Cavco Industries, Inc. (CVCO) CEO Bill Boor on Q4 2020 Results - Earnings Call Transcript

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Cavco Industries, Inc. (NASDAQ:CVCO) Q4 2020 Results Conference Call May 27, 2020 8:00 AM ET

Company Participants

Mark Fusler - Director of Financial Reporting and Investor Relations

Bill Boor - President and Chief Executive Officer

Dan Urness - Executive Vice President, Chief Financial Officer and Treasurer

Conference Call Participants

Daniel Moore - CJS Securities

Chris Sansone - Sansone Advisors

Ian Lapey - Gabelli Funds

Greg Palm - Craig-Hallum Capital

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Fourth Quarter Fiscal Year 2020 Cavco Industries Earnings Call Webcast. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. [Operator Instructions].

I would now like to hand the conference over to your host for today, Mr. Mark Fusler, Director of Financial Reporting and Investor Relations. Sir, please go ahead.

Mark Fusler

Good afternoon and thank you for joining us for Cavco Industries’ fourth quarter and fiscal year 2020 earnings conference call. During the call, you will be hearing from Bill Boor, President and Chief Executive Officer; and Dan Urness, Executive Vice President and Chief Financial Officer. Before we begin, we would 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 results from our ability to operate our business in ordinary course and impacts on: one, customer demand and the availability of financing for our products; two, our supply chain and availability of raw materials for the manufacture of our products; three, the availability of labor and the health and safety of our workforce; and four, the liquidity and access to the capital markets; and also 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 regulation affecting manufactured housing.

This conference call also contains time-sensitive information that is only accurate as of the date of this live broadcast, Wednesday, May 27, 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 would like to turn the call over to Bill Boor, President and Chief Executive Officer. Bill?

Bill Boor

Thank you, Mark, and welcome, everyone. Our fiscal year obviously changed our close during a time of incredible disruption and uncertainty, but I think it's important to start the call by reviewing a few of the accomplishments of what was a very strong year. Net revenue grew by over 10% and exceeded $1 billion for the first time in our history. We passed the 15,000 homes sold milestone, factory-built housing gross margin as a percentage of net revenue expanded by over 0.5% contributing to record segment operating income. We acquired and integrated Destiny Homes which is a strong contributor to our results.

Financial Services gross profit grew by over 5%, despite significant allowances and non-cash charges at the end of the year due to the crisis. And at $75 million, our net income grew 9.4%. Again, these are just a few of the milestones and accomplishments in a year that until March was marked by growing demand and positive trends in all of our markets.

The fourth quarter did become defined by the COVID-19 developments. We reacted quickly by focusing on our employees and our customers. Homebuilding was designated as an essential service in all of the geographies we operate in, then which provided us the opportunity to continue operations. We committed to finding ways to operate safely with the goal of providing continued employment and benefits for our people and to meet our commitments to our customers. So we developed lead policies to support employees that face hardship due to the virus. And we resolved to implement the CDC guidelines to manage the possibility of transmission within our facilities. Our financial services operations quickly transitioned to working from home, and they did a remarkable job continuing to support customers.

Our plants experienced episodic downtime due to a variety of COVID related causes. The vast majority of that downtime occurred in April after the year end. While it fluctuated on a daily basis for a period of time, we peaked at six of our 20 plants down. Most days down for a week occurred in early April when we did not run 25% of the possible plant operating days. However, for the second half of April the typical downtime was closer to 5%, or said a different way, about one out of our 20 plants at any given point in time. Over the last couple of weeks, all of our plants have been operating for the most part.

In addition to plant downtime, we experienced elevated absenteeism from late March through early May that contributed to reduced production efficiency. For the most part, absenteeism is back to pre-COVID levels and our plants are quickly returning to full run rates.

Let me take a minute and comment about Lexington. Unfortunately, we had to make a very difficult decision to cease operations at our Lexington, Mississippi plant. Cavco purchased this operation in 2017. Since the acquisition we struggled to get the operation at the expected level of performance. In particular, we've not been able to establish the product positioning in that region that's needed to improve the plant’s distribution network as planned. These challenges were compounded by the drop off in orders due to COVID-19 and ultimately the uncertainty about the timing of recovery. We're currently operating the plant to deliver on pre-existing orders in support of our independent dealers. The plant will be closed by the end of June.

Shifting back to the total manufactured housing business, reduced production roughly matched the decline in orders resulting in relatively unchanged backlogs. Those backlogs remain at healthy levels. There were a few order cancellations. However, some orders were put on hold mostly by large community operators. Communities which have been driving much of the manufactured housing industry demand growth in recent period slowed orders starting in March.

Street dealer businesses remained surprisingly robust during the period to-date. In our retail operation, traffic, which includes e-leads and phone inquiries as well as walk-ins initially dropped by over 50%, however, traffic has improved to the near pre-COVID levels. As has been reported elsewhere, conversion rates in the sales process have been high, resulting in retail sales recently exceeding pre-COVID and year-over-year levels, despite the reduced traffic.

In-line with these retail results planned orders have been trending up since the second half of April, and they've currently surpassed February levels. Clearly, there was a lot of momentum going into the pandemic after an initial shock that reduced activity from mid-March through mid-April. It's been really encouraging to observe the people who are actively seeking a home before have largely continued on with the process and are placing orders. What is less clear is the extent to which the pipeline is reselling with new buyers entering the process.

Each week, we're more convinced that the demand is replenishing. Time will tell whether the positive order trends we're seeing now will be sustained. That will depend largely on macroeconomic drivers such as employment and consumer confidence, as well as a supportive lending environment. Given the lack of visibility in these drivers, we're spending less time and attention on specific forecasts and predictions and more on remaining flexible and ready to react to various scenarios.

I'm extremely proud of the way the people who’re at Cavco delivered a year of growth and record breaking results and then responded so positively to the disruption as our fiscal year came to a close. Through the COVID-19 challenges, people throughout the company have stayed focused and flexible and have demonstrated a tremendous amount of commitment for our important work of providing affordable homes.

The virus did not wipe away the country's deficit of affordable housing and associated pent up demand. Sitting where we are today, we can't reliably predict when that demand will translate into orders. But the indications at the moment are positive.

From a business perspective, we're responding to the uncertainty by focusing on costs and cash flow and remaining ready regardless of the market scenario. Our balance sheet and demonstrated ability to flex our cost structure to market conditions affords us the ability to continue making decisions for the long-term while managing the urgency demanded by the COVID-19 crisis.

With that, I'll turn it over to Dan Urness to review the financial results.

Dan Urness

Thank you, Bill. Net revenue for the fourth fiscal quarter of 2020 was $255 million, up 5.9%, compared to $241 million during the prior year's fourth fiscal quarter. Within the factory-built housing segment, net revenue increased approximately 7% to $241 million from $226 million in the prior year quarter. Improvement in the factory-built housing segment was for a 4% increase in units sold largely from the addition of the Destiny Homes factory earlier in the fiscal year, and a 3% increase in average revenue per home sold, primarily from changes in product mix toward more multi-section homes.

Home shipments and related net revenue slowed in the latter part of the quarter from operational challenges presented by COVID-19. Financial services segment net revenue decreased nearly 7%, mainly the result of a $2 million unrealized loss on equity investments in the insurance subsidiaries portfolio versus the prior period, which included $600,000 in unrealized gains. Excluding those unrealized gains and losses, revenue for the fourth quarter increased from higher home sales -- home loan sales volume and more insurance policies in force compared to the prior year.

Consolidated gross profit in the fourth fiscal quarter as a percentage of net revenue was 20.3%, down from 23.1% in the same period last year. This decline is mainly the result of challenges in both of the company's operating segments related to COVID-19 and changes in financial markets. The largest impact was in the financial services segment, as the company increased its loan loss reserves, primarily from adverse effects the pandemic is expected to have on borrower loan payments and recorded negative accounting impacts of interest rate lock and forward loan sale commitments used as part of our lending operations.

In addition, there was higher insurance claim volume than the same quarter last year. And as discussed above, unrealized losses were incurred in the financial services equity portfolio.

In the factory-built housing segment, adverse impacts included idle days at some factories, while payroll and certain other costs continued and substantial home assembly inefficiency in the final part of the quarter related to implementing COVID-19 working guidelines in our factory setting and general disruption of the construction materials supply chain.

Selling, general and administrative expenses in the fiscal 2020 fourth quarter as a percentage of net revenue was 14.7%, compared to 13.1% during the same quarter last year. The increase was primarily from additional employee-related costs, including stock compensation, as well as higher general and administrative expenses. Income before income taxes this quarter also included an unrealized loss of $2.1 million on corporate equity investments versus $700,000 in unrealized gains in the prior year quarter.

The current year period also has lower interest income earned on cash resulting from reduced interest rates. The effective income tax rate was 12% for the fourth fiscal quarter compared to 23.4% in the same period last year. The current quarter included a $1.7 million benefit related to tax benefits from stock option exercises versus a $200,000 benefit in the prior year quarter. Net income was $12 million, down 40% compared to net income of $20 million in the same quarter of the prior year. Net income per diluted share this quarter was $1.29 versus $2.17 in last year's fourth quarter.

Comparing the March 28, 2020 balance sheet to March 30, 2019 last year, the cash balance was nearly $242 million, up from $187 million a year earlier. The increase is from net income and changes in working capital partially offset by the repurchase of securitization bonds and cash paid for the Destiny Homes acquisition. Inventories were lower from a reduction in the number of homes at are company-owned retail locations compared to last year. Property, plant and equipment, goodwill and other intangible balances increased from the Destiny Homes purchase. Property, plant and equipment also increased from the completion of a lifetime exchange whereby the company obtained commercial real estate in Phoenix for a potential future plant site.

Certain balance sheet line items were affected by the new lease accounting standard, which was implemented at the beginning of this fiscal year. As a reminder, this accounting standard requires that all leases be recorded on the balance sheet. The current portion of the securitized financings and other, declined from the repurchase of securitization debt in August of 2019. And last week stockholders’ equity was approximately $608 million as of March 28, 2020, up approximately $78 million from the March 30, 2019 balance.

Bill, that completes the financial report.

Bill Boor

Thank you, Dan. Demetrius, let’s turn it over for questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question comes from Daniel Moore with CJS Securities. You may proceed.

Daniel Moore

Bill, Dan, good morning. Thanks for taking the question. Want to start with, sales orders down about 40% for April, now trending I guess down 20 percentage. Are those seasonally adjusted? In other words, are those -- what those orders look like on a year-over-year basis thus far quarter-to-date? And I think you gave us some detail Bill in terms of shipments, but similar question for shipments. Where are we sort of quarter-to-date at this point?

Bill Boor

So let me just I guess start with one part of that, where you're talking about the fiscal quarter or since the fiscal quarter, Dan?

Daniel Moore

The description of sales orders was essentially since pre-COVID levels, I'm just trying to get a sense on a year-over-year basis for fiscal Q1 kind of where -- how we are trending year-over-year for sales orders as well as shipments, quarter-to-date?

Bill Boor

Okay. Got it. Yes, year-over-year for the quarter both -- and I'm not sure if there's any specific component you're looking for in there, but certainly both higher. And unlike the last, you quoted some numbers there at the beginning of your question, could you repeat that? Because …

Daniel Moore

Sales orders, you told us what they were quarter-to-date so far on a sequential, essentially since pre-COVID levels, but I'm just trying to make sure that understand what they look like year-over-year. That's all. Sales orders, as well as shipments?

Bill Boor

Trying to look back at what we commented on and seeing what you were picking up. So yes, you're saying that we were -- we dropped in the middle of kind of the pandemic, if you will, down 40% and then we were up to back 20% around mid-May. And that's compared to pre-pandemic levels. It's not compared to say a year ago. It's not compared to the end of December, sequentially. When we say those numbers, we're comparing to kind of a shortened period of time that we’re called pre-pandemic levels. And that's roughly a few weeks leading up to the first week or so of March.

Daniel Moore

Understood. So do you have more detail on a year-over-year basis? How we are trending thus far in the quarter versus say the first half of first quarter last year? If not, I will move on.

Bill Boor

I see you're saying, yes, okay. So we're looking at the seasonal impact there as well. We don't have those numbers to compare. We've really been able to compare against the -- and see kind of where we're at to give you some sense of how the quarter is shaping up on a sequential basis. Year-over-year I would say we're flat to probably down still because you got to take the seasonal impact into account and we're not -- we should be obviously higher now than where we were pre-pandemic just because of the seasonality that is normally in place this time of year. We did get a pump in March, April, May timeframe. And we're not at those levels yet, like we were last year. And it's difficult because we want to help with the question. One of the challenges we're facing is literally the weeks are highly variable. So to be just a few weeks into the period, and kind of be able to get a really clear answer, in our own minds is a little bit of a challenge, because things are bouncing so much. But we’ve definitely seen an upward trend. We've been focused, as Dan said, more on the late February to mid March timeframe as a baseline. And we're kind of encouraged by the upward trend. But I think to your point, if you looked at it on a seasonally adjusted basis, we'd still be down.

Daniel Moore

Right. I'm assuming April was down, somewhere in the 40%, 50% range, just trying to get a sense there but I will move on. In terms of where are you today as far as operating capacity, if you took Lexington out of the mix, are we -- it sounds like you're almost back, if not fully back to pre-COVID levels. Is that correct? And what kind of impact does social distancing have on operating capacity as this stage?

Bill Boor

It's definitely had an impact. I would say my sense is that the social distancing and the guidelines we've implemented in our plants has been a challenge, but probably less of an impact on productivity during the month of April than just absenteeism. We had elevated levels of absenteeism and we had relaxed policies in that area just out of consideration of the situation. So I would personally say the CDC guidelines are a factor but I don't think they're a huge factor in efficiency. And yes, my comments -- it’s generalization where every plant kind of has its own story but I feel like most of our plants are really getting right back to full run rate. We've got a couple that are lagging a little bit, that happen to be struggling getting back to full absentees -- or lower absenteeism kind of more typical, but the general statement would be we're kind of right back at able to run as hard as we could before. And I don't think the social distancing is a big enough factor to kind of enter into that discussion too much.

Our folks have done really a good job of some meaningful changes to how they operate, but doing it in a way that when they have all their folks in the plant, they can run pretty well.

Daniel Moore

And then maybe just some detail on geographies, starting with Texas, how are traffic order and traffic trends currently into mid-May in light of the recent sharp declines in oil prices, are you seeing an impact there? And then other regions, Florida, Southeast, Southwest, et cetera, just kind of walk us through region-by-region, what you're seeing if there's much differentials?

Bill Boor

Yes, I can comment, maybe Dan can add to it. Texas has been pretty strong. Everyone saw kind of an impact from an initial kind of the shock factor of what went on late March, early April. So that was just disruptive everywhere. But Texas, there -- from a production perspective, we've been pretty steady there and from a demand perspective what we've seen is pretty strong orders. In fact, in recent weeks, they've been a little bit above that pre-COVID base period that we've talked about. So we've been really encouraged by -- we wondered about and talked a lot internally about the oilfield impact. And the truth is that we're probably a little less exposed to that than kind of the overall industry. In Texas, we probably are skewed a little bit to the upper range of products in manufactured housing. And so we haven't felt like it's been a huge impact on our results in Texas. But I think from an industry perspective, you'd have to expect that it will have an impact or has.

Other regions, they're all going to be in between the bookmarks of Texas and Florida. Florida, you might remember, when we were -- when COVID was ahead of us all and we didn't really have any idea what we were getting ourselves into as a society, we were already talking in these calls and otherwise that if you had to look at an area and say, we got to keep our eye on that, it was Florida. And that's been true during this experience as well. Florida has definitely been the geography of most concern.

For us, here I'm going to say the opposite of Texas, we probably skew a little bit extra exposure to communities. And communities have dropped off more significantly than street dealerships. And I think that's a general statement, but it's very true in Florida. So we definitely have felt the impact there in orders, have been significantly down. But when I've looked at the trends, we're just looking at it in preparation for the call. And some of the trends in Florida on orders are that they are coming back up. So I don't know where that's going to settle but has been the most challenging geography for us and not to kind of glance over it but I would say all the other regions like somewhere in between.

The community impact that I mentioned relative to Florida is an important general comment about the market. The community operators, particularly the big community operators reacted very quickly and put a lot of orders on hold. And so we've definitely seen a difference between the reaction or impact on community orders compared to street dealerships, where street dealers I think have probably been surprisingly -- I wouldn't say steady, surprisingly relatively strong. If I -- if you had told me what the industry was going to face as far as just the pandemic, I guess I would have expected the dealers to fall off much more than they did. I guess that's a way to say it.

So there's really a difference between the impact on community orders and street orders. And I'll just close off that thought. I mentioned that a lot of communities put orders on hold. We saw pretty few cancellations of orders, but a significant amount that were put on hold and time will tell whether those folks see clear as things unfold here in the coming weeks and months to release those orders or not, we take them -- and from this -- we take those hold orders out of our backlog when we make comments about backlog. So, that's encouraging if those orders do come through here in the next a little bit.

Daniel Moore

That's great color Bill. Just any sense, order of magnitude, how much of -- relative to the size of backlog, how big those orders on hold could be?

Bill Boor

Do you have a feel for that?

Dan Urness

Yes, it’s -- I mean, it's not very -- a real large amount. We don't have the number Dan. It's a little bit fluid but it would be addition to the backlog in a meaningful way if we got those orders back in and counted. But they haven't, it's not large enough that we called it out separately.

Operator

[Operator Instructions]. And our next question comes from Chris Sansone with Sansone Advisors. You may proceed.

Chris Sansone

A couple of general questions from me. I guess the first one is, what should you say is the long-term growth rate, if we were just to exclude COVID-19, what do you think the long-term growth rates could be for your business and for Cavco? And then separately, to try to understand the SG&A. It was up this year over last year? What do you think the right SG&A level should be? I know there's variable costs in the business. So should SG&A as a percentage of revenue look more like it did in the past fiscal year than this fiscal year? Thanks.

Dan Urness

Well, maybe I'll take the first one and then -- sorry the last one and Bill can take the first one. The last question was SG&A. But yes, we have higher SG&A this quarter due to a number of factors, which included higher stock compensation expense, and that was a meaningful comparison difference. So, we want to make sure we called that out. And then, of course, other employee related costs including commission expense from the higher home sales volumes. So our numbers go up in SG&A with higher volume, given the commission based and variable nature of the sales component there, but we also have higher G&A costs in various categories and they'll be higher going forward as the business continues to grow. But I would say that administrative costs can vary quarter-to-quarter. So we certainly saw some of that this quarter compared to last comparison.

Chris Sansone

The other thing you might comment on -- I hate to be the one to throw this into the discussionbut I think it's relevant to the SG&A. You might comment on the SEC type expenses that are driver there?

Dan Urness

Yes, we've got that included this quarter as well. And so that's a very good point because well we have mainly administrative costs going on with respect to the SEC investigation. At some point those will drop off. We certainly don't know when that is. But then we have large D&O expenses that you may have seen that are running through that line item as well, $2.1 million per quarter. And that was again this quarter and that will continue through the first half of this coming fiscal year. So that's another drop off that we would expect to see as the year progresses.

Bill Boor

Yes, bringing that up because Chris, it’s clear, you’re trying to think about a long-term run rate and those would be kind of I think extraordinary costs that should be out of there at some point. And your first question, I think Dan and I were looking at each other like it was a hot potato because it's hard to pull ourselves out of the current situation and think about long-term growth rates if COVID didn't exist. I guess I feel like I'm going to give you a less of a satisfactory answer, but if you did put yourself before this and remember what it felt like in this industry before COVID-19, the demographics are so compelling and we were seeing that in our growth rates for the year.

I mean when we see our revenue grow at the levels it was growing this last fiscal year, we didn't see that -- we saw a lot more runway with those kind of growth rates because of the demographics. So while I don't have a number for you, I commented very subtly in my opening comments that COVID-19 didn't wipe away the deficit of affordable housing. We're just hearing a lot less about it right now. So I think this industry and certainly Cavco has the opportunity for continuing strong growth and it's just a matter of how quickly we'll get back to that. So I apologize for not having a specific number for you, but I think there's reason to be pretty optimistic by -- driven by those long-term demand drivers.

Chris Sansone

Okay, great. And then last question, I know Cavco has historically had a lot of cash on the balance sheet. What are your thoughts on dividends, returning some of that capital to shareholders? Thanks.

Bill Boor

Yes, it's definitely something that we're doing a lot of thinking about. I guess when we -- and it's been an active discussion over time and I think we recognize the perspective that people have about us needing to do a good job in general in capital allocation, managing the balance sheet. So the point is, I want to assure you the point is not lost on us. I think as we hit the COVID-19 situation, even though we have a pretty good cash balance and we remain cash positive, which is an important statement as well, we kind of did mentally put those somewhat on hold and said, now is not the time to be -- that was the time to be focused on cash flow and focused on having a cushion. So I guess this did slow the thinking down a little bit there. But we get the point and have been doing a lot of thinking about capital allocation here.

Operator

And our next question comes from Ian Lapey with Gabelli Funds. You may proceed.

Ian Lapey

Hey Bill and Dan, congrats on a record year. Two questions. First is on the equity unrealized losses, maybe you could differentiate, so the $2 million in the insurance portfolio, I assume that would mostly come back with the market's recovering. But then on the corporate equity investments, would those also recover or were those more impairments because I believe that relates to community investments and communities.

And then the second question, broader question, what's happening with pricing and as you obviously are incurring costs for absenteeism and social distancing networks in production. Are you able to recapture some of that with pricing or do you think you will be so that if you look out the next couple of years, margins will be at similar rates to what they have been the last couple of years?

Dan Urness

Okay. Hey Ian, good morning. This is Dan. And yeah, let me just help clarify a little bit on the unrealized losses we experienced this quarter. We had them in two categories, as you mentioned, and both are related to stock market conditions entirely. So there is no impairments that are part of those numbers. And as equity markets recover, we would expect those would recover as well.

The first piece is the unrealized gain on the equity investments in the Financial Services segment and that runs through the revenue line. That was a $2 million unrealized loss this quarter and then the $2.1 million, similar dollar amount was in other income related to corporate equity investments, but none of those are impairment type situations as you mentioned.

Ian Lapey

Okay, good.

Bill Boor

Hi, Ian.

Ian Lapey

Hey Bill.

Bill Boor

The pricing question is an interesting one. I think I can say that so far through this experience, we haven't seen a lot of movement on price, so it hasn't been heavy pressure to the downside or anything like that. The question about whether we can recover some of the costs that we've had, I think it's really more a question of whether the current positive trend in orders sustains itself, because if -- if we really do see orders get back to a level where you're trying to say, well, they haven't been that if -- we got through the bump and now it's as if orders are where they would have been were it not for COVID-19, then I don't think there'll be any pressure on prices whatsoever.

If we see those orders turned down, it stands to reason that we run a risk of just pricing pressure or pricing competition in the industry. So I certainly think about it more on that side than us being able to push through price increases to recover costs. Our focus hasn't been on that at this moment.

But the positive is that orders are -- for the moment, and I'm going to tell you everything is painted by the week-to-week right now. For the moment, we feel like orders are trending up and it gives us some -- some level or room for optimism. If communities come back and release some of those holds and dealer orders continue up, I don't think there -- I wouldn't expect there to be a lot of price pressure in the industry.

Operator

And our next question comes from Greg Palm with Craig-Hallum Capital. You may proceed.

Greg Palm

Thanks for all the sort of color on intra-quarter type order trends. Bill, I just wanted to sort of go back and start off, just clarify something that you'd said. I think you had mentioned that sales or orders and I don't know if you had mentioned it was retail or companywide, have already surpassed February levels or the sort of pre-COVID timeframe. Can you just repeat or clarify what you said there? I just wanted to make sure I got it right?

Bill Boor

Yes, I appreciate you asking for the clarification because it's important to make sure that people understood what I was referring to. I was referring to our retail organization sales. And people need to keep in mind that we're largely Texas oriented for our retail business. So it kind of -- it dovetails into the discussion with Dan earlier that Texas has been a relative strong area.

But our retail, our company-owned retail operation, again week-to-week information, but they exceeded pre-COVID orders written here in the last couple of weeks. And so that was the comment, it shouldn't be taken out of light but -- or out of context. But that was what I was referring to.

Greg Palm

Yes, okay. That's an interesting data point. And sort of thinking about this call it mid-May timeframe as a reference point, can you talk about how the last sort of 10 days or two weeks have been. I mean, I think a lot of the color you gave was up until mid-May but how have -- whether its traffic or order rates, companywide, how have they trended just in the last couple of weeks alone?

Bill Boor

Yes, I think that's really the distinction we've been trying to and I know it's not crystal clear, we've been trying to make it -- these last several weeks from, call it early to mid-May may be, the trend has been upward. So looking at that from both a company-owned retail orders written as well as our plant orders, the trend has been definitely upward and approaching those pre-COVID levels overall.

Greg Palm

Okay. So it's continued to trend upward companywide. And then, I may have missed it, but did you give an actual capacity utilization number where we stand today. Was it the 75% that was referenced in the release or was that referencing something else?

Dan Urness

Yes, it's -- no, it's referencing the 75% that was in the release. That's the best estimate. Hard to get too specific on that but we want to kind of give you the range where it had been kind of at the lowest points up toward it's been running more recently here.

Greg Palm

Okay, got it.

Bill Boor

And Greg, that kind of dovetails with -- we're giving you kind of the same information in different ways. I guess sometimes. I threw in the point that in the second half of April or early May we were down about 5% of the possible plant operating days. And that's roughly one out of our 20 plants. And I think that's pretty much in line with that 70% number.

Greg Palm

Yes. So I mean it's fair to -- so production rates today relative to -- and I'm talking companywide, but production rates today relative to pre-COVID are maybe only down like mid-single digits. Is that sort of the right way to think about it?

Bill Boor

Yes, I don't know if I've got the number because like I said, it's a moving thing. But I think you're in the right range because we have definitely shifted our focus back to evaluating productivity and trying to get back to those rates. And for the most part our system is really approaching those run rates.

Greg Palm

And then, noticed that CapEx was unusually high in the quarter. Was that associated with a new plan or something else?

Dan Urness

Yes, that was associated with that commercial real estate comment I had in my -- in my remarks that we did a like kind of exchange and obtained some commercial real estate property for about $6 million of that number. So that is a bit of a stand out in the quarter, yeah.

Greg Palm

Okay. And then, what are expectations for the next fiscal year for CapEx?

Dan Urness

This, I think, would be something that we'll continue to keep at these levels, around $8 million to $10 million potentially higher as we continue to reinvest, but we're not slowing down in our initiatives to reinvest and it could be higher depending on what kind of initiatives that we finally engage in. But no slowdown in the maintenance CapEx or the efficiency improvement CapEx and probably an increase.

Bill Boor

Hey, Greg. I might be -- I might be wise just leave it alone. I'm just trying to help everyone tie things together and I may complicate it instead, so Dan can help. That purchase of land, as Dan said, was kind of half of like-kind exchange and the sale of the land that we had earlier in the year kind of offsets that. So if you look at it on a total year basis, it's kind of neutral from a cash perspective, I would say or maybe -- would you say neutral?

Dan Urness

Yes, relatively neutral from a cash perspective.

Bill Boor

Yes, but it inflated that capital number, particularly for this quarter because you're just seeing the purchase side of that exchange.

Operator

Ladies and gentlemen, this concludes the Q&A portion of today's conference.

Bill Boor

Yes, let me just make a comment here as we close out. The experience of the last few months has certainly demonstrated the flexibility, the commitment, the can-do attitude of our people. Our Financial Services operations transitioned to work from home without missing a beat while at a time when customer needs peaked. They were dealing with a lot of inbound calls from customers looking for relief on payments, for example, on top of a pretty active market around -- due to the low interest rates.

So while their demands were going up, they made a complete operating transition, which I thought was very impressive. As walk in traffic dropped off, our retail organization shifted gears very quickly to a focus on phone and electronic communications and by doing that, they were able to remain available to prospective homeowners who continued to need assistance figuring out the right home to buy. And as we've talked, our operations certainly rose to the challenge of adjusting practices, so they could continue safely building desperately needed affordable homes.

Aside from getting homes to deserving families, I think the efforts of our manufacturing people have made a big contribution to keeping small independent dealers in business and that was something we are concerned about going into this experience and we thought it was important to keep the supply of homes, that's really their life blood flowing. So I feel great about that, our dealers, our partners and they've been front of mind for us throughout this.

So while the uncertainty certainly persists, we have every reason to expect continuing challenges, but our employees certainly has given us great confidence and Cavco will be up for it and we'll continue our important work. So with that, we certainly want to thank everyone for your interest in Cavco and we hope that you and your family stay healthy and safe. Thanks, everyone.

Operator

Pardon me. We have a follow-up question. Can we take this last question?

Bill Boor

Sure.

Dan Urness

Yes, happy to. Yes.

Operator

Okay. We have a follow-up question from Daniel Moore and you're free to ask your question sir.

Daniel Moore

Sorry to make it bank anticlimactic gentlemen, but I appreciate the extra moment here.

Bill Boor

That was a big finish.

Daniel Moore

Exactly, exactly. I guess just looking forward, any comments Dan, gross margin presumably likely to trend a little lower sequentially from fiscal Q4 into Q1 just giving lower absorption to start the quarter, is that the right kind of thought process if -- and I'll start with that.

Dan Urness

Yes. And thinking about our gross margins there, largely going to be impacted by what we see with material prices as much as what we see with respect to the inefficiencies related to COVID-19. The latter, we continue to get more and more under control, minimizing those impacts on efficiencies, as Bill mentioned earlier in the commentary, and the ongoing planning and logistical efforts with our suppliers certainly helps as well. So that's been a very good development.

Absenteeism, as you mentioned, has been improving. So all those things are going in the right direction. The variability with the material prices has certainly been relevant. And obviously we can't predict that, they've been increasing more so lately relatively low for the bulk of obviously, fiscal year 2020 which we just reported on. But during this time period, whether -- for various reasons, they've -- they dropped early but then they've been spiking again lately.

So I think there is some margin pressure there to be certain but part of it, I think, we'll be able to control and improve on and then part of it will still be pretty subjective.

Daniel Moore

Got it. And then the other one I wanted to -- string I wanted to pull on was just mix, pretty impressively favorable given the environment. I guess where geographically -- is it Texas where you're seeing higher ASPs and more multi-floor homes or is that spread across the board. And is that the trend that's likely to continue?

Bill Boor

Yes, little hard to pick out a trend right now given that there's so much movement in the marketplace. We did have our continuation of a trend that we had been seeing this quarter, which was higher multi-section homes as a percentage and proportion of our overall mix. But where that goes going forward, we've got initiatives under way really in both areas whether it'd be single section and multi-section.

I think that we will flex accordingly and then overall be watching to see if there is an overall push toward lower price points, that's been -- for what it's worth been the experience in past downturns, if we do happen to see a downturn, we'd see a push toward lower average sales prices, that would mean more single section homes, smaller and smaller square footage and lower priced multi-section homes, but a little hard to tell at this point.

Dan Urness

Yes, I think just to closeout out on that. I think from an industry perspective, it would be a really -- may be counterintuitive, it would be, in my opinion a positive sign if we saw single sections kind of increase dramatically. And if we all set back and looked at the past period, and said, geez the mix has shifted to single sections.

If that happens, because of the volume of single sections is up and not that the volume of multi-sections is down that indicates that those entry level buyers are doing well. That's a good sign about the economy, and I think it would be a positive about the industry, even if we saw a shift to the single sections on a proportionate basis and accommodating ASP drop.

So it's all how that shift comes about I guess if we see a move toward single cells or single units. And it's because multi dropped, that's one thing. But if it's because single volume came up that would be a great sign in my opinion.

Bill Boor

So I'll say again, I really appreciate everyone's interest and for your time today, and hope everyone has a great day.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for connecting and you may now disconnect. Everyone, have a great day.