address this. To dive deeper into that discussion, you mentioned units being turned away and also referenced the communities and the REIT space. Can you share anything about the size of that opportunity? I'm not just thinking about the next year, but looking even further ahead. I'm sure you've analyzed some of your park customers who have made both public and private disclosures. Given the acreage of these parks, you can calculate units per acre and consider the returns that public REITs are seeing alongside their available capital. It seems very appealing to expand these communities. Any details you could provide about the demand, such as the number of units needed over the next five years, would help the shareholder community better understand your perspective since you're making positive comments about the outlook. Any facts or figures would be appreciated.

William Boor, President and Chief Executive Officer

I’m not sure if we have a specific projection for a number of years, but what we observe most immediately is the interaction with our customers. It's challenging for manufacturers not to meet the order demand we’re experiencing. There has been consistent interest from communities to purchase a significant number of homes over the years. While land availability and zoning certainly impact us, it doesn’t seem that we're nearing a point where this becomes a constraint. I understand this is a broad response to your question, and I wish I could provide more concrete details, but we see the momentum remaining strong for the foreseeable future. Regarding rising interest rates, your concern about demand is valid. Higher interest rates lead to increased monthly payments, which influence our customers' purchasing decisions. However, we need to consider this in light of the longer loan terms we've discussed previously. Those longer terms help to lower monthly payments, which positively affects affordability. Additionally, when you examine demographics, the negative impact of rising interest rates tends to be less significant for manufactured housing compared to traditional site-built homes. The trend towards affordability favors us. History indicates that during periods of rising interest rates, the effect on manufactured housing is minimal. We will monitor all these factors closely, as there are many upward and downward pressures. However, looking at the demographic trends over time, I feel very confident in our ability to invest in this market.

DeForest Hinman, Analyst

No. That's very helpful. That's good information for everyone. Now, regarding the raw material situation, could you provide an update on the challenges you're facing with certain products? Are things improving, remaining the same, or getting worse regarding the raw materials you are currently struggling with?

William Boor, President and Chief Executive Officer

It's a challenging situation that continues, and I feel like I'm repeating myself because it's affecting us across the board. We were on the phone with our operations team this morning, and I noted issues like installation fasteners and electrical parts. Some plants have been informed that they are months away from receiving refrigerators, for instance. One significant concern right now is with overhead flex duct. The main point is that these specific items highlight a widespread problem, which is impacting our efficiency just as much now as it has in the past. Additionally, trucking issues play a major role; sometimes the supply we order is available, but the truck delivering it is significantly delayed. Logistics contribute greatly to the supply challenges. I believe our team has managed the situation well despite the impact on efficiency, and we’ve been able to increase our throughput. I am confident in our approach, but every day we feel uncertain about whether a particular plant will continue running, as we never know which supply issue might cause a halt. Overall, we've experienced some, but very few, actual shutdowns, though the efficiency impact has been considerable and difficult to quantify.

DeForest Hinman, Analyst

Thank you. And then just a last question on the energy tax credit. Can you just give us color there? I mean, is this something we just were missing over the last 5 or 10 years? Something came up with an audit review; how were we not accruing for that previously?

Allison Aden, Executive Vice President and Chief Financial Officer

Thank you for the questions. We continuously assess opportunities for tax incentives, and this particular opportunity emerged during our ongoing process of identification. As you know, tax laws and regulations can be intricate, and we have been investigating this credit for quite a while. After thorough examination and consultations with a third-party expert and some of our peers in home building, we concluded that we could take advantage of this credit and proceed with what turned out to be a lengthy process. The significant factor was the size of the credit. To gauge its effect for the current period under GAAP, all periods need to be considered at once, which is reflected in this quarter's earnings.

DeForest Hinman, Analyst

Okay, perfect. And then last question on share repurchases. I know you had this odd situation with this energy credit. Did that preclude us from buying stock at any point during the fourth quarter? And if it did, should we be anticipating a higher level or accelerated pacing of share repurchases going forward?

Allison Aden, Executive Vice President and Chief Financial Officer

This particular item did not preclude us from purchasing shares, and buybacks still are a very important lever for us to be able to return excess cash to our shareholders. We were able to accomplish about $9 million in the quarter, and if you'll recall, we have about $100 million in the purchase authorization and we've burned through about a third of that. So we still view this as a very proactive way for us to deploy and return excess cash to the shareholders.

DeForest Hinman, Analyst

So is $10 million probably the right number or is it more or less?

Allison Aden, Executive Vice President and Chief Financial Officer

We will not be providing guidance on a specific outcome. If you examine the last few quarters, it likely suggests that the pace has varied significantly from quarter to quarter, depending on the information available in the marketplace.

DeForest Hinman, Analyst

Okay. Thank you for taking all my questions.

William Boor, President and Chief Executive Officer

Thanks DeForest.

Operator, Operator

Thank you. Our next question comes from Ethan Steinberg with SG Capital. Your line is open.

Ethan Steinberg, Analyst

Hey everyone. Thanks for joining the call and great job on the execution. The 50 basis points impact was solely due to the accounting related to the acquisition. Can you provide some insight into how much of a drag there was from managing the low-priced backlog?

Allison Aden, Executive Vice President and Chief Financial Officer

I would say that working through the low-priced backlog was probably 2 percentage points to 3 percentage points in the quarter.

Ethan Steinberg, Analyst

200 or 300 basis points?

Allison Aden, Executive Vice President and Chief Financial Officer

Yes, that's correct.

Ethan Steinberg, Analyst

So the total gross margin?

Allison Aden, Executive Vice President and Chief Financial Officer

Yes, that's correct.

Ethan Steinberg, Analyst

Can you get a sense of how much of that is left? It sounds like that's been worked down quite a bit?

Allison Aden, Executive Vice President and Chief Financial Officer

I think it's hard to pinpoint. I would say into the quarter they are very aggressive projection, probably something that will tend to see the timing of the backlog that we have with them, which is similar to ours.

William Boor, President and Chief Executive Officer

The backlog will dwindle down.

Ethan Steinberg, Analyst

So when we are thinking about the 25% run rate in the building of 26 and change blended, there's a lot of upward momentum to that sequentially from here based on those two factors, it seems like. Is that the right interpretation?

Allison Aden, Executive Vice President and Chief Financial Officer

With regards to those two factors in isolation, that'd be fair.

Ethan Steinberg, Analyst

That's a lot of tailwind. And then also want to check applied that units, you still feel pretty good about growing units nicely from here, absent big surprises on operations?

William Boor, President and Chief Executive Officer

I do. I mean, like I said, I'm always more nervous getting ahead of myself, but we've got momentum and we're driving it with what I would consider fundamentals. I think it's a huge accomplishment for our operations to get to 80% while we still do have these labor and supply challenges. If we can get to 80% with these challenges, by continuing to make progress on labor, which we're doing; and with hope that someday suppliers will settle out, then you would be natural to think you ought to be able to go higher.

Ethan Steinberg, Analyst

What do you think you're mostly done on working down that low-priced product? Maybe not 100% of it? But when do you think it's something that we don't get to see your measure that much anymore? You think that's done by the end of this quarter?

Allison Aden, Executive Vice President and Chief Financial Officer

I think it's hard to pinpoint. I would say into the quarter they are very aggressive projection, probably something that will tend to see the timing of the backlog that we have with them, which is similar to ours.

William Boor, President and Chief Executive Officer

If you think about it, you've got a stratification of prices. It's not perfectly this way, but the homes we're making today are the oldest ones in the backlog, the lowest price. So the impact will dwindle down over the next several quarters, will be a way to think about it.

Ethan Steinberg, Analyst

Yeah, that makes sense. Last thing is just that it was helpful getting that color on the moving pieces, on the average price based on what's in the backlog. Should the price still be going up sequentially generally from here or not?

William Boor, President and Chief Executive Officer

I always emphasize that we operate in an industry with long backlogs, so we discuss this frequently in relation to costs. There’s definitely not much room for price reductions. We handle pricing at the local plant level, which largely depends on specific cost inputs and market conditions. I mentioned in my remarks during the third quarter that on a same-plant basis, we are still observing rising prices, indicating there may still be some potential for further increases.

Ethan Steinberg, Analyst

That's great. I thought of one more thing. Was there any acquisition one-time-ish cost in SG&A or OpEx anywhere?

Allison Aden, Executive Vice President and Chief Financial Officer

No, not this quarter.

Ethan Steinberg, Analyst

Okay. Great job. Thank you.

Operator, Operator

Thank you. And we have a follow-up from Daniel Moore with CJS Securities. Your line is open.

Daniel Moore, Analyst

Thank you again. And Allison, if you gave this, forgive me, but what was the SG&A impact from the consultant fees during the quarter related to the tax benefit?

Allison Aden, Executive Vice President and Chief Financial Officer

Yes, so it was a high-level expert that we used in a pretty protractive process that we went through. So the fees in total estimated to be right around $5.8 million.

Daniel Moore, Analyst

Very helpful. Thank you.

William Boor, President and Chief Executive Officer

Thanks, Catherine. We do feel like it was a really strong quarter from all the operational improvements that we talked about, beyond quarter clearly favorable market forces; we made great strides in many areas that ultimately led to operating improvement. So we really appreciate everyone's interest, and we look forward to keeping you updated as we go forward. Thanks.

Operator, Operator

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