Q2 2023 Legacy Housing Corp Earnings Call

Participants

Max M. Africk; Corporate Secretary & General Counsel; Legacy Housing Corporation

Robert Duncan Bates; President & CEO; Legacy Housing Corporation

Alexander John Rygiel; Associate Director of Research; B. Riley Securities, Inc., Research Division

Mark Eric Smith; Senior Research Analyst; Lake Street Capital Markets, LLC, Research Division

Timothy M. Moore; Research Analyst; EF Hutton, Research Division

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Legacy Housing Corporation Second Quarter 2023 Earnings Conference Call. (Operator Instructions). Please note that today's conference is being recorded. I will now hand the conference over to your speaker host, the Duncan Bates President Executive Officer. Please go ahead, sir. Good morning.

Robert Duncan Bates

This is Duncan Bates, Legacy's President and CEO. Thanks for joining our second quarter 2023 conference call. Max Africk, Legacy's General Counsel, will read the safe harbor disclosure before getting started. Max?

Max M. Africk

Thanks, Duncan. Before we 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 of 1995. 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 annual 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.

Robert Duncan Bates

Thanks, Max. I will run through our prepared remarks, then open the call for Q&A. Product revenue decreased to $42.3 million or 23.2% in the second quarter of 2023 compared to the second quarter of 2022. The decrease primarily resulted from a 14.6% decrease in products sold and a 10.1% decrease in net revenue per product as customer demand shifted towards the lower end of our product line. Also, we did not convert any independent dealer consignment arrangements to floor plan financing agreements during this quarter as we did in the second quarter of 2022. According to Manufactured Housing Institute 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 and our industry is accelerating. One of the leading indicators that we track on the retail or dealer side of our business is loan applications, a few recent data points. Loan applications at Heritage housing are 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 second quarter of 2023 compared to the second quarter of 2022. Also, applications surged 60.8% in July 2023 compared to July of 2022.

On the community or park side of our business, sales to existing customers remain stable. 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. Consumer and MHP loan interest income increased $8.5 million or 13.2% during the 3 months ended June 30, 2023, as compared to the same period in 2022. This increase was driven by increased balances in MHP and consumer loan portfolios. Our financing businesses generate predictable recurring revenue, and we continue to invest in them. Between June 30, 2023 and June 30, 2022, our MHP note portfolio increased by $43.9 million, and our consumer loan portfolio increased by $15.1 million. This is net of principal payments and loan loss allowances. Also, this does not include floor plan financing or development loans. I frequently field questions from investors about loan performance. The accountants 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% of MHP notes and 98.5% 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 $1.8 million or 13.4% in the second quarter of 2023 compared to the second quarter 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. 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 million in the second quarter compared to the second quarter of 2022. Legacy delivered a 17.3% return on equity over the last 12 months. At the end of the second quarter of 2023, Legacy's book value per basic share outstanding was 16.94%, an increase of 18.6% from the same period in 2022. We continue to hold pricing, reduce our raw material inventory and reduce our SG&A. Legacy has not missed 1 production day at any manufacturing facility in 2023. Legacy's balance sheet is strong. We ended the quarter with $1.5 million in cash and $4.7 million 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 million with a $25 million accordion feature. 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. 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. Please begin Q&A.

Question and Answer Session

Operator

(Operator Instructions)and our first question coming from the line of Alex Rygiel with B Riley Securities.

Alexander John Rygiel

Good morning, Duncan, how are you. A couple of quick questions here. So do you have any sales remaining to be booked from transitioning from that consignment program?

Robert Duncan Bates

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

Alexander John Rygiel

And what is the time frame or time line look like for converting those?

Robert Duncan Bates

I think we'd like to do it by year-end. There's some -- there are kind of the final hold out of dealers. So it's taking a little bit of time to work through this.

Alexander John Rygiel

 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?

Robert Duncan Bates

Yes. There's 2 pieces. I mean, we've got some dealers in Texas that -- that have relationships with, say, larger oilfield services or E&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. So they range from us selling a couple of these things to potentially selling hundreds of these things. And we've got a lot of quotes out now. We're trying to real people in and it'd be great if something hits.

Alexander John Rygiel

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

Robert Duncan Bates

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 spend 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, a new general manager. We've shifted people around. We've hired a lot of people. Right now, we're running 3 to 4 a day in Georgia. And our hope is to continue to ramp that up as -- depending on demand. So Georgia is in a good spot and now we just got to get out and keep selling.

Operator

And our next question coming from the line of Mark Smith with Lake Street Capita.

Mark Eric Smith

 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 change, where the headwinds are, maybe where emphasis is to drive maybe better sales in different channels?

Robert Duncan Bates

Yes, sure. I'll try to take that a couple of pieces at a time. I mean if you -- 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. And so they're just -- we're selling lower -- we're selling park model homes, and we're selling less option homes to dealers as they start to build inventory again.

Mark Eric Smith

 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 the higher price points?

Robert Duncan Bates

Yes, absolutely. I think the -- this consumer with inflation 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, lower end or less auctioned homes than they were 12 months ago.

Mark Eric Smith

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 can you reach a breaking point where you just can't raise that anymore.

Robert Duncan Bates

Yes. Our strategy for the past 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 consumers' credit quality. On the MHP side of the business, our financing program has a base rate and then it flips to variable. And so we've held the base rate 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 refine their projects and pay us off.

Mark Eric Smith

And the last question for me. You said that kind of the park and 9 development projects or something that you're focused on now? Any update on where these projects stand today? Any goalpost you should be looking for over the next couple of quarters?

Robert Duncan Bates

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 -- obviously, the markets slowed down. I mean we are 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. So right now, we're in the process of assembling a team. We're committed to these projects. They haven't stalled. I think we just feel like they're not moving as quickly as they need to. We're primarily focused on the kind of, I'd say, the crown jewel of this portfolio, which is Bastrop County. And we are making good progress now on Phase 1. And I'd hope -- I think I need another, say, another month or 2 to put out some actual goalposts, but that certainly is the game plan.

Operator

And our next question coming from the line of Tim Moore with EF Hutton.

Timothy M. Moore

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 on like the set 3% rise in single-family mortgage rates over the past 1.5 years or so. You mentioned the green shoots in loan applications in July, and that was terrific. It sounds like walk-in traffic is better at the retail locations and not a lot. 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 and November sale?

Robert Duncan Bates

Yes. I wish I had a crystal ball and could tell you exactly when that is happening. The dealer channel -- the dealer channel of our business has been 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 or 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. 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 seem 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. 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'll -- we hope it continues, and we'll obviously -- we'll keep the market updated quarterly as we see things.

Timothy M. Moore

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

Robert Duncan Bates

 Yes, it's slower than we 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 setup 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 and our larger competitors. 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 house is 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, the like that channel will gain traction like for the dealer channel is now?

Timothy M. Moore

That's helpful color. Duncan. So 2 more questions. How are the labor constraints of the 3 plants compared to maybe last summer? You mentioned you haven't missed one production data this year so far, which is phenomenal and you're hiring more with the social media push. Do you think that's just theoretically to it out there that maybe volumes start coming back pretty good in November, December that you'll have enough labor in place and routines.

Robert Duncan Bates

Yes. labor, it has been a challenge for a while all the way back through COVID. And I think for us and for the other manufacturers, the constraint is not how much space you have or how big your yard is or how big your plan is, it really is a labor constraint. And what -- I mentioned this, I think, on another call, but this is a very simple parameter that we use to think about the labor market is 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, they didn't have a single person show up looking for a job. And we're consistently getting 3, 4, 5 people that come in each day and apply. So it does feel like the labor market is 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.

Timothy M. Moore

 Great. That's helpful. It's funny to mention that because I remember recall seeing 3 people filling out applications in our Fort Worth lobby when I was there doing a tour last August. So...

Robert Duncan Bates

Exactly. If there's nobody out there, that's a problem.

Timothy M. Moore

No, no, there was a line. That was a good barometer. That was maybe feel better to then Georgia happened, but just one last question. Given the $50 million 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 is firing on off cylinders. The plants are doing well operationally that there could be an acquisition or vertical integration target on the near-term horizon?

Robert Duncan Bates

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 million line with a $25 million accordion feature. So we can take that up to $75 million. So we've got some firepower. The other thing that's interesting is it's only secured by our consumer loan portfolio. 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. 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 higher rates of return. And if something comes up that we really like, we're positioned to be aggressive on it.

Timothy M. Moore

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

Operator

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

Robert Duncan Bates

Sure. A couple of final remarks. I want to thank everybody joining 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 the third in Fort Worth, Texas. It's a great opportunity to see our new products and meet the team and a link to the RVP is on our website. Operator, this concludes our call.

Operator

Ladies and gentlemen, that does our conference for today. Thank you for your participation. You may now disconnect.