Ladies and gentlemen, thank you for standing by, and welcome to the Second Quarter Fiscal Year 2021 Cavco Industries Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions].

I will now hand the conference over to your speaker Mark Fusler, Director of Financial Reporting and Investor Relations. Please go ahead..

Good day, and thank you for joining us for Cavco Industries' second quarter fiscal year 2021 earnings conference call. During this call, you'll be hearing from Bill Boor, President, and Chief Executive Officer; Paul Bigbee, Chief Accounting Officer; and myself.

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 use, cost savings, operational efficiencies, current or future volatility in the credit markets or future market conditions.

All forward-looking statements involve risks and uncertainties, which could affect Cavco's actual results and could cause its actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of Cavco.

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.

Some factors that may affect the company's results include, but are not limited to the impact of local or national emergencies including the COVID-19 pandemic and such impacts from state and federal regulatory action that restricts our ability to operate our business in the ordinary course and the impacts on customer demand and the availability of financing for our products, our supply chain and availability of raw materials for the manufacturer of our products, the availability of labor, and the health and safety of our workforce, our liquidity and access to the capital markets, the risk of litigation or regulatory action, potential reputational damage that Cavco may suffer as a result of matters under inquiry, adverse industry conditions, our involvement in vertically integrated lines of business, including manufactured housing, consumer finance, commercial finance and insurance, market forces and housing demand fluctuations, our business and operations being concentrated in certain geographic regions, loss of any of our executive officers, additional federal government shutdowns and the regulations affecting manufactured housing.

This conference call also contains time-sensitive information that is accurate as of the date of this live broadcast Friday. October 30, 2020. Cavco undertakes no obligation to revise or update any forward-looking statements whether written or oral to reflect events or circumstances after the date of this conference call, except as required by law.

Now I'd like to turn the call over to Bill Boor, President and Chief Executive Officer.

Bill?.

Thanks, Mark. Welcome everyone and thank you for joining us to review our results for the second quarter. The people of Cavco continue to adjust to constantly changing dynamics with our clear objective of operating all of our businesses to the extent we can do so safely.

It's been humbling to be part of and to see the commitment, it hasn't been easy in any regard. I really want to begin today's call by acknowledging, our people. We need to keep driving forward to serve our customers. Our folks are making smart decisions in light of the circumstances. I'm very proud of our performance. In late March.

I don't believe anybody could have foreseen where we are today. I expect everyone on the call that has been watching demand indicators and understands that the general homebuilding industry, we're seeing extraordinary buyer activity.

But we've been talking for a long time about the fundamental drivers such as years of under-building to household formations enabled by very low-interest rates, the pent-up demand is being proven despite the pandemic.

Looking at recent MH industry shipment data could be misinterpreted as a demand indicator with the seasonally adjusted annual rate below last year's shipments over the shipments reflect what the industry has been able to supply.

We have a backlog that has grown $164 million since last quarter and stands at approximately 21 weeks to 22 weeks, based on our current production rates. We believe every producer is experiencing backlogs that are on - at on a healthy level.

Backlog increases from a combination of very high order rates and continuing production challenges due to labor and supply issues. To provide some perspective, even if we are producing at the same rate as last year, orders have been so strong that we would still have 19-week to 20-week backlog.

We know that we need to produce more, however, the growth in our backlog has been primarily the result of extraordinarily high order rates. This quarter home order rates were nearly 65% higher than a year ago. Turning to the cost side, it's been widely reported that lumber prices increased dramatically since hitting lows this past April.

Moving to extreme high as by the end of September. As an example, the Southern Yellow Pine indicator price rose approximately 180% in that period. The lumber prices has since come off those highs. The magnitude of these changes have resulted in the need to quickly adjust pricing on our homes.

Gross margins may continue to be squeezed in the near-term as those price increase has worked through the backlog. Our proactive approach in addressing pricing should allow us to maintain gross margins over time. Production labor challenges continued through the second quarter.

Absenteeism has affected our productivity and while there has been some improvement hiring still remains limited. To address these issues, our plants are making adjustments to hiring practices and wage rates as well as implementing other programs to attract, retain, and develop production employees.

In manufacturing, our focus continues to be taking action to increase productivity. In our retail operations, we've continued to perform very well. What we're seeing in our own retail stores is a level of traffic that is a typical seasonal pattern with some slowing going into the fall.

The traffic remained strong and still higher than last year's levels. Conversion rates, the percent of traffic opportunities converted into sales remained significantly higher than a year ago. In financial services, our lending has been relatively stable.

Interest rates for mortgages - mortgages and home-only loans are at historic lows making financing much more affordable for most homebuyers. As previously discussed, the home-only lending environment has been increasingly competitive since early in the pandemic. We're still pursuing a longer-term strategy of increasing our home-only originations.

The pace of that strategy in the near-term is affected by our measured underwriting standards and an aggressive low rate competitive environment. Our insurance operation is doing a great job with what they control, new policy sales, and renewals.

During the quarter, we experienced an unusually high number of weather events, none of which were catastrophic but cumulatively they represented a high claims cost. The United States experienced a record number of named storm landfills this year 11. 4 of those directly affected Texas.

Normally were affected by a name storm only about once every 2 years. I'll remind people that for comparison this quarter a year ago claims costs were very low due to unusually favorable weather. Overall, we generated a significant amount of cash from operations since the beginning of the fiscal year.

Paul and Mark are going to provide specifics in a few minutes. As we've said in the past, we're continually evaluating capital priorities in light of our growing cash balance. When COVID hit I think it was understandable that we adopted a wait and see approach regarding cash.

Two quarters later Cavco has demonstrated our ability to remain profitable and generate significant cash from operations, despite the disruption. There's no doubt that uncertainty remains high regarding interest rates, consumer demand, the general economy, and other factors that impact MH demand.

However, our Board of Directors has determined that it makes sense to authorize a new $100 million stock buyback program. In light of those uncertainties, we are not putting a specific timeline in place.

However, this is an important tool we now have along with other opportunities to deploy capital for us to manage our cash reserves at appropriate levels. It's very important to make clear that our decision to put this buyback authorization in place does not change our view about investment in our businesses for organic growth or an acquisition.

We're comfortable that the buyback does not impede other opportunities. Again it was a good quarter in light of the challenges of the day, with all of our operations team flexible and focusing on the fundamentals. We know we have a lot of work ahead to meet the demand of buyers who are in need of quality, affordable manufactured homes.

As noted in our recent 8-K, our CFO, Dan Urness has decided to go on leave to deal with the Wells Notice he received from the SEC. For those who have not heard from him previously, I want to introduce Paul Bigbee, our Chief Accounting Officer. Paul is doing an outstanding job stepping up. He and Mark Fusler will be reviewing the financial results.

With that, I'll turn it over to Paul..

Thanks, Bill. Today, I'm going to cover the company's financial results and then turn it over to Mark to go through the balance sheet. I'll start with consolidated net revenue and for the second fiscal quarter of 2021, we were at $258 million, which was down 4% compared to $258.7 million during the prior year's second fiscal quarter.

When we look at the pieces, the first I'll cut and go through is a factory-built housing segment, where net revenue decreased 4.6% to $241 million from $252.7 million in the prior-year quarter. This reduction was primarily due to a 9% decline in units sold, home production decline from primarily operational challenges presented by COVID-19.

We had high production employee absenteeism, and we are complying with health guidelines and also had supplier disruption in production, down days. These unit sales, however, were partially offset by 5.2% increase in average revenue per home sold, primarily from product pricing increases. Also, call out a few non-comparables.

In the current quarter, we had an additional month of net revenue from Destiny Homes acquisition compared to last year's prior quarter, as the transaction occurred in August 2019 in the prior-year quarter included revenue from Lexington Homes, which is closed in June 2020.

In the Financial Services segment, net revenue increased by 6.3% to $17 million from $16.8 million mainly the result of $700,000 unrealized gains on equity investments and the insurance subsidiary's portfolio compared to $200,000 in the prior-year period.

In addition, there were higher home loan sales and more insurance policies in force compared to the prior year. These increases were partially offset by declines in interest income from the formally securitized loan portfolios that continue to amortize as expected.

Consolidated gross profit in the second fiscal quarter as a percentage of net revenue was 20.8% down from 21.8% in the same period last year. The decline here was primarily the result of $3.3 million in higher weather-related claims compared to the same period in the prior year.

If you recall we had 2 hurricanes, Hanna in July and Laura in August have made landfall on or near the Texas Coast.

In the factory-built housing segment margins were consistent between periods with lower sales and production inefficiencies caused by the COVID-19 pandemic and increases in material costs were partially offset from decreases in labor cost driven by declines in overtime hours given the high absentees have some levels.

Selling, general and administrative expenses in fiscal 2021 second quarter as a percentage of net revenue was 13.7% compared to 13.4$ during the same quarter last year. This increase was primarily due to additional compensation-related costs and other corporate-related expenses on a lower revenue base offset by decreases in legal expenses.

Also wanted to call out in the second quarter of 2021 was favorably impacted that the Company received an $800,000 insurance recovery of prior legal expenses related to the SEC inquiry resulting in a net benefit of $300,000 compared to last year's quarter $800,000 cost.

Other income, net this quarter was $1.7 million compared to $5.2 million in last year's second quarter. This decline was primarily due to a $3.4 million gain that was recorded on the sale of idle land in the prior-year quarter. Income tax rate remained fairly stable at 23.2% for the second fiscal quarter compared to 23.4% in the same period last year.

Net income came in at $15.1 million, down 27.8% compared to net income of $20.9 million in the same quarter of the prior year. Net income per diluted share this quarter was $1.62 versus $2.25 in the last year's second quarter. Now let's turn it over to Mark to cover the balance sheet..

Thanks, Paul. I'll be covering the changes in the September 26, 2020 balance sheet, compared to the March 28, 2020. The cash balance was $312.2 million, up from $241.8 million 6 months earlier. The increase is primarily due to 5 areas.

Net income offset by other non-cash items, changes in working capital, including higher customer deposits received as a result of higher order rates, deferral of certain payroll taxes under the Cares Act, collections on outstanding accounts receivable and consumer loans principal balances and lower net commercial lending activity.

The current portion of consumer loans increased from a greater number of loans classified as held for sale, which are expected to be sold in the near-term due to the timing of such sale.

Prepaid and other assets was higher from the assets recorded in regards to the loan repurchase option for delinquent loans that have been sold to Ginnie Mae, while we're not obligated to repurchase these loans accounting guidance requires us to record an asset and liability for the potential of a repurchase.

Balance increased from the additional loans in forbearance. Long-term consumer loans receivable decreased from principle collection on loans held for investments that were previously securitized.

Accounts payable and accrued expenses and other current liabilities increased from greater payments received on consumer loans to be remitted to third parties, higher customer deposits, which have grown with factory backlogs as well as the delinquent loan repurchase option discussed above.

Lastly, stockholders' equity was approximately $641.2 million as of September 26, 2020, up approximately $33.6 million from March 28, 2020 balance. And that completes the financial report..

Thank you, Mark. Sydney, let's turn it over for questions..

[Operator Instructions]. Our first question comes from Daniel Moore with CJS Securities. Your line is now open..

Good afternoon, gentlemen. Thank you for taking the questions. Maybe starting with just capacity utilization, you said 65%, I believe during the quarter, up to 75%, it's up to 70% by the end.

How quickly can you ramp that to 75% and ultimately closer to 80% and what kind of key challenges to doing so?.

Yeah, the speed, I mean that's what we're all focused on, I can tell you that. The speed is partly going to be dependent on how things continue.

I mean, just to give you a feel like in a given plant, we might be going along pretty well with low absenteeism, and then is that area sees upsurge in for example COVID cases suddenly our absenteeism spikes and it hurts our utilization.

So as you guys know we're not past COVID and we're seeing kind of, bit of a moving target on where those cases surge, so that's just one example. The other thing that we don't control and it's hard to have a crystal ball on supply, which is really affecting us.

And so as Dan, it's hard to say how quickly if all that stuff suddenly smoothed out, I think we would move up pretty quickly to 80%. We've been able to run that way consistently in the past, but it's just kind of a battle it every plant to try to get there right now.

Those are the main factors, some of what affected our utilization it contributed that people may not be thinking about for example is we had days down for the Oregon fires. So we've had those kind of things happen as well that have contributed to the utilization challenges that are non-COVID related..

Absolutely. In terms of the supply chain issues, do you see an end in sight not this quarter obviously or this month.

But is that a 6-month, 3-month phenomenon, 6-month phenomenon? COVID obviously a more difficult crystal ball, but just wondering if you see some of those of supply chain constraints working themselves out over a couple of quarters?.

Yeah, it certainly would hope over a couple of quarters. In talking, we've had it's been almost across the board. It's hard, even zero-in on one piece of the supply that we need. But we have had different suppliers tell us that they expect to be challenged, well into the first calendar quarter.

So it's going to take some time and hopefully early in the calendar year, will be feeling a little bit better than we do right now, but that's really speculative, Dan..

Is 70% capacity utilization, a decent base rate to utilize for this current quarter, at least for the time being?.

We've been bouncing right in that $65 to $70 rates the last 2 quarters, including the first one, it was so disruptive. So that's kind of the - been the process for last 6 months..

Okay.

In terms of margins, gross margin lower by 100 bps but you called out the insurance claims obviously with input costs rising more significantly towards the back half of this past quarter, how do we think about gross margins in Q3 and Q4, may be relative to Q2 as a baseline?.

Yeah, well, people that follow, things like lumbers one of the biggest contributors to our cost structure and people averages public indicator pricing on that. No that, as I've said this thing really shot up. I don't know if I can say unprecedented but incredibly quickly from April through September.

One thing I stated was, Southern Yellow Pine up about 180%. They have come off of their highs, those lumber prices and equally important lumbers become more available. We are worried about running out, I think we can talk about price but running out was a concern as well.

So there is an example where right now, a big contributor to our cost has started to come off. It's very high peak, still high that pointed in a better direction for us. If that kind of a trend continues. I think we're going to see a dynamic, we've seen in the past right? We're going to see margins compress, well prices.

Well, costs are going up before we can get prices through the backlog, and then potentially that can all reverse and we get a quarter where margins are bigger because prices have taken hold and the costs are down. So that's a typical pattern. I don't know for sure.

The timing of how that will play out, but as I commented in my remarks, I think over a period of a few quarters, we feel like we'll be able to manage that kind of solid typical margins..

That's helpful.

ASPs grew but was that - was that mix or largely pass through of rising raw material costs or both? And what do you expect for ASPs year-over-year kind of over the next quarter or two?.

Yeah, I mean we really are pushing price increases to the point that it's been very difficult for dealers and customers. I think we're all very sensitive to that but it's been a really volatile cost market. It's more about price increases than it is about mix shifts in this quarter.

So we expect to be able to - for the short-term, I think it's fair to say we should be able to hold that price increase, but we haven't - It hasn't been driven as much by mix shifts..

Is that another way, you probably didn't get the full benefit of that in this past quarter given the timing, is that fair?.

That's fair. I mean, we still have a backlog now. Now this price increase you may have heard this from other folks you talk to, this price increase has been, as I said, particularly hard for dealers and customers because it was so rapid, they were successive.

And where we typically as an industry protect existing orders particularly retail sale orders or there is a home buyer on the other end, that even got kind of loose end these price increases. So we have to wait for some of it to get through the backlog out of the other parts of the price increase took hold pretty quickly.

It's a bit of a negotiation at the grassroots, but I don't think all of it has gotten through in the numbers that you're seeing now..

Got it. And I wanted two more. I'll jump out.

Financial services, are you seeing weather events that drove claims in fiscal Q2 continue into Q3 so far?.

Yeah, really, I have no idea. I mean we are through kind of the quarters that are typically the toughest from a claims cost perspective. So we're entering quarters at general tend to be milder but it was - as I said, it was pretty unprecedented for the number of storms that hit the U.S. and we've got our share of them.

Now as I said, none of them from a claims perspective in sense of about it. None of them were what we call catastrophic, - it was just [indiscernible] up..

Perfect. Lastly, the D&O insurance amortization of $2.1 million, I think it's scheduled to burn off after this past quarter.

Do you expect that full amount to come off the P&L? Are there any offsets that would prevent that from kind of flowing to the bottom line?.

No, after a lot of quarters of telling you which quarter we're going to end the amortization should be over..

Perfect. I'll jump back with any follow-ups. Thank you for the color..

Thanks, Dan..

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

Yeah. Hi, everyone. Thanks for taking the questions here. I mean, maybe to start off, can you just comment a little bit on the cadence of orders throughout the quarter.

What you've seen thus far in October? And anything that was sort of outsized performance from a geography standpoint or EBITDA specific channel?.

I'll probably hesitate a little bit on this quarter, because we are this month because we're not commenting on it, but the orders were high consistently. I mean they really have been, it hasn't been when we look at year-over-year order rates it hasn't been jumping around. It's been consistently higher than last year.

Geographically, we've commented in the past and might be a question people are thinking about there. We've commented in the past about community business and where the communities really, very quickly when the pandemic hit put their orders on hold. We've seen that come back generally.

Geographically, I guess, to give you more color in the Southwest we've seen it come back a little stronger. They both have taken orders that were on hold off of hold one delivery of them and they've resumed picking up orders, so that's been pretty encouraging. And but backlogs like this, it's just adding to the challenge I guess, ahead of us.

And then in Florida.

I guess I'd comment that the community side really probably hasn't been quite as strong as I just comment about the Southwest and Florida, it seems to be particularly at the larger community operators, it seems to be a little bit more of a wait and see as far as what the probably, what the snowbird season looks like and whether they need to really be starting homes at this point.

So those are some geographic differences, I guess, but generally, when we talk about the strength of the MH orders, it's across our geographies. We don't have an area that really has lagged there..

And what gives you confidence that this is not some sort of short-term pent-up demand versus something that got legs to it.

I don't know if you can comment, and maybe one of the biggest reasons you think you're seeing the strength to whether financing related, whether it's this migration trend from urban to rural, what's, what are your general thoughts there?.

Yeah. You're asking for speculation. I'll give you a little bit of personal speculation. But I'll leave it at that way. I believe we've been talking a long time about if you just look at supply and demand of homes over really the last decade it's been lacking. The supply has been lacking household formations and I believe in that.

And I think that, in particular, is lacked at the lower ends in the more affordable segments because there is even the traditional home builders have been stretched to supply in the market, they've moved to higher price homes.

So we've been talking about a pent-up demand that we really believe in and it's much more than just a near-term cyclical event and I believe that, that's what we're seeing. And I believe it's obviously very much, I mean we can never forget how much that's facilitated by the low-interest rates that we're seeing.

If interest rates hadn't been incredibly low through this period, I think we would have a very different scenario. That the pent - the demand is there, it's got to be met at some point and it seems to be coming out right now with the low-interest rates, despite the pandemic.

I've been a little bit more - I guess hesitant on kind of predicting or pointing at trends driven by the pandemic, doesn't mean I'm right. But I think what we're seeing is way too big to really think that those are significant drivers of what we're seeing. I think it's more of a complete - it's a demand that has been built up for years.

So that gives me - I mean - given my view about that, that gives me some confidence that this is something that is going to persist. It probably will have some micro cycles as we go forward, because of the economy and interest rates. But we've got a great opportunity here, I think as an industry to catch up with building..

Yeah, that makes sense.

I mean, if that's the general thought process and in light of all of these labor challenges that we've been talking about, I mean, does that change how you might be thinking about investments in your own manufacturing facilities - anything you're looking at non-labor base to maybe try to increase production rates?.

Yeah, I mean we're looking, we're always looking at just general market opportunities. People have asked about greenfielding in the past, when we're having labor challenges like we are. I think there's a little bit of putting first things first, as far as trying to get our capacity utilization up. But we're looking at all those kinds of things.

And I also spoken in the past, I think there are entirely new market opportunities available to factory-built housing outside of our traditional markets that we're looking at and we would love to be able to break through of some investments on. So we're trying to get the opportunity to invest behind these demand drivers that I spoke about..

Okay. Last one on the buyback. Obviously phenomenal free cash flow generation, so cash continues to build, but anything specific that drove the decision to up the authorization. I mean, pretty meaningfully here from $10 million all the way up to $100 million.

I mean, did you buyback any stock under the previous program?.

The previous program, which is in place for a long time. I'm looking at more was the 2008 all right. It was not utilized and can't really comment too much about that. But as far as the decision we made here to put $100 million into the buyback program. As I said, it gives us another tool to try to manage our cash balance.

I know the investors have been pointing out it for quite a while appropriately and we have one more tool to start managing at the appropriate levels. So that's about it. We talked quite a lot about it, we've - I've been asked in past calls and I've had uncomfortable situation of things.

Believe me, we're thinking about it now, we finally have something tangible that we hopefully will be able to go out and execute against..

Okay, great. I'll leave it there. Best of luck going forward..

Thanks..

Thank you. And our next question comes from the line of Jay McCanless with Wedbush. Your line is now open..

Hey, everyone. Thanks for taking my questions.

I guess the first one, could you talk about what you're seeing for chattel rates right now? And are you seeing anything from a lending perspective, whether it's taking a lower down payment, little bit of widening on credit terms anything that concerns you there?.

Yes, I don't know that I. I mean man whether things get too aggressive. I guess is in the eye of the beholder and I'm not sure I have a strong in a view to say that I have concerns about what we're seeing out there.

As far as rates we're seeing historic low rates for not only traditional mortgages, manufactured housing mortgages but also home-only loans. Home-only is not typically correlated to mortgage rates. I think I'm in the right zone to say it's typically run in the 7.5% to 8% and what we're seeing right now is more in the mid-5s.

So, it came down pretty aggressively since the pandemic, and it's been interesting to see how lenders have moved in trying to lower those rates and be a more aggressive. Whether that's overheated or not. I don't know that I have a strong view about that.

Obviously, there's a big demand and that kind of interest rate is helping bring that demand forward and creating some of the backlog challenges we have..

Yes, I'd say so.

From the dealer perspective have you all sorted to have any type of cancellations or I know you said there were some push back to the most recent price increase, but are you starting to lose some orders, because it's just such a long back or long delivery time at this point?.

I think the dynamic about losing orders every essentially every manufacturer has a huge backlog right now.

So there probably is some shuffling, anecdotally we've talked to folks and understood that customer gets frustrated with the length of the backlog and maybe either doesn't buy or acts out and says I'm going somewhere else and they probably are going to get a similar backlog. So I think, in my mind is kind of probably just a shuffling of the chairs.

I don't think net we're losing anything because we're not standing out as the ones with the high backlog. So I don't think we're really losing anything. As far as pushback I guess, I wouldn't necessarily characterize it is pushed back, it's just very hard on a dealer work when manufacturers are increasing one after another increase.

The manufacturers would make an increase thinking will that get us where we need to be and cost kept going up and they turned around oh geez, we need to do another one. That's real hard on a distributor dealer.

And so what takes place after that is a lot of working together and sitting down and looking actually specific deals and deciding which one is the wholesaler agrees we should price for tech. So there's a lot of work going on, really at the ground floor to try to work through it with the dealers but it's been a difficult dynamic for sure.

I don't think we've net loss anything is I think that dynamic. I think I'm safe to say that dynamics going on with all manufacturers and no one's really sitting there with an empty backlog ready to jump in, so I can get your house a lot quicker..

Got it. And then the last one I had and apologize from put merging mouth, Bill but I think you said when it comes to the homes that you all are taking orders, for now, people are maybe going a little more upscale a little bit bigger footprint, more options inside the home.

if I heard that correctly, could that along with the price increases you are talking about result in a meaningful step function higher in where your average prices are at this point?.

Yeah, thanks, thanks for giving me the chance to correct something if I came across that way because I didn't intend to say that. I'm trying to think what I said. I know at one point in the Q&A here, I talked about traditional site builders when they are kind of stretch for capacity.

They tend to go up and build more expensive homes leaving the lower price levels and it even more in deficit as far as supply. Wondering if that's what you're picking up on but I didn't mean to imply that we were seeing a big move of customers going to higher-end right now or even from an options perspective going up.

It's been fairly stable from my perspective..

Yeah, thank you for clarifying that..

But yes, because I didn't mean to leave a wrong impression there..

No, it may have been - may have been my bad hearing. So thank you guys for all that.

The one other question I had does it make sense to restart Lexington or think about keeping it open just to give you another shot at working through the backlog?.

So we'll keep looking at that, but right now, that's not something that we're looking at. We made a decision. I still think it was probably the right decision just from where that plant was positioned in the market and the specific struggles, we were having trying to identify the right product niche for it.

So that's not something that we're actively looking at, but I get - definitely get the point when got get these kind of backlogs. So we'll keep our eyes open on all those kind of choices..

Thank you. And our next question comes from DeForest Hinman with Walthausen & Company. Your line is open..

Hi, thanks for taking the questions.

Can you just give us a little bit more color as it relates to the response, the Company is taking on the labor side? You alluded to some things in the prepared remarks, but any additional color there would be helpful in terms of how can we address the labor issues we've been facing?.

Yes, I mean it's certainly not a one same approach. One of the challenges, we're having is hiring and we've done a lot to try to improve basically the recruiting effort. We've over the last year we've built up, bit more of a human resources infrastructure in the company.

I think that's paying dividends for us now because those folks are working very closely with our individual plants to improve their recruiting efforts and it's sometimes is trial and error. We definitely have had some spots of success where we've seen plants take a different approach to recruiting and it's paid off. So that's underway.

There has been a considerable amount of work on wage rates and that's not generally just as simple as saying, we're going to increase the base wage.

Usually, it's plants thinking through how to, how much will be in base wage, and how much would be an incentive compensation and what the drivers, the incentive comp, but the net effect is several of our plants are making significant moves on their wage rates. And I think that's necessary and I think it's smart moves.

In our system and this is a philosophical thing and we're standing by it because I really think it's the way to operate. In our system plants probably get plenty of input. People like me will comment. We're talking at a minimum.

I'm in a conversation and operating reviews with the GMs every month but our VPs are really the ones that are managing that system.

And but ultimately, we believe that the local general managers have the best perspective on what they need to do in these kinds of areas, but I can report that generally our plants are increasing wage rates and structuring it good ways. So I think that will have an impact on retention.

And over time, we've tried to do things to also improve the workplace. All that stuff, I think all of that is smart, it's generally mid-term type things as far as the pay-off but right now, right now the need is urgent as we all understand.

So it's just been heightened attention to those sorts of efforts that, I'm confident will pay off for us but it's been frustrating..

Does it make sense to run overtime at the facilities or try to get the teammates or crews to work an extra day of the week or are the plants running 5 or 6 or 7 days a week? Can you just give us color in terms of any of those initiatives are potential opportunities?.

That's a really good question. And I can on that typically our plants do run overtime even in much slower backlog environments and like this, often they will run on Saturdays here in there not is a scheduled approach, but it's not atypical at all for a plant to run couple of Saturdays a month and we continue to do that.

But you think about the dynamic when you're absenteeism is high the people that are showing up the work you kind of have to be a little bit careful about how hard you work that group trying to make up for the production. So the folks in our plants, really have balancing act to do.

They are driving hard to get that extra house out, but if they drive too hard with the overtime in the Saturday work, we're just going to compound our labor problems by basically burn in people out.

So we actually saw our labor costs go down a little bit, our production worker cost go down a little bit, partly because we had days that were not producing in the plant, partly because of absenteeism that partly because we just can't work, the folks who are showing up so hard that we exacerbated our problem.

So it's a real fine line, but we definitely do it. You're talking about as far as looking at opportunities to work overtime to get the incremental wholesale..

Okay, that's very helpful. I appreciate the color. Separate topic the share repurchase authorization. We have had the SEC inquiry.

Are we restricted from making share repurchases, while that inquiry is outstanding in these Wells notices are outstanding, or are we allowed to purchase stock at this point?.

Yes, it's something that is material inside information question right, obviously. And so they're very well may be times when we have to under a blacked-out and keep ourselves out of the market. Having said that, so frankly, it could be a challenge at times just as you're alluding to.

Having said that we have taken an approach is trying to be as transparent to the market with what we disclosed as possible around the SEC matter. So no. They're going to be when the market knows as much as we know in those points in times taking a conservative approach to inside information will hopefully be able to be in the market.

So it'll be interesting to see how that plays out but we didn't, we wouldn't have done the authorization. If we thought were going to be precluded from doing it..

Well, I was just, I know, I just wanted the insight, because the Board meets at certain times. And in some instances, it could be an indication that the SEC inquiry may be nearing a close if there is a blackout and we've already taken the steps and put that in our tool kit and we're prepared to use it appropriately..

Yes, I mean the Board gave management authorization. So the Board is not going to be directly managing when we're able to purchase. So we'll be able to do that obviously as we go forward.

Yes, like I said, I will be, obviously will be very cautious about it but we wouldn't have authorized or ask the Board authorize if we didn't think there'll be opportunities..

Okay. And then final question on the repurchase authorization.

Can you just help us understand the philosophy around that is the goal to offset dilution? Is the goal to reduce the outstanding share count? Is the goal to be opportunistic from a pricing valuation perspective or should we think about of as a gradual run off of this authorization over some period of time?.

So the pace of execution is yet to be seen. The goal in my mind is pretty clearly balance sheet management. I mean that's the priority. We've got a cash balance that we needed another way to manage that cash balance and this is that added tool as I said..

Okay, thank you..

Thanks a lot..

[Operator Instructions]. Our next question comes from Daniel Moore with CJS Securities. Your line is open..

Sorry about that as I was muted.

I was going to ask, but I think you covered it Bill to the extent that you could, but is there any level, high level of color you can provide on beyond the press release recently on whether or not we're closer to putting the SEC investigation as it relates to Cavco at least to rest?.

Yeah, I appreciate the question. I mean, we had the 8-K, that just went out in September and it was late September. I can't remember the date actually but - and really there is not an update since then. And that's the way this is going to go. It's been that way for a while. These things will come in but it's in spurts.

We'll do our best to be transparent to the extent we can, extend it's appropriate, but not much to update from that 8-K..

Okay, thank you again..

Thanks Dan..

Thank you. And I'm not showing any further questions at this time. I'd like to turn the call back to the speakers..

Okay. Well, just to wrap up, I mean, it goes up saying that these are strange times we're operating in, but our teams continue to plow forward to meet the needs of our customers and I'm very proud of the commitment being demonstrated every day by the folks that make up Cavco without a doubt.

Quarter ago we were relieved that we were seeing demand for our products and services and when the pandemic first hit, it was a big question mark whether things would kind of go to zero and last quarter when we talked to you, we're kind of - our backlog was - I think it was around 7 weeks, it was kind of just healthy, maybe a little long, but we were relieved to be seeing the demand.

And now in manufacturing and retail, we're challenged to keep up with, challenge to provide enough homes with orders that would exceed production under any circumstances. So continues to change, we know we have to do. And with that, I really want to thank you for all your interest in Cavco. I hope each of you and your family will stay healthy and safe.

And we'll wrap up the call. Thanks..

End of Q&A:.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a good day..