Cavco Industries, Inc.CVCONASDAQ
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Operator: Good day, and thank you for standing by. Welcome to the Third Quarter Fiscal Year 2026 Cavco Industries, Inc. Earnings Call Webcast. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Mark Fusler, Corporate Controller and Investor Relations. Please go ahead.
Mark Fusler: Good day, and thank you for joining us for Cavco Industries Third Quarter Fiscal Year 2026 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 comments made during this conference call by management may contain forward-looking statements. Forward-looking statements include statements about our future or expected business and financial performance and are not promises or guarantees of future performance. They are expectations or assumptions about 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. For a discussion of material risks and important factors that could affect our actual results, please refer to those contained in our filings with the SEC, which are also available on our Investor Relations website and at sec.gov. This conference call also contains time-sensitive information that is accurate only as of the date of this live broadcast, Friday, January 30, 2026. 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?
William Boor: Thanks, Mark. Welcome, and thank you for joining us today for our third quarter results for fiscal 2026. There are a lot of moving parts in our Q3 results, mostly due to the closing of the American Homestar deal and its impact on the quarter. Later in my comments, I'll discuss the integration activities and our solidifying view of the deal synergies. But I'd like to start by framing the discussion that Allison and Paul will fill in around the profit and EPS results. The year-over-year EPS decrease is best dissected starting from the bottom of the income statement. Our tax rate was considerably higher than a year ago, partly due to declining tax credits from the phasing out of the Energy Star program and partly due to nondeductible deal costs. Moving up the P&L to SG&A, the increase this quarter was mainly the result of bringing American Homestar overhead costs into the company and the aforementioned onetime transaction costs. These SG&A and tax rate items represent a considerable part of the year-over-year EPS difference, but not all of it. So now let's get into the underlying business environment and results. Based on HUD shipment data, industry shipments slowed in October and November. Those 2 months were down 13% from the calendar 2024 period. We don't yet have the December data point to round out the quarter. We were not immune to the overall decrease. Excluding the volume pickup we got from American Homestar, our volume was down about 4% compared to last year and 6% sequentially. From an operational perspective, we took some additional down days around the holidays where it made sense, but we deliberately maintained our daily production rate or floors per day so that we could stay positioned for opportunities in the spring selling season. While we're all looking to see how orders shape up in the weeks ahead, the bias in our plants generally is to hold pace and go up from here whenever orders and backlogs allow. As part of staying poised for market opportunities, we utilized about a week of overall backlog, similar to what we did last year in the third quarter, and we finished this quarter in the 4 to 6 weeks range. Early indications are that backlogs are stable and could increase or if we pick up production pace, be maintained at this level heading into the spring. Last quarter, I referenced some relative slowdown in the Southeast region of the country compared to other regions. I said at the time that we didn't see any systemic reason for the variation and sure enough, the Southeast stabilized and saw higher volume in Q3 versus Q2, while most all of the other regions had decline in shipments. Regarding channels, communities represented most of the reduced volume we experienced. Retailers remained steady quarter-to-quarter. A positive indicator of underlying demand continues to be average selling price, which grew sequentially despite the volume drop-off. After considering the impacts of product mix and retail integration, both of which pushed average selling price upward, single-section home prices were roughly flat and multi-section pricing was up. We have seen the trend toward multi-section homes for a while now, both in the HUD data and our results. It's difficult to pinpoint any one reason. However, it seems fair to conclude that affordability at the lowest price levels is increasingly strained. In other words, households that are seeking to become homeowners of the lowest-priced homes seem to be increasingly priced out or they're lacking the confidence to purchase in this environment. Sequentially, our gross margin dropped in the quarter despite the average selling price increase. While usually the primary factors driving movement in factory-built gross margin are manufacturing costs, those period-to-period changes roughly netted out. We saw some compression between retail and wholesale prices in our retail operations, which drove the bulk of our gross margin decrease. And to be clear, those retail comments are based on our pre-Homestar network, not due to the addition of the acquired operations. And it's worth noting that retail -- our retail operations remain primarily centered in the South Central region. We don't believe that price compression is either an indication of the broader market or that it represents a meaningful shift over time. I know the focus is rightly looking forward and trying to figure out where the industry will go from here in the coming quarters. While the uncertainty remains, the tone we are picking up in both our operations and in the market is optimistic. The leading indicators such as [ quotes ] and retail traffic remain healthy. Notably, policy discussions are increasingly focused on affordable housing and specifically on increasing supply of first time -- poor first-time buyers. Affordable housing is one of the highest voter priorities heading into the November election and policies to increase supply, remove barriers, enable innovation and help buyers are all supportive of Factory-built Housing. It will be interesting to see the proposals shape up in the coming months. It's important to comment on financial services, where the trend continued with another strong quarter, driven by our insurance operations. Our lending operations have been less of a contributor in recent periods. However, we've been making progress identifying buyers of our loans, and I expect the originations and loan sales to pick up in the coming quarters. Both of these operations are important strategic contributors to the integrated value of Cavco and our ability to provide complete solutions for our homebuyers. Now I'd like to take a few minutes to talk about the American Homestar integration. First, we had a solid integration plan heading into the combination and both organizations have come together, really hitting the ground running as one company. We're right on that plan with impressive execution from HR benefits and payroll to finance, IT and operations. Now that we've been together for over a quarter, our view of synergies is starting to firm up. What I'd like to share today is our view of the most tangible cost reduction synergies. We spoke previously about this deal offering meaningful purchasing, labor and SG&A cost savings. Our total view of these tangible and measurable synergies is now above $10 million on an annual basis, and we estimate that about half has been achieved in the run rate as we entered Q4. The positive impact didn't show itself in Q3 because the gains were achieved as the quarter progressed, and they were offset by integration costs that will decline going forward. I thought it important to provide this information at a time when we are well into our integration work and can provide a more informed view. It's good news that the current picture is significantly higher than our pre-deal internal estimates. Additionally, there are a number of areas where precise quantification is difficult, but where we know value is being created. Areas like the ability to optimize product within and across plants as the system grows and the ability to fill out company store offerings with Cavco product from various plants are examples of the very real ways in which the strategic benefits of a combination like this show. Again, these are very real synergies and are not included in the tangible cost savings I laid out. And finally, we continued our share repurchases during the quarter with another $44 million used to buy back company stock. With this return of capital and the significant use of cash for the acquisition in the quarter, our unrestricted cash balance at the end of Q3 was a healthy $225 million. Now I'll turn it over to Allison to give more details on the financial results.
Allison Aden: Thank you, Bill. Net revenue for the third fiscal quarter of 2026 was $581 million, up $59 million or 11.3% from $522 million in the prior year quarter. Sequentially, net revenues increased $24.5 million, driven by the addition of American Homestar, which contributed $42 million and an increase in average revenue per homes sold, partially offset by a reduction in base business units sold. Within the Factory-Built Housing segment, net revenue was $558.5 million, up $57.6 million or 11.5% from $500.9 million in the prior year quarter. The increase was primarily due to the addition of American Homestar and an increase in base business average revenue per homes sold, partially offset by a decrease in the number of base business homes sold. The increase in base business average revenue per home was largely due to a higher proportion of homes sold through our company-owned stores, more multi-wise in the mix, along with product pricing increases. Financial Services segment net revenue was $22.5 million, up $1.3 million or 6.2% from $21.2 million in the prior year quarter and sequentially up $1.1 million. These increases were due to the addition of American Homestar Financial Services and higher insurance premium rates, partially offset by fewer loan sales and fewer insurance policies in force. In the third fiscal quarter, consolidated gross margin as a percentage of net revenue was 23.4%, down from 24.9% in the same period last year. In the Factory-Built Housing segment, gross profit was 21.7% in the third quarter, down from 23.6% in the prior year quarter. The reduction was broadly due to higher per unit cost. Financial Services gross margin as a percentage of revenue increased to 65.2% in the third quarter from 55.5% in the prior year quarter. This increase is primarily due to lower weather-related claims, the growing impact of rate increases and underwriting changes on policies. Selling, general and administrative expenses in the third quarter were $81.4 million or 14% of net revenue compared to $66 million or 12.6% of net revenue during the same quarter last year. Expenses rose primarily due to the addition of American Homestar, which contributed $6.9 million in operating costs and $2.9 million in deal-related expenses, along with higher year-over-year compensation. The American Homestar operating costs are expected to decline as we realize projected synergies. Interest income for the third quarter was $3 million, down from $5.4 million in the prior year quarter, primarily due to lower cash balances after the purchase of American Homestar at the beginning of the quarter. Pretax profit was down 16.9% this quarter to $57.6 million from $69.3 million for the prior year period. The effective income tax rate was 23.5% for the third fiscal quarter compared to 18.6% in the same period in the prior year. This increase was driven primarily by a reduction in tax credits and nondeductibility of certain American Homestar deal costs. Net income was $44.1 million compared to net income of $56.5 million in the same quarter of the prior year, and diluted earnings per share this quarter was $5.58 versus $6.90 in last year's third quarter. Before we discuss the balance sheet, I'd like to take a minute to talk further about capital allocation. During the quarter, we repurchased just over $44 million of common shares under our Board-authorized share repurchase program, leaving approximately $98 million under authorization for further repurchases. Additionally, we've closed our acquisition of American Homestar. Our capital deployment will continue to align with our strategic priorities, which include enhancing our plant facilities, pursuing additional acquisitions and consistently assessing opportunities within our lending operations. Share buybacks will then serve as a mechanism to responsibly manage our balance sheet after considering these initiatives. Now I'll turn it over to Paul to discuss the balance sheet.
Paul Bigbee: Thank you, Allison. In the quarter, we had a decrease in cash and restricted cash of $157.5 million, bringing our balance to $242.5 million. Cash provided by operating activities was $66.1 million. Cash used in investing activities was $179.7 million, primarily related to the American Homestar acquisition and cash used in financing activities was $43.9 million, primarily due to share repurchases. As you would expect, when we compare the December 27, 2025 balance sheet to March 29, 2025, several of the balances increased from the addition of American Homestar, including inventories, notes receivable, property, plant and equipment, goodwill and intangibles, accrued liabilities and deferred income taxes. Base business accrued expenses and other current liabilities increased from higher volume rebates and warranty accruals. And finally, treasury stock increased due to stock buybacks executed in the period. With this, I'll turn it back to Bill for closing remarks.
William Boor: Thanks, Paul. Before I turn it over to questions, I'd like to briefly comment on our continuing brand and market strategy progress. I know everyone is focused on the numbers this call, but I think this is really important, and it reflects a long-term strategy that's been unfolding really nicely for us. Over a long period, you've heard me talk initially about a redesign of our digital marketing infrastructure. We then rolled out dramatically improved websites, not only for our operations, but micro sites for our retail partners. Last year, we talked about rebranding 19 manufacturing brands to 1 under the Cavco name. And most recently, at the Louisville show just a couple of weeks ago, we unveiled our product line framework that organizes every home made across our system under defined lines that we can then market locally and nationally. This is a huge milestone and a long-term strategy aimed at helping a potential homebuyer more easily find their best fit Cavco home and helping our retail partners with more and better leads. A lot of very impressive teamwork continues to be exhibited to transform our go-to-market strategy all the way from concept to customer conversations across the system. And I believe we're really well positioned to be a great partner for our retailers and to get more deserving families into quality homes. So I imagine there may be a couple of questions. So Marvin, go ahead and open up the line.
Operator: [Operator Instructions] And our first question comes from the line of Daniel Moore of CJS Securities.
Dan Moore: Let me start with utilization, obviously ticked a little bit lower than I think some people expected. Last quarter, you talked about keeping production steady overall. Where did you see maybe some pockets of weakness that caused you to pull back a little bit or take some more days of downtime? And I guess, probably more importantly, how should we think about production as you see the world in Q4 relative to Q3?
William Boor: Yes. It was interesting. I mean, October and November were kind of the downtick. And like I said, for the industry, it was pretty sizable. As I commented in my opening remarks, we talked quite a bit about the Southeast last time because I just wanted to point out that it was standing out relative to the other as kind of struggling or just not as much pickup there as in other regions. That really reversed. And to be honest, Dan, I could kind of tick through them, but the Southeast was the strongest quarter as far as holding volume and gaining a little bit this quarter. And as you can imagine, I mean, there's -- we always talk about seasonality. I think the dropoff in October, November was more than you would expect from seasonality, but everything across the north is going to slow a bit going into that quarter. But yes, you picked up. I'm trying to make it clear to folks that increasing production in a plant is tougher than pulling back production because you've got to have the teams in place, you've got to have a level of training. And so our tactical decision, very similar to what we talked last year, even when you expect the third quarter to possibly be a little bit slower, we, at our plants, really held production rate. We held our staffing. We held production rate. And where we had to, which wasn't across the whole system, if backlogs were just too lean, those folks -- those plants just took a little extra time at the holidays and down days. And that's how we balance the market. If we had done it the other way, we would have probably not been as well positioned now for the possibility of a nice increase in the spring season. So that's how we've tried to position ourselves. We don't -- may be frustrating to some people on the calls, but we don't do a lot of predicting and forecasting. We do a lot of making sure we're able to adjust accordingly upward and downward when necessary. And our plants right now because we maintain that production rate are just in a really nice spot to be able to continue moving up if we get the spring selling season we're hoping and expecting. There is -- I think people might get tired of us saying at this time of the year, but when you're at the Louisville show and when you're talking to our plants and operating reviews and when you're talking to customers, there is not a feeling of gloom. People are generally optimistic, and we'll see how it develops. We started off the quarter. I'm jumping beyond your question, Dan, and I apologize if I'm going too far. Yes, we -- as everyone knows, the weather here in the beginning of the calendar year has been a bit challenging. And so that's likely to show us in January as straining some traffic and also delaying some shipments and setting of homes. But the way I think about that is it's early in the quarter and those sales don't go away. So our plants, even ones that had to miss some time in the -- due to the recent weather, we've got a number of plants, not a small number of plants that are running this Saturday because they want to keep up. And so that's a good indication of their optimism going into the spring.
Dan Moore: Very helpful. I'm going to maybe just pull on that string a little bit more and go back to the comments you made in the prepared remarks, which is we're in position, I think, if I heard correctly, to hold -- in general, hold production here with backlogs potentially ticking higher unless we decide to increase production, in which case they might stay flat. So net-net, it feels like flattish sequentially and maybe a little upside to that is where you're seeing the world for fiscal Q4, but tell me if that's wrong.
William Boor: Yes. Yes, you caught me. I slid in a little bit of an update there, mid-quarter update, right? Because what I was trying to convey -- and I didn't mean to be too subtle about it. What I was trying to convey is that as we sit here today, we're pretty comfortable that our backlogs are holding. And if we get the uptick, you're almost inevitably going to get an uptick from the spring selling season. But we'll have kind of complete control and choice about whether to increase production rate and let the backlog kind of sit where it is or let the backlog move up a little bit for us. And 4 to 6 weeks is not a bad place to be if you feel like it's stable. So yes, that's a little bit of a mid-course update on the first quarter that we're not feeling like that backlog has fallen out from under us.
Dan Moore: Really helpful. Shifting to gross margin, factory-built gross margins. You mentioned higher per unit costs. Wondering, Allison, if we can just tease that out a little bit. I mean the questions I'd have is, is there any lingering impact in acquisition accounting? And how do we think about the impact of kind of lower utilization versus mix in the quarter?
Allison Aden: Yes. Thanks for that. On a year-to-year basis, I think it's what we'll just kind of reflect on. There was no -- consistent with what we foreshadowed last quarter in our statements, there really was no impact to gross margins from the acquisition. And when we think about margins year-over-year, they were down due to increases in input costs. And just in summary, prices were stable and they were resilient, even less so in forward markets. It really speaks to kind of a consistent underlying demand. But the reality was the prices did not increase enough to offset the input cost. This is a little unusual, particularly when we reflect on the retail side, but we don't think -- we don't see that as a systematic change.
Dan Moore: And as you mentioned, the retail margin was a little lighter, and I assume that flowed through there as well.
Allison Aden: That's correct.
Dan Moore: Okay. [indiscernible] 1 or 2 more...
William Boor: That was like a little bit of -- we haven't seen that historically. And while we wanted to call it out to help explain where we saw some of the downward impact on gross margin, at the same time, I'm going to encourage people to listen when we say that our retail operations still are, even as we've expanded them, they still are largely concentrated in Texas and surrounding states in the South Central. And -- so I just wouldn't want people to project that retail margins across the country for independents or the industry in general necessarily saw the same thing. It was one quarter where they kind of compressed their cost of buying a home and then their cost of selling it, but it's localized. And we also don't think in Texas, we're reading a whole lot into it at this point. But it was a factor that was more significant than we've seen in the past on gross margin.
Dan Moore: Helpful. Is -- in terms of mix, is retail slightly lower margin than producing homes? Or is it not necessarily the case?
Allison Aden: Typically, we don't see that as the case.
Dan Moore: Okay. Last for me, I'll jump out. Deal-related costs, I think you said $2.9 million. Are those largely behind you? And can you quantify at all the impact of integration plan spend in the quarter and what that kind of looks like in fiscal Q4 and beyond?
Allison Aden: Yes. The deal costs would have concluded in the third quarter when the deal was closed. And when we think about integration costs, we also, as Bill mentioned, absorbed a good bit of integration costs this quarter, which kind of tend to mute the uptick that we saw from early synergies. I would say that both -- as the synergies begin to take hold and we see an uptick there, we'll also see the integration costs continue to decrease slightly as we go forward.
Dan Moore: Perfect. [indiscernible] with my follow-ups. Go ahead.
William Boor: This felt like an investment quarter to kind of get us positioned with American Homestar. I mean some of those deal-related costs are things that -- things like adviser fees that are contingent on success of the deal that can't be capitalized. So a lot of those, obviously, they're paid and they're behind us. So this quarter kind of got all the negatives out of the way on that. And I think going forward, we'll see the positive synergies really come to the front.
Operator: Our next question comes from the line of Greg Palm of Craig-Hallum.
Greg Palm: I guess just digging in a little bit more about activity by channel. Bill, I think you mentioned that you saw maybe relative weakness or underperformance, I forget the term you used in communities versus retail. So can you talk a little bit about what you're seeing from some of the REITs in the community in general and as a whole?
William Boor: Yes. No, you heard me right. I mean when we look at the volume decrease that we saw, which -- well, I'll just stop there. When we look at the volume decrease we saw, it was pretty focused on the community side. And we went back and looked over quarters, and I will tell you that communities can be pretty volatile, right? You look quarter-to-quarter. And what we're looking at actually is our revenue by channel. That can move up and down quarter-to-quarter, sometimes without explanation. As we come to the end of the year, I think there could be a lot of reasons for it. Things like them -- they have allocations to various suppliers. We did pretty well earlier in the year. It could be a little bit of evening out there. Even their capital management as they come to the end of their calendar year, I think, can play into the third -- our third quarter being down at times. What I haven't heard and did kind of go out to try to listen and see if it was a factor, I'm still not hearing communities with pessimism or feeling that if they set another house, they won't be able to find either a buyer or a renter for that house. They're not concerned about the end consumer. And they're not -- we talk -- sales to communities to larger REITs really occur at different levels. We talk at higher levels about their overall plans for the coming year and years at times and then the actual sales happen actually on a plant-by-plant basis. At those higher-level discussions, I'm not hearing any bearish tone about slowing down their plans for the coming year or years. So it's an observation that communities were probably the biggest part of the weakness in sales this quarter. And I feel like I say this to you guys on a lot of things, I want to call it out. It's something we're watching, but I don't know that we should call it a trend at this point.
Greg Palm: Yes. Understood. And are you able to -- I know you mentioned October, November a few times, but are you able to comment on kind of what you thought in December just from the standpoint that I think you sort of hinted that October was maybe trending a little bit better. And so -- but at the same point, you mentioned or alluded to that really bad production data. So I'm just trying to figure out kind of how December went and what -- how sort of the cadence of activities played throughout the quarter?
William Boor: Yes. My comments about October, November were only called out because that's the industry data that's available. I wasn't trying to not talk about what happened internally in December. So as you know, I mean, we're all still waiting for the December shipments data. But I'm doing this off the top of my head. I think through the year, through the calendar year, we saw seasonally adjusted rates of shipments. In the early part of the year, it was pretty strong, up 106-ish -- 106,000 or so. October, I think it dropped to -- Mark is pulling up the data, to 96,000 seasonally adjusted rate and November, it dropped to 93,000. So those were significant moves down, no denying it. And we just wish we had the data before this call to report on the industry data in December. The shape, I would say, because we have told you guys in some quarters, the shape of how the quarter shaped out, I would actually tell you that this was lower October through December. And I don't feel like the market -- even though that November seasonally adjusted rate for the industry was down compared to October, I don't know that internally, we felt like we were on a steep downward slope during the quarter. It was a holiday quarter, right? So you always have to figure that in. But it didn't feel like things were falling apart incrementally month-to-month.
Greg Palm: Yes. Okay.
William Boor: [indiscernible].
Greg Palm: Yes. No, that's helpful. And on the gross margins, you talked about what a little bit of compression at retail. And I'm just wondering, was this some sort of company-specific strategy because you said it was not an industry thing. It kind of sounded like it was more, I don't know, certain geographies within your footprint, but I just wanted to better understand exactly what you meant.
William Boor: Yes. I don't know if I can capably comment on other people. So I can't tell you whether that same dynamic was at play for others. I'll tell you, I mean, just to be very frank about it, our volume in retail was pretty strong compared to the market they're operating in. And I still -- sometimes I talk about our retail as if it's still just Texas and that area. It's broader than that now, but a lot of our retail results are still driven by Texas. So we saw a quarter where our volume was strong relative to what we were seeing in the market, and we had that compression. So we're going to be looking at it and trying to figure out if we were under the market, to be frank. But I think it's that kind of a tactical discussion. It's something that I think from everything we can tell is isolated, and we'll jump on it and figure it out.
Greg Palm: And just to be clear, there were no purchase accounting inventory step-up impacts in gross margin in the quarter. And is there a meaningful difference in Homestar gross margins versus Cavco?
Allison Aden: So no, there was no real impact on the consolidated gross margins, gross profit due to any purchase accounting associated with the acquisition as we had experienced in previous acquisitions. I think that's consistent with comments that we also shared last quarter. So in general, as we've mentioned, when we look at the acquisition, their margins tend to be broadly in line with Cavco margins.
William Boor: That's at both retail and manufacturing.
Allison Aden: Yes, within the company.
William Boor: The other thing we've commented on last time people had asked questions about it was they're more integrated on average. They were about 60% selling their homes through their stores versus previous Cavco was in probably the 22% range. So while they're small relative to the rest of the system, just directionally, that means that those integrated sales are upward pushing on the gross margin. So if anything, we have a little bit of an upward push from bringing American Homestar into the company.
Greg Palm: Yes. Okay. And by the way, just last one on that. Do you have a metric for -- or an updated metric on the homes sold through company-owned stores, both as what it was in the quarter, including Homestar and maybe I don't know if you have it on a like-for-like or same-store basis, if you exclude that impact since they sell a lot more through company-owned than you?
Mark Fusler: Yes, Greg, American Homestar was 343 homes.
William Boor: Total, not just through retail.
Mark Fusler: Not just through retail, right. So this quarter, our company-owned store was 1,339. And the prior year quarter was 1,075. So it's up 25%.
William Boor: And that would be, I think, consolidated with American Homestar.
Greg Palm: I'll run the math and maybe follow up offline.
Operator: Our next question comes from the line of Jesse Lederman of Zelman & Associates.
Jesse Lederman: I appreciate all the color thus far. I wanted to dig in a little bit more on kind of the cadence through the quarter and maybe into the beginning of the year here. Appreciating you don't have national industry shipments yet for December. Are you able to comment on internally, maybe your progress, how things might feel if you're not willing to share specific numbers going from November to December and then December to January and maybe your outlook for the spring selling season?
William Boor: Yes. December -- if everything is equal, December is going to be a holiday month and everything is going to slow down, right? So if you think about it on a seasonally adjusted average rate, which I find helpful, just -- and let's just think conceptually on that basis of was December a dropoff considering that it's always going to be a relatively slow month, right? I don't think December felt like it was a drop off from November, just as far as looking at our data and kind of the tone of what was going on in the industry. So I don't know if that's helpful because I can't be real quantified lacking the industry data. But if I had to guess what the industry data is going to come in saying for December, it's probably going to be similar seasonally adjusted rate to November, and we'll see if I'm right. But it didn't feel like it was slowing down. I guess you're also asking for the -- a sense of how we're doing so far this quarter. The one thing that we have talked about already in this call is that we're pretty comfortable that backlogs aren't dropping off for us. So that's a positive. And the thing that makes it really hard to give an update even to the extent we're willing to share, Jesse, is that, man, the weather. I mean we're just a few weeks in, and that storm really is going to kind of shake things up for the month, but it will be muted by the time we get to the end of the quarter is my expectation. So I wouldn't expect people to overly react to that comment about the January weather when you're thinking about what Q4 might look like because, again, those sales don't go away, and our plants are already actually running Saturdays and doing things like that to make up for that lost time. So over time, that just moves activity from 1 week or 1 month to another, not something that we're overly concerned about. So I apologize if that's not as complete as you'd like, Jesse, but that's kind of my reaction to the question.
Jesse Lederman: No, that's really helpful. I appreciate the comments there. When you say backlogs aren't dropping off, it seems they've kind of stabilized in the near term. Is that at a similar utilization that you ended the quarter with? Or have you slowed things maybe just a touch quarter-to-date, maybe given the weather, given some other trends you've seen?
William Boor: No, we haven't slowed things. I mean think about our production rate in 2 pieces, right? It's how much we make a day across the whole system and then how many days we operate. We have not slowed -- we didn't slow in the third quarter as far as production rate. And we haven't slowed -- I'm giving you the update, but we haven't slowed here early January. However, we have lost operating days due to the storm. And that's where I said we're doing things to try to recapture that time. So we're not in the mode at this point of feeling like we got to pull back our daily production rate in the plants. And instead, we're trying to make sure we hold it and are ready to go up.
Jesse Lederman: Okay. That's great to hear. What is your sense from conversations maybe at the Louisville show or from communities or other dealers that's driving some of the optimism for the spring selling season that makes you think that you could see an increase in backlog or perhaps an increase in capacity utilization? Are there any early indicators that you're hearing or you're seeing or you're looking for that give you that confidence?
William Boor: Yes. The tone at the show, and I actually wasn't able to go, but I'll tell you, I talked a lot with people that did go because it's always a great interest, and our team was pretty -- actually pretty jacked up about the show, frankly, which made me feel really good. They were happy with how we showed up, but they were also happy with the discussions they had with our customers, the dealers and the communities about their prospects for the new year. And I think we all look at similar things. Traffic, I look at quotes, which I think is a bit of a directional long lead indicator. If we see quote activity drop off, then that makes me think about what are our orders going to be like in a month or 2. We have not seen them drop off. They've been actually pretty healthy. So I think everybody kind of hits the Louisville show excited about what spring could offer. So that's just the nature of our attitudes and our mindsets. But then the more tangible measures around traffic and quotes and activity like that still seems to be pretty strong. So that's what we're reading at this point. And we're real anxious as we get to this point in the year, it's always interesting when we have our conference call because it's a little early even for us to have a feel for how early spring is shaping up, right? We're not there yet, but we get pretty anxious this time of year to look at even weekly sales activity because it gives us an early indication of the spring. We're just not there yet.
Jesse Lederman: Got it. Okay. Two more for me. One is from an inventory level perspective, is there any evidence maybe across your captive retail that you're aware of that there's any evidence of destocking that could pressure near-term orders even if end demand is recovering a bit?
William Boor: You're saying destocking? Or are you worried about overstocking?
Jesse Lederman: Overstocking, sorry.
William Boor: Yes. Yes. No, I actually think that from the time when we had that big problem, now it feels like at least 1.5 years, 2 years ago, people have been pretty disciplined. I don't think there's any -- I certainly haven't heard of anyone stocking up, and there's a reason for that. I mean, let's think about just the dealers, right? They can order a home and because backlogs are where they're at, it's not a long wait to get that home. So they're not jumping back in line with multiple orders because they're worried about the pace at which they can receive a home. So that causes them to really stick very close to whatever their individual store target inventory is. So I really don't think we've seen any buildup there.
Jesse Lederman: Okay. That makes a lot of sense. And the last one for me is a little bit more high level. Given you have great exposure in Texas, particularly bolstering that with the American Homestar acquisition, we're aware of some legislation that's been passed that's set to be effective in the middle of 2026, just statewide to level the playing field a little bit more, at least as it pertains to zoning for manufactured homes relative to single-family homes. Quite frankly, surprised. We haven't heard much about that or even other statewide legislation reform over the last few years. What are your thoughts on that? Why maybe have we not heard of it? Is there optimism surrounding it? Any clarity there would be great.
William Boor: Yes, I read your note on that, and you also cited Kentucky, which is a big market and Kentucky's changes are a little bit more sweeping, right, more -- possibly more impactful on a local basis. So I don't know why we haven't heard more about it. I thought it was good that you covered it. I think maybe people just aren't keeping tabs on what's going on in those legislatures, but it's a great example of that slow progress, but definitely progress that the industry is going to make over time about zoning. Having states actually put legislation in place to either encourage or actually push local municipalities to open up a little bit to these solutions is a great development. So I think we should be excited about it. I don't know if the next obvious question is how big of an impact do we think it's going to make. I don't have that for you, but man, it's something that we should be looking at and you put a spotlight on it.
Operator: [Operator Instructions] Our next question comes from the line of Daniel Moore of CJS Securities.
Dan Moore: Just a couple more lots -- you covered a lot of ground, but maybe any color on sort of bucketing the updated and upgraded synergy targets? I think you said $10 million. How do we kind of think about the -- where those are coming from? And you mentioned roughly half actioned or we should see starting in the March quarter. How do we think about the cadence there going forward as well?
William Boor: Do you want that one? Go ahead.
Allison Aden: Sure, I'll go for it. So we talked -- Bill talked about leading on an annualized rate of $5 million into the quarter and ultimately being at like a $10 million level, right, which would be about $2.5 million a quarter. So as we think about the next quarter ahead of us, if we've exited at -- the third quarter at, call it, $5 million on an annualized basis, that puts us at perhaps like a $1.25 million positive uplift to profitability in Q4. If you think about it, the areas that we've talked about as far as where the synergies would hit on the geography of the P&L. When we first talked about the acquisition and so consistent today is we look to have purchasing savings and optimization. We also look to have direct labor savings at the COGS level. And certainly, through the course of time, we've proven that we're very effective and efficient in driving synergies through our shared services, which is our SG&A area. So those would be broadly the buckets that we would qualify -- quantify the $10 million.
Dan Moore: Perfect. On the ASP front, jumped to $107,000 during the quarter. How do we think -- how much of that is mix from American Homestar, which obviously includes a higher percentage of homes through captive retail? And is that a number that you think is sustainable as we move forward here?
Mark Fusler: Yes, Dan, this is Mark. So it increased a little bit as -- due to the high proportion of homes sold through company-owned stores, but it was about $1,000 increase of -- the sequential increase that you saw.
Unknown Executive: Due to American Homestar.
Mark Fusler: Due to American Homestar, yes.
William Boor: Kind of a lot of things. We talk about all these variables that make our average selling price so hard to dissect. This was a period where a lot of things were kind of pushing it upward. American Homestar pushing it upward mostly because of their integration with -- between manufacturing and retail. I know I'm using integration in different ways on this call. The shift overall, even in our previous business toward retail a little bit, we had that going on. Definitely a product mix shift moved toward multi, which we've seen for a number of quarters. And then I think I commented about the -- what we think is the best proxy for what is a given product selling for now versus the previous period, that was up a bit. So this was a quarter where everything was kind of pushing the price up.
Dan Moore: Got it. We talked a lot about the -- dissected the factory-built gross margin in Q3. Kind of any thoughts about factory-built gross margins looking at Q4 and how we should expect it relative to Q3 over the next quarter or 2?
William Boor: I think Allison commented that I think on the commodities, if you just look at them, there's some movement up. I mean lumber is starting to move. Some steel increases have been announced, and we'll see how they flow through. So Allison, you might have more color, but I think directionally, there is going to be some cost of goods -- bill of materials -- focused on bill of materials, there is going to be some bill of materials movement, right?
Allison Aden: Yes. I mean -- and to build on that a little bit, we haven't touched on it yet, but let's introduce it here, right? We know that tariffs are having an upward impact on our COGS. However, it's getting really difficult to precisely estimate the impact. But if we think about it this quarter, our best estimate overall that COGS was impacted by about $3 million this quarter. And the reason for the challenge of really being able to project that going forward, which, to your point, would fall within manufacturing. The challenge is that just simply put, the suppliers' ability to pass through tariffs, it's also partially a function of the level of demand for the products. So for example, if the demand for lumber or steel starts to heat up, we're likely to see the full impact of tariffs. So that's the area that, we'd be watching for as far as pressure on the margins.
Dan Moore: Helpful. And last one, the tax rate. I appreciate you kind of delineating some of those pressures this past quarter. What do we think about where that should settle out in fiscal Q4? And how much is transitory, how much is kind of permanent?
Allison Aden: Yes. No, thanks for the question. I think just high level, it's reasonable to use the Q3 rate of 23.5% that we experienced in Q3 and then subtract out of that the nonrecurring item of about 1%, which hit the tax rate or increase the tax rate, and that was really due to the nondeductibility of the American Homestar deal cost. So that won't reoccur in Q4. So you take that 23.5% down by 1%.
Operator: I'm showing no further questions at this time. I'll now turn it back to President and CEO, Bill Boor, for closing remarks.
William Boor: Yes, I'll be brief. We've talked a lot here in this one, but happy to have follow-up calls. We're looking forward to the coming months. I think we're positioned well to execute when the market improves. Part of that positioning is just having the ability to adjust quickly to near-term conditions. And I think we've shown our ability to do that. Over time, we don't get too nervous because we know that Factory-Built Housing is the primary solution to the housing unit shortage in the country. And that's what we're working every day to step up to that challenge. So I really do appreciate everyone's interest and joining us for the call, and we'll look forward to keeping you updated. Thank you.
Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.