Legacy Housing Q2 2023 Earnings Call Transcript

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August 10, 2023

There are 6 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Legacy Housing Corporation's 2nd Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. After the stated presentation, there will be a question and answer session. Please note that today's conference is being recorded.

Operator

I will now hand the conference over to your speaker host, to Duncan Bates' President and Chief Executive Officer. Please go ahead, sir.

Speaker 1

Good morning. This is Duncan Bates, Legacy's President and CEO. Thanks for joining our Q2 2023 conference call. Max Safraic, Legacy's General Counsel, will read the Safe Harbor disclosure before getting started. Max?

Speaker 2

Thanks, Duncan. Before we

Speaker 3

begin, may I remind our listeners that management's prepared remarks today will contain forward looking statements, which are subject to risks and uncertainties, and management may make Additional forward looking statements in response to your questions. Therefore, the company claims the protection of the Safe Harbor for forward looking statements that is contained in the Private Securities Litigation Reform Act 19 95. Actual results may differ from management's current expectations, and therefore, we refer you to a more detailed discussion of the risks and uncertainties in the company's Report filed with the Securities and Exchange Commission. In addition, any projections as to the company's future performance represent management's estimates as of today's call. Legacy Housing assumes no obligation to update these projections in the future unless otherwise required by applicable law.

Speaker 1

Thanks, Max. I will run through our prepared remarks, then open the call for Q and A. Product revenue decreased to $42,300,000 or 23.2 percent in the Q2 of 2023 compared to the Q2 of 2022. The decrease primarily resulted from a 14.6% decrease in products sold and a 10.1% decrease in and net revenue per product as customer demand shifted toward the lower end of our product line. Also, we did not convert any independent dealer consignment arrangements to floorplan financing agreements during this quarter as we did in the Q2 of 2022.

Speaker 1

According to Manufactured Housing To data, industry home shipments through May 2023 were down 29% year to date. However, Housing affordability in the U. S. Continues to deteriorate and retail traffic in our industry is accelerating. One of the leading indicators that we track on the retail or dealer side of our business is loan applications.

Speaker 1

A few recent data points. Loan applications at Heritage Housing, our company owned retail stores, hit a 12 month high in July 2023. Loan applications at Federal Investors, Our consumer lending arm were up 17.6% in the Q2 of 2023 compared to the Q2 of 2022. Also, applications surged 60.8% and July 2023 compared to July of 2022. On the community or park side of our business, Sales to existing customers remain stable.

Speaker 1

Like other manufacturers, we have battled delayed shipments due to setup related issues. Our quote activity for new projects beginning late 2023 and early 2024 is strong. We rarely discuss Legacy's commercial product portfolio. Legacy has an extensive line of workforce housing solutions. Inquiries for our commercial products from customers in the energy, agricultural, film and disaster relief industries are the highest I've seen since joining Legacy.

Speaker 1

Consumer and MHP loan interest income increased $8,500,000 or 13.2 percent during the 3 months ended June 30, and the MHP and consumer loan portfolios. Our financing businesses generate predictable Recurring revenue and we continue to invest in them. Between June 30, 2023 June 30, 2022, Our MHP note portfolio increased by $43,900,000 and our consumer loan portfolio increased by $15,100,000 This is net of principal payments and loan loss allowances. Also, this does not include floorplan financing or development loans. I frequently field questions from investors about loan performance.

Speaker 1

The accountant's figures are in the filing, But the way that I think about delinquent accounts is over 30 days with no payments. At June 30, 2023, Over 99.5 percent of MHP notes and 98.5 percent of consumer loans were current. We monitor these numbers closely and are confident in the strength of our loan portfolios. Other revenue primarily consists of dealer finance fees and commercial lease rents, which increased to $1,800,000 or 13 point 4% in the Q2 of 2023 compared to the Q2 of 2022. Selling, general and administrative expenses decreased 6.3% during the 3 months ended June 30, 2023 as compared to the same period in 2022.

Speaker 1

This decrease was primarily due to the decrease in consulting and professional fees and a decrease in warranty costs. Net income decreased 13% to $15,000,000 in the 2nd quarter compared to the Q2 of 2022. Legacy delivered a 17.3% return on equity over the last 12 months. At the end of the Q2 of 2023, Legacy's book value per basic share outstanding was 16.94, an increase of 18.6 percent from the same period in 2022. We continue to hold pricing, reduce our raw material inventory and reduce our SG and A.

Speaker 1

Legacy has not missed One production day at any manufacturing facility in 2023. Legacy's balance sheet is strong. We ended the quarter with $1,500,000 in cash and $4,700,000 drawn on our line of credit. On July 28, 2023, we closed a new revolving credit facility with Prosperity Bank. The facility is for $50,000,000 with a $25,000,000 accordion feature.

Speaker 1

It is secured by our consumer loan portfolio. Our team has been focused this quarter on internal strategic projects. A few examples, We are updating and adding more modern features to our products. We are revamping our sales processes and hiring additional talented sales professionals. We made a big push on social media and digital advertising at Heritage Housing and are beginning to see results.

Speaker 1

We also believe there is significant value to unlock on the land development side of our business. We are committed to these projects and are hiring additional team members to prioritize and accelerate progress. In addition to internal projects, We are consistently evaluating inorganic growth opportunities. The new bank line gives us the flexibility to Pursue these opportunities if they hit our return threshold. Operator, this concludes our prepared remarks.

Speaker 1

Please begin Q and

Operator

A. Please standby, we'll be And our first question coming from the line of Alex Rygiel with B. Riley Securities. Your line is open.

Speaker 1

Hey, Alex.

Speaker 4

Good morning, Duncan. How are you?

Speaker 1

I'm good. How are you?

Speaker 4

Doing well. A couple of quick questions here. So do you have any sales remaining to be booked from transitioning from that consignment program?

Speaker 1

Yes, we have about 120 or so houses that are still in the old consignment program.

Speaker 4

And what is the timeframe or timeline look like for converting those?

Speaker 1

I think we'd like to do it By year end, there's some these are kind of the final holdout of dealers.

Speaker 5

So it's taken a little

Speaker 1

bit of time to work through this.

Speaker 4

And then you brought up an interesting Point as it relates to inquiries for commercial product being very, very high. Can you remind us When these commercial orders come in, I suspect they're kind of fairly large in size from time to time. So maybe talk about How big some of these could be?

Speaker 1

Yes. There's 2 pieces. I mean, we've got some dealers in Texas That will that have relationships with, say, larger oilfield services or E and P companies or agricultural businesses. And they're selling lower volume, just 2 here, 3 there, 4 there. But there's we are seeing some inquiries from larger products that I would say are closer to Sales that we would see on the community or park side of our business.

Speaker 1

So they range from us selling a couple of these Thanks to potentially selling 100 of these things. And we've got a lot of quotes out now. We're trying to reel people in. And it'd be great if something hits.

Speaker 4

And lastly, where is the Georgia plant as it relates to production levels? And yes, that an opportunity to utilize that facility for these commercial opportunities?

Speaker 1

We have built this product in Georgia. We didn't I didn't comment on Georgia in our prepared remarks because Frankly, we feel great about where that plant spends where it sits today. We've made A tremendous amount of or we've implemented a tremendous amount of changes there. We've got new sales manager, new general manager. We've shifted people around.

Speaker 1

We've hired a lot of people. Right now, we're running 3 to 4 a day at Georgia. And our hope is to continue to ramp that up as depending on demand. So George is in a good spot and now just got to get out and keep selling. That's great.

Speaker 1

Thank you. Thanks, Alex.

Operator

Thank you. And our next question coming from the line of Mark Smith with Lake Street Capital, your line is now open.

Speaker 2

Hey, Duncan. First off, can you just walk us through a little bit more in-depth Sales mix, both channel and kind of price points, kind of where things changed, where the headwinds are, maybe where emphasis is to Drive maybe better sales in different channels?

Speaker 1

Yes, sure. I'll Sorry to take that a couple of pieces at a time. I mean, if you look at the Q, The price or the revenue per product sold is down and that contributes to the decline in sales in addition to just lower volume. And I think what's happened is We build a great park model home. We've got some large customers that continue to take a lot of these.

Speaker 1

And so they're just we're selling lower we're selling park model homes and we're selling less optioned homes to dealers as they start to build inventory again.

Speaker 2

And I think you said in your prepared remarks that as we look at kind of a standard consumer home, are you seeing more demand at those lower price points than you are The higher price points?

Speaker 1

Yes, absolutely. I think the this consumer with inflation has has been hit pretty hard. And although chattel rates have not gone up as much as traditional mortgages, Just with inflation and every other aspect of their lives, they're looking at A little bit lower end or less optioned homes than they were 12 months ago.

Speaker 2

Okay. And that leads to my next question. As we think about both loan portfolios, consumer and MHP, Any thoughts around rates? It looks like it came up a little bit here in the quarter. Can you take more or is Can you reach a breaking point where you just can't raise rates anymore?

Speaker 1

Yes. Our strategy for the past little over 12 months has been Hold price firm and hold rates firm. Now that said, there's some nuances On either side of the business, on the consumer loan portfolios, I mean, we've held our base rates, but The rates are subject to our underwriting process. And so That really depends on the consumer's credit quality. On the MHP side of the business, Our financing program has a base rate and then it flips to variable.

Speaker 1

And so We've held the base rates consistent. Over the next, say, 24 months, you're going to see a lot of these flip to variable. And you've got community customers that when that flip happens, will be Inclined to refi their projects and pay us off.

Speaker 2

Okay. And the last question for me, you said that kind of the park and land development projects are Something that you're focused on now. Any update on where these projects stand today? Any goalposts we should be looking for over the next couple of quarters?

Speaker 1

Yes. We've had so much going on over the last 12 months, where I feel like We finally got the foundation stable and we've had Issues at the Georgia plant, we've obviously the market's slowed down. I mean we're spending all of our time focused on the business. And as we move forward, we've got to accelerate These legacy projects. And so a big topic internally was land development this quarter and actually putting together a plan on for what we're going to do going forward.

Speaker 1

So right now, we're in the process of assembling a team. We're committed to these projects. They haven't installed. I think we just feel like they're not moving as quickly As they need to, we're primarily focused on the kind of the, I'd say, the crown jewel of this Portfolio, which is Bastrop County. And we are making good progress now on Phase 1.

Speaker 1

And I'd hope I think I need another say another month or 2 to put out some actual goalpost, but that certainly is the game plan.

Speaker 2

Okay. Thank you.

Speaker 1

Thanks, Mark.

Operator

Thank you. And our next question coming from the line of Tim Moore with EF Hutton, your line is open.

Speaker 5

Thanks. I'm talking a few of my prepared questions already asked, but I actually have 4 remaining ones. You mentioned that legacy and it's pretty obvious and a great attribute. You've held kind of the base interest rate pretty much the same unlike The steep 3% rise in single family mortgage rates over the past year and a half or You mentioned the green shoots in loan applications in July and it was terrific. Sounds like walk in traffic is better at the retail locations and up a lot.

Speaker 5

My question is, I'm just trying to pinpoint the possible conversion of timing for how many months it might take from loan applications To convert to an order, to ship lead time when you can actually book revenues, is that something like 3 months? In other words, If there is an inflection point and I'm not putting words in your mouth for July and maybe that's continuing in August, does that convert something like October November sales? Yes.

Speaker 1

I wish I had a crystal ball and couldn't tell you exactly when that It's happening. The dealer channel of our business has been Yes, pretty slow for a few quarters. The consumer backed off. You had dealers that were Had a lot of inventory and install their consignment or floor plan financing arrangements Our interest rates go up pretty significantly. And but what we're hearing from our customers now and what we're Seeing with our own stores is there does seem to be a pickup in that channel.

Speaker 1

You have dealers that are Selling homes, reordering homes and you've got a lot of foot traffic at the dealer level and obviously we're seeing it in the loan applications. I don't I think it's going to be a steady progression. Like I don't think you just Overnight, there's this huge boom on the dealer side of the business, but it does feel like we're getting some momentum. Dealers are Clearing out their inventory, they're starting to reorder. And We've seen an uptick in applications, but we've also seen an uptick in the credit quality of those applications.

Speaker 1

Seems like there's consumers out there that maybe are dropping down into this category and are able to put up Larger down payments than we've seen historically. So we're monitoring it closely. We hope it continues And, we'll obviously, we'll keep the market updated quarterly as we see things.

Speaker 5

Great, Duncan. That's really good color and Nice to see the credit quality increase on the applications. How is the demand and the interest levels from the park operators? I know that It held up pretty good. How has that been doing in the last few months?

Speaker 1

Yes. It's slower than we'd like. It seems like a lot of these guys are facing pretty serious delays on the setup side. And I don't know if it's It doesn't seem like it's as much set up crews. It's like getting the utility operators to cooperate or the counties To cooperate with certificate of occupancies and things like that, we tend to serve I think a different a little bit different customer base in our larger competitors.

Speaker 1

I mean most of our customers on the park side are regional entrepreneurs. And a lot of these guys sold Portions of their portfolios when the prices really went crazy last year. So we've got some big customers that Are deploying capital now, they're ordering houses fairly consistently. But We are like and we are making a sales push for new customers, but it's a little bit slower than we'd like. And so we're I think just based on our quote activity, it feels like end of the year, Early next year, these like that channel will gain traction like the dealer channel is now.

Speaker 5

That's helpful color, Duncan. I just have 2 more questions. Sure. How are the labor constraints of the 3 plants compared to maybe last summer? You mentioned You haven't missed one production day this year so far, which is phenomenal, and you're hiring more with the social media push.

Speaker 5

Do you think let's just theoretically, I'll throw it out there that maybe volumes start coming back pretty good in November, December that you'll have enough Labor in place and retained?

Speaker 1

Yes. Jeez, labor has been a challenge for A while, all the way back through COVID. And I think for us and For the other manufacturers, it's the constraint is not how much space you have or how big your yard is or how big Plan is, it really is a labor constraint. And what I mentioned this, I think, on another But this is a very simple parameter that we use to think about the labor market is that At our Fort Worth plant, there's a waiting room on the front. And if you talk to Curt and Kenny, they'll tell you through COVID, And have a single person show up looking for a job.

Speaker 1

And we're consistently getting 3, 4, 5 people They come in each day and apply. So it does feel like the labor market's loosening up a little bit. And I feel much better about ramping up production now or over the next couple of quarters than I would during COVID.

Speaker 5

Great. That's helpful. It's funny you mentioned that because I remember recall seeing 3 people filling out applications in your Fort Worth Lobby when I was there doing a tour last August. So

Speaker 1

Exactly. Exactly. And if there's nobody up there, that's a problem.

Speaker 5

No, no, there was a line. That was a good barometer. That was a made me feel better, although than Georgia happened. But just one last question. Given the $50,000,000 availability that you mentioned and the possible accordion option feature if you take that up, Should we read into that at all that maybe now that some of the operational pickups are well behind you, Georgia's Firing on all cylinders, the plants are doing well operationally, that there could be an acquisition or a vertical integration target on the near term horizon?

Speaker 1

We're looking hard. The new bank line is We've been working on it for a little while. I don't care what size business you're operating. Banks can be difficult to deal with Now and so it's actually it's a $50,000,000 line with a $25,000,000 accordion feature. So we can take that up to 75,000,000 So we've got some firepower.

Speaker 1

The other thing that's interesting is it's only secured by our And so we've got other assets out there unencumbered. We're really we're looking. I just we're we've been focused internally. There's still a lot of work to do internally and but with if the right opportunity comes up, we're ready to go. I mean, we've been looking at all types of things.

Speaker 1

So I think We're not going to chase something that's expensive or risky. We're going to stay patient, Continue to invest in our own business at high rates of return. And if something comes up that we really like. We're positioned to be aggressive on it.

Speaker 5

Great. That's very helpful color. And I always remember your ROI hurdle. I mean, You've done a great job reinvesting back in the business and maybe you'll have some other external options. But that's it for my questions.

Speaker 5

And I hope that you, Kurt, Kenny and the rest of the team have a wonderful summer. And Ron.

Speaker 1

Yes. Thanks, Tim. Appreciate it. You too.

Operator

Thank you. And I'm not showing any further questions in the queue at this time. I would now like to turn the call back over to you, Mr. Bates, for any closing remarks.

Speaker 1

Sure. A couple of final remarks. Want to thank everybody who joined today's earnings call. We appreciate your interest in Legacy Housing. And then next, Our annual fall show, which is Legacy's largest sales event, is October 1 through 3 in Fort Worth, Texas.

Speaker 1

It's a great opportunity to see our new products and meet the team and a link to the RSVP is on our website. Operator, this concludes our call.

Operator

Ladies and gentlemen, that doesn't call conference for today. Thank you for your participation. You may now

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Legacy Housing Q2 2023
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