Cavco Industries Inc (CVCO) 2021 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Second Quarter Fiscal Year 2021 Cavco Industries Earnings Call. (Operator Instructions) Please be advised, today's conference is being recorded. (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 statement, whether written or oral, to reflect events or circumstances after the date of this conference call, except as required by law.

Now I'd like to turn the call over to Bill 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 and 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 and 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 has been watching demand indicators and understands that the general homebuilding industry is seeing extraordinary buyer activity. While 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. However, 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 unhealthy levels.

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 were producing at the same rate as last year, orders have been so strong that we would still have a 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. Though lumber prices have 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 work through the backlog, but 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 owned retail stores is a level of traffic that is a typical seasonal pattern with some slowing going into the fall. But traffic remains strong and still higher than last year's levels. Conversion rates, the percent of traffic opportunities converted into sales, remain significantly higher than a year ago.

In financial services, our lending has been relatively stable. Interest rates for 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 landfalls this year: 11. 4 of those directly affected Texas. Normally we're affected by a named 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've 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 in 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 staying flexible and focusing on the fundamentals. We know that 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 $268.7 million during the prior year's second fiscal quarter.

When we look at the pieces, the first I'll go through is the 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 declined from primarily operational challenges presented by COVID-19. We had high production employee absenteeism, we were 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 and the prior year quarter included revenue from Lexington Homes, which was closed in June 2020.

In the Financial Services segment, net revenue increased by 6.3% to $17 million from [$16 million], mainly the result of $700,000 unrealized gains on equity investments in 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 formerly 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, had 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 costs driven by declines in overtime hours given the high absenteeism 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 as 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. Effective income tax rate remained fairly stable, 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 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 noncash 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. The balance increased from the additional loans in forbearance.

Long-term consumer loans receivable decreased from principle collection on loans held for investment 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.

Maybe starting with just capacity utilization, you said 65%, I believe, during the quarter, up to 75% -- 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?

Yes, 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 if that area sees an 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 a 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 is supply, which is really affecting us. So -- yes, 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 at every plant to try to get there right now.

Those are the main factors. Some of what affected our utilization, a contributor 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 supply chain constraints working themselves out over a couple of quarters?

Yes, I 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, we'll 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% rate the last 2 quarters, including the first when it was so disruptive. So that's kind of the -- been the process the 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, maybe relative to Q2 as a baseline?

Yes, well, people that follow things -- like lumber's one of the biggest contributors to our cost structure. And people who follow just public indicator pricing on that know that, as I said, this thing's really shot up. I don't know if I can say unprecedented, but incredibly quickly from April through September. One thing I cited was, I think it was Southern Yellow Pine, up about 180%. They have come off of their highs, those lumber prices. And equally important, lumber's become more available. We are worried about running out. 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 but 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, while prices -- while 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 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 to kind of solid typical margins.

That's helpful. ASPs grew but 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 2?

Yes, 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 -- we're sensitive to that, but it's been a really volatile cost market. It's more about price increases than it is about mix shift 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 shift.

Said 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. This price increase, and 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 where there is a home buyer on the other end, that even got kind of loosened in these price increases. So we have to wait for some of it to get through the backlog; 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 1 or 2 more, I'll jump out. Financial services, are you seeing weather events that drove claims in fiscal Q2 continue into Q3 so far?

Yes, I really 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 that generally 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 got our share of them. Now, as I said, none of them from a claims perspective, being sensitive about it. None of them were what we call catastrophic, but there were just several so (technical difficulty) sped it 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.

And the next question comes from Greg Palm with Craig-Hallum.

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 -- or 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 and want delivery of them. And they've resumed picking up orders, so that's been pretty encouraging. But with 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 commented about the Southwest. In 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 stocking 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's got legs to it? I don't know if you can comment, maybe what are the biggest reasons you think you're seeing the strength, whether it's financing related, whether it's this migration trend from urban to rural. What are your general thoughts there?

Yes. You're asking for speculation. I'll give you a little bit of personal speculation but I'll label it 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, it's lacked at the lower ends in the more affordable segments. Because as even the traditional home builders have been stretched to supply 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. But 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's been built up for years. So that gives me -- I mean, given my view about that, that gives me some confidence 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.

Yes, 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?

Yes, 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 have 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 with some investment 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 buy back any stock under the previous program?

The previous program, which is in place for a long time. I'm looking at Mark; was it 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 at it for quite a while, appropriately, and we have one more tool to start managing it to 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 kind of had the uncomfortable situation of saying believe me, we're thinking about it. And now we finally have something tangible that we hopefully will be able to go out and execute against.

And our next question comes from the line of Jay McCanless with Wedbush.

I guess the first one, could you talk about what you all are 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 enough 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 being 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 started to have any type of cancellations? Or I know you said there was some push back to the most recent price increase, but are you all 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 a 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, it's 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 push back. It's just very hard on a dealer when manufacturers are increasing, one after another increase. The manufacturers would make an increase thinking, well, that ought to get us where we need to be and costs kept going up. And they turned around, oh geez, we need to do another one. That's real hard on a distributor or dealer.

And so what takes place after that is a lot of working together and sitting down and looking actually at specific deals and deciding which ones the wholesaler agrees we should price protect. 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 lost anything because I think that dynamic -- I think I'm safe to say that dynamic's going on with all manufacturers and no one's really sitting there with an empty backlog ready to jump in, saying I can get you your house a lot quicker.

Got it. And then the last one I had, and apologize if I'm putting words in your 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 all are talking about, result in a meaningful step function higher in where your average prices are at this point?

Yes, 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 stretched for capacity, they tend to go up and build more expensive homes, leaving the lower price levels kind of even more in deficit as far as supply. And I'm wondering if that's what you were 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. I'm glad you asked, because I didn't mean to leave the wrong impression there.

No, it may have been -- may have been my bad hearing. 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?

Well, 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 you've got these kind of backlogs. So we'll keep our eyes open on all those kind of choices.

And our next question comes from DeForest Hinman with Walthausen & Co.

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 thing 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 a 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 it's trial and error, but 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 -- a plant's thinking through how to -- how much will be in base wage and how much would be in incentive compensation and what the drivers of the incentive comp are. 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, the plants probably get plenty of input. People like me will comment. We're talking, at a minimum -- I'm in 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 in 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 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 or potential opportunities?

That's a really good question and I can -- typically our plants do run overtime even in much slower backlog environments like this. Often they'll run on Saturdays here and there, not as a scheduled approach, but it's not atypical at all for a plant to run a couple of Saturdays a month. And we continue to do that, but you think about the dynamic. When your absenteeism is high, the people that are showing up to 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 a balancing act to do. They are driving hard to get that extra house out, but if they drive too hard with the overtime and the Saturday work, we're just going to compound our labor problems by basically burning 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, but partly because we just can't work the folks who are showing up so hard that we exacerbate our problem. So it's a real fine line, but we definitely do what you're talking about as far as looking at opportunities to work overtime to get the incremental house out.

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 and 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 be under a black-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 of trying to be as transparent to the market with what we disclose as possible around the SEC matter. So there are going to be times when the market knows as much as we know and those points in times taking a conservative approach to inside information we'll 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 we 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 even 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, it's like I said, I we'll be -- we'll obviously be very cautious about it but we wouldn't have authorized or asked the Board to authorize if we didn't think there'd 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 or valuation perspective? Or should we think about it as a gradual run off of this authorization over some period of time?

Well, 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.

(Operator Instructions) Our next question comes from Daniel Moore with CJS Securities.

Sorry about that, still had it 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?

Yes, I appreciate the question. I mean we had the 8-K that just went out in September, I think 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 bits and spurts. We'll do our best to be transparent to the extent we can and the extent it's appropriate, but not much to update from that 8-K.

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 without 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. A 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 0. And last quarter when we talked to you, we were 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 it, challenged to provide enough homes with orders that would exceed production under any circumstances. So continues to change; we know what 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 families are staying healthy and safe, and we'll wrap up the call. Thanks.

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