Legacy Housing Corp

NASDAQ:LEGH

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Good day, and thank you for standing by. Welcome to the Legacy Housing Corp. Second Quarter 2020 Earnings Call. [Operator Instructions].

Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Duncan Bates. Please go ahead.

[Robert Bates, executive]

Good morning. This is Duncan Bates, Legacy's President and CEO. Thanks for joining our second quarter 2024 conference call. Max Africk, Legacy's General Counsel, will read the safe harbor disclosure before getting started. Max?

[Max Africk, executive]

Thanks, Duncan. At the outset, I will 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 represents management's best 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 Bates, executive]

Thanks, Max. I'm joined today by Jeff Fiedelman, Legacy's Chief Financial Officer. Jeff will discuss our second quarter financial performance then I will provide additional corporate updates and open the call for Q&A. Jeff?

[Jeffrey Fiedelman, executive]

Thanks, Duncan. Product sales primarily consist of direct sales, commercial sales, inventory finance sales and retail store sales. Product sales decreased $10.7 million or 25.2% during the 3 months ended June 30, 2024, as compared to the same period in 2023.

This decrease was driven by a decrease in unit volumes shipped primarily in direct sales, mobile home park sales in inventory finance sales categories. The decrease was partially offset by increased sales at our company-owned retail stores. For the 3 months ended June 30, 2024, our net revenue per unit sold decreased 1.3% to $61,600 as compared to the same period in 2023, primarily due to a shift in product mix to smaller units.

Consumer MHP and dealer loans interest income increased $1.4 million or 16.0% during the 3 months ended June 30, 2024, as compared to the same period in 2023 due to growth in our loan portfolios. This increase was driven by increased balances in the MHP consumer and dealer loan portfolios. Between June 30, 2024 and June 30, 2023, our MHP loan portfolio increased by $16.6 million. Our consumer loan portfolio increased by $15.8 million and our dealer finance notes increased by $0.9 million.

Other revenue primarily consists of contract deposit forfeitures, consignment fees, commercial lease rents, service fees and other miscellaneous income and decreased $0.8 million or 45.5% during the 3 months ended June 30, 2024, as compared to the same period in 2023. This decrease was primarily due to a $1.0 million decrease in dealer finance fees, a $0.2 million decrease in commercial lease rents, partially offset by a $0.4 million increase in other miscellaneous revenue.

Cost of product sales decreased $8.2 million or 27.4% during the 3 months ended June 30, 2024, as compared to the same period in 2023. The decrease in cost is primarily related to the decrease in units sold. Gross profit margin was 31.9% of product sales during the 3 months ended June 30, 2024, as compared to 29.8% during the 3 months ended June 30, 2023.

Selling, general and administrative expenses were flat during the 3 months ended June 30, 2024, as compared to the same period in 2023. We had a $0.8 million decrease in warranty costs, a $0.7 million decrease in payroll and related expense and a $0.2 million decrease in bad debt expense, offset by a $0.8 million increase in legal expense, a $0.4 million increase in property tax expense, $0.2 million increase in loan loss provision, a $0.1 million increase in marketing expense and a net $0.2 million increase in other miscellaneous expense.

Other income expense increased $3.2 million or 538.3% during the 3 months ended June 30, 2024, as compared to the same period in 2023. We had an increase of $2.6 million in miscellaneous income as a result of a gain of $1.3 million on the sale of real property in Georgia and a reversal of $1.3 million of accrued liabilities. We had an increase of $0.3 million in other miscellaneous income, and we had an increase of $0.3 million in interest income for other notes, receivables, net of allowances.

Net income increased 7.8% to $16.2 million in the second quarter of 2024 compared to the second quarter of 2023. Basic earnings per share increased $0.05 per share or 8.7% in the second quarter of 2024 compared to the second quarter of 2023. As of June 30, 2024, we had approximately $0.1 million in cash compared to $0.7 million as of December 31, 2023. The outstanding balance of the revolver as of June 30, 2024, and December 31, 2023, was $11.9 million and $23.7 million, respectively.

At the end of the second quarter of 2024, Legacy's book value per basic share outstanding was $19.17, an increase of 13.2% from the same period in 2023. We repurchased 170,342 shares for $3.5 million during the 3 months ended June 30, 2024. On August 6, 2024, our Board of Directors authorized the repurchase of an additional $10.0 million of the company's common stock under the share repurchase program. We will continue to repurchase shares opportunistically when the stock trades near liquidation value.

[Robert Bates, executive]

Thanks, Jeff. Our team continues to focus on product sales. We worked through delays in Georgia and with certain customers in Texas to push shipments into the third quarter. Our dealer business across most of the platform is strong. Some independent dealers are slow to move aged inventory. We launched a retail financing special to assist with this ahead of our fall show. Retail finance applications were up 34% from the second quarter of 2024 compared to the second quarter of 2023. Our community business has been impacted by higher interest rates for the past few quarters. Transaction volume, which drives demand as new owners work to increase rent rolls is down and new development is slow. However, the market is improving.

Our quote activity is up meaningfully since the first quarter. We're having success selling smaller HUD units and tiny homes to both MH and RV park owners, aiming to keep rent affordable and occupancy high. Legacy has a handful of large community customers who paused orders for the past 12 months or so. These customers are back ordering and taking deliveries. Product gross margins were 31.9% for the second quarter of 2024. I'm proud of our team's effort to manage margins at lower production volumes.

We are disciplined on price and watching labor and overhead expenses closely. Our top priority for the remainder of 2024 is continuing to build our backlog, which will result in higher production volume. Our new sales team members are building customer relationships and signing orders. We increased production at our Georgia plant in July. As Jeff mentioned, we sold a property in Georgia during the second quarter. The sale positively impacted our results. Although onetime in nature, investors will continue to see similar sales over the next few quarters. There are several real estate assets on our balance sheet, excluding our core developments that have meaningful value. We received 0 credit for these assets in the public markets, and we'll continue to monetize them. Although sales volumes are down in 2024, our lending portfolios continue to grow. From the first half of 2023 to the first half of 2024, interest revenue from MHP, retail finance and floor plan financing is up 26.5%. Our delinquencies remain low and recovery rates are strong.

On July 27, 2024, we signed a binding settlement agreement to resolve litigation with a long-term MHP customer. Under the agreement, the borrower will need 2 mobile home parks with homes to Legacy. Legacy will refinance the remaining debt and a new 2-year note the collateral and guarantors remain the same. We are finalizing the transfers and the new note and plan to discuss more details on the next earnings call. We view this as a very positive outcome for both parties. Investors following our story know that we have worked through multiple challenging situations over the last 2 years. We're hands-on operators in solving these complex problems take significant time and energy. With most of yesterday's challenges behind us, we can focus on growing our core business. There are no more distractions. We have built a great team. Everyone is contributing and today, I feel better about the company and our prospects than any other time since starting full time in June 2022. I'm excited to show investors the earnings potential of this business as we push more volume through the plants this year.

Operator, this concludes our prepared remarks. Please begin the Q&A.

[Operator]

[Operator Instructions] Our first question will come from the line of Daniel Moore from CJS Securities.

[Dan Moore, analyst]

Maybe start with, is it possible to quantify in ballpark terms, the impact of the delays, the delayed shipments that referenced in Georgia and Texas in the quarter that are being pushed into Q3?

[Jeffrey Fiedelman, executive]

The bulk of that is in Georgia. We were -- we had shipments held up for a few weeks over there. And those obviously will get pushed into Q3. I'd say there -- I don't have a specific number. I just think that the backlog looks decent, but customers are struggling, especially on the park side with permits and getting pads ready and we just -- we experienced some delays where we thought, hey, we'd get 30 homes out and instead, you ship the first 10, and it takes them longer than expected to take the rest. So I think the third quarter you'll certainly see a ramp-up in shipments, but it was certainly slower than we would like this quarter.

[Dan Moore, analyst]

That's helpful. Obviously, the retail finance adds up 34% is a great sign. Anything you can say in terms of order rates and/or changes in backlog during the quarter either sequentially or year-over-year?

[Robert Bates, executive]

Yes. Dan, we don't publish backlog, but we obviously follow it closely internally. I think this week, we probably -- we had one of the best sales weeks that we've had all year. And so we're -- we're excited to get back focused 100% on sales. We've had a lot of distractions this year as we've cleaned up yesterday's problems. But I think that customers on both sides of the business are ordering, the outlook looks a lot better than it did at this time last summer, and we fought some challenges that are unique to us, but we're really like starting to push a lot of homes out the door, and we've got some big projects. There are some projects that I think we're pretty close on -- that would be a game changer for us and really allow us to take production up.

But we're just -- we're taking it day by day. We've got a lot of new salespeople that we've hired over the last 12 months and it takes some time to get people trained and get them up to speed and have them really understand the product and really understand the financing solutions before they can contribute. And I'm happy with the direction that that's going. We've also -- we implemented a new sales order system that we launched early this year where we're now tracking all the details around quotes and orders and shipments in 1 system, all the way through the process, so we can hold people accountable on the sales side.

So a lot of things moving in the right direction. We've just got to stay focused and really push sales forward. I think another -- in addition to the retail finance applications being up pretty dramatically. We do a fall show in Fort Worth every year. We're obviously tracking RSVPs to that show. It's our big sales event for the year, and we're way ahead of where we typically are from RSVP. So we're pushing hard to get to the show, and we're expecting a pretty good show in late September.

[Dan Moore, analyst]

Excellent. Really helpful. Maybe 1 or 2 more and I'll jump back in queue. But in terms of the litigation settlement, given the inflation that we've seen, is it possible if the value of those assets could be above or meaningfully above the loans against them? Just how do we think about any potential gains or losses there?

[Robert Bates, executive]

Yes. We've got to roll up our sleeves and do the work, and we've spoken with the auditors about that. And so quantifying putting those on the balance sheet is something that we're going to spend a lot of time on this quarter. But I think we're in the assets right we're talking about over 300 spaces with houses.

And I think there could be some upside, but we just -- we've got to get everything wrapped up and get our team in there and then figure out the best way to monetize the assets. We're not planning to own them long-term.

[Dan Moore, analyst]

Makes sense. And then lastly, any sense for like combined market value of the noncore real estate assets that you're in the process of divesting.

[Robert Bates, executive]

Well, I'll give you an example. What we sold in this quarter was a group of warehouses that we add lease to some tenants at our Eatonton facility. And we essentially -- I mean we didn't pay much for that facility to start with. So I think when you can sell something for a $1.3 million gain that no one even realizes that you own is pretty important. And there's -- there are several, at least 4 or 5 real estate assets like that in addition to a meaningfully sized portfolio of leased homes that have real value.

So as we've -- as Jeff and his team have really dug into the balance sheet. We've got a list of opportunities and we're just -- we're working through them. And this was the first real estate asset to come off the balance sheet and for us to monetize.

[Operator]

Our next question will come from the line of Mark Smith from Lake Street.

[Mark Smith, analyst]

First 1 for me, just looking at the MHP loan portfolio here sequentially stayed pretty flat, but it looks like maybe the actual rate maybe came down a little bit. Maybe just talk about that portfolio and especially in a declining rate environment, maybe what we should look for on kind of interest rates coming from that portfolio of MHP loans.

[Robert Bates, executive]

Yes, sure. I think park sales have been down, right? And so if we're selling less park model homes to communities, you've got less financing opportunities. And so the growth in that portfolio was pretty robust, '19, '20, '21, '22 -- '23 park business started slowing down as the full effect of interest rates carried over into the real estate transactions. And so the park business has been slower, and the portfolio has been growing slower than it had the prior 3 to 4 years. As far as interest rates go, the way that, that product works is there's a 2-year fixed rate and then it flips to variable.

And so as notes flip to variable, the interest rate will increase. And there are certain loans in that book that will start to flip this year. We've used during slower times -- I mean, we've used financing concessions to drive volume tends to be a period of no payments. So these park owners can get homes in and get them set and get them rented before they start paying on the houses. But the interest rates or the starting rates tend to be in line. And so what we have seen though is we will offer a little bit better rate for that 2-year fixed period if buyers put down a higher down payment. So we have seen people say, "Hey, I've got my customer in these communities is tapped out at $1200 a month." And I need to make x hundred a month in lot rent to support the real estate asset. And so I need houses in here that I can keep the overall payment affordable. And so we've seen a shift to smaller homes but we've also seen a shift toward people putting a higher down payment. So their monthly payment to us is lower to keep the homes affordable.

[Mark Smith, analyst]

And then I don't know if you're able to talk about it today, but can you talk about the settlement and any change that this has? I know that there was some refinancing of that note that was out there. Any impact that this has on the MHP notes as we kind of see them reported in GAAP accounting?

[Robert Bates, executive]

Well, this is a longtime customer. We've done business with him and his is partners for over 12 years. And he's got a nice portfolio, and it was an unfortunate situation, how we ended up here. But I think, look, it was complex. There were a lot of feelings, a lot of history there. And so it's taken a lot of time to put this deal together. And I think it's a win for both parties. And so essentially, -- the 2 parts that are coming to us will reduce the balance on a new note, and we'll wrap up notes that are in the MHP portfolio and in the development portfolio and refinance those into 1 note that's drafted in accordance with Louisiana while -- where all of the collateral is located.

So I guess a long way of saying that you're going from, say, 60 to 70 individual MHP and development notes down to 1 note.

[Mark Smith, analyst]

Okay. So kind of a consolidation, but at the same time, it sounds like you get these couple of parks, but that loan -- the refinance loan is a smaller piece than what it was on the books before.

[Robert Bates, executive]

That's right. And I think from their side, right, it gives them time to refinance, sell assets and get us paid back.

[Mark Smith, analyst]

Okay. And the last 1 for me, Duncan, is just looking at the gross profit margin on product sales was really pretty solid here in the quarter. Can you just talk about sustainability of that? It sounds like you've ramped up production in Georgia a little bit. But are there any cost pressures? What are you seeing on labor, input costs, anything that we should be looking at as we think about gross profit margin going forward?

[Robert Bates, executive]

Sure. Yes. I mean I'm really proud of the team for keeping it at those levels, just given the production volume. And I think we can maintain it. We took production up in Georgia. We're pushing really hard to take it up in Texas. We've hit some -- we've been closed, hit some air pockets. But orders were looking pretty strong in the past couple of weeks, so that's a good sign. I think the hardest thing to manage is labor. I think all companies struggle with labor inflation. I don't think wages are coming down anytime soon. And so we've been really disciplined with our pricing. We've had some -- we've reduced our raw material inventory. We've got a ways to go, but we've been able to take advantage of some materials coming but the big 1 is labor and holding price. And so I think if we can push production volume higher, which we will be able to do this year, we should be able to maintain gross margins, product gross margins that are at similar levels.

[Operator]

Next question will come from the line of Jay McCanless from Wedbush.

[James McCanless, analyst]

Pretty much gone through everything that I had. On the repurchase, nice to see that step up sequentially from 1Q to 2Q. Maybe how are you guys thinking about that on a quarterly run rate going forward?

[Robert Bates, executive]

Yes. We've got support from the Board to continue buying stock. We're not going to come out. We're not going to come out and say, "Hey, every quarter, we're going to repurchase a certain amount of stock." We don't think that, that's necessarily the best way to allocate capital. But we are going to repurchase opportunistically. So we're going to run a calculation internally each quarter that identifies our -- what we calculate as our liquidation value.

And when the stock trades down to those levels, we'll buy as much back as we can. And if we go through this authorization, we'll ask the Board for another one. But I think the buybacks have been well received. I feel great about the prices that were -- and the volumes that we were able to repurchase stock in the first and second quarter, and we're just -- we'll keep an eye on it. And when it hit certain levels, we'll be aggressive.

[James McCanless, analyst]

Okay. That sounds great. And then the liability reversed in the quarter, was that a one-off thing? Or should we expect some more of that going forward?

[Robert Bates, executive]

I kind of throw that in the camp with some of these asset sales. Jeff and his team now that we've got a great team on the accounting and SEC reporting side. And they're really digging in. So as they find order things on our balance sheet that don't make sense anymore, they're going to clean those up. And so there's items on both sides of the balance sheet. It's not all lopsided. But we're getting the balance sheet cleaned up, and we're going to sell assets that we don't get credit for and don't use.

[Operator]

Our next question is come from the line of George Melas-Kyriazi from MKH Management.

[George Melas, analyst]

Just a quick, I think you guys talked a little bit about the production about things sort of working out better at the plant about increasing production in Georgia. Can you just provide a little bit more color on the plans, how things are going from production level quality basis, sort of give us a sense of how happy you are and where do you think you could be in 6 months there?

[Robert Bates, executive]

George, I've been living and breathing Georgia for 2 years. And we have made some significant progress in Georgia. As far as the first step was you've got a clean -- you have to fix your quality issues, and we fix those. And the house is coming out of Georgia now are just as good as anything we're building in Texas. And so I'm really proud of the team and their efforts and working with the regulators and to get the quality to where it needs to be. And then the second -- first, you have to fix the quality, then you've got to go out and resolve sins of the past with homes that have issues.

And so we've spent a tremendous amount of time and money doing that. And as you do that, you start to win back some customers. And we have an entirely new sales team in Georgia. And they've been here for, I'd say, in some cases a year, some less than a year. But it's full of young professionals who see the opportunity and they are starting to really get something going on the sales side. We had to win new customers. We had to win relationships back with customers that had problems with houses.

We've had to rebuild a dealer base over there. And I feel good about where Georgia stands today. And we just -- we've got to keep the momentum. The Georgia sales team is really firing and they're all excited. And so we just -- we got to keep pushing. We took production up 1 house a day in July. We didn't have to -- I think we had maybe we're a little heavy on labor there already to keep good people. And so we're rightsizing Georgia. It's moving in the right direction.

The Southeast is -- the market seems to be pretty strong. And I think as you have storm activity through hurricane season, we may get lucky with some big projects over there. I think one interesting thing that the Georgia team has done is they've targeted RV park owners with our tiny home products. And we've been able to build some customer relationships that look like they're turning into [ Wales ], where there able to get these houses in and in many cases, have them rented before they're even set up and we're calling us back and ordering more houses. So a lot of good things coming out of Georgia, but we've got to keep our head down and keep moving in the right direction.

[George Melas, analyst]

Okay. That's [indiscernible]. Just remind us, in Georgia, is it primarily park sales historically what's sort of the mix of sales there? And maybe also just a very brief update on the Texas plant.

[Robert Bates, executive]

Yes, Georgia, we have some big park customers over there. We've had to rebuild a dealer base, and we've got some work to do with dealers. Some of the new sales guys are hitting the road and coming back with applications, and that's encouraging. But I'd say most of the sales in Georgia right now are park sales.

As far as Texas goes, 2 plants in Texas, also a lot of new faces on the sales team, people starting to hit their stride. We've got some dealers that are just knocking the ball out of the park in Texas. And then we've got others that I'd say, haven't moved to a more modern base sales approach using the Internet and technology that are a little behind. And so we're trying to help them. And the park business has been slower in Texas, but orders have been picking up over the past couple of weeks, and we're really pushing. So a lot of things moving in the right direction, but a we got to show up next quarter and the following with those -- with that reflected in the numbers.

And I think now that we've gotten through a lot of these larger distractions, we'll be able to do that.

[George Melas, analyst]

Okay. Great. And then maybe just a quick update on your own dealerships, I think you have 12, I can't exactly remember the number.

[Robert Bates, executive]

Yes, we have 12 dealerships, I'd say we're making more changes to those the way that we operate those right now than we probably have in the last 5 years. So we've really embraced technology and Internet marketing, and we're starting to see some success. We've got some stores that are really outperforming and some stores that are underperforming. And we've got to keep the hammer down there, too. I mean, I think if I'm an investor looking at Legacy, the retail business has underperformed for years now. And I see that as a real opportunity. We see our larger competitors right, with big dealer company-owned stores and large footprints, and they're making it work. And this is certainly a fixable piece of our business. We just had to -- our focus was elsewhere. And we're on it now, and I'm excited with some of the things that the team is coming back with.

[Operator]

Our next question comes from the line of Alex Rygiel from B. Riley Securities.

[Alexander Rygiel, analyst]

It sounds like you're calling sort of an inflection point here, positively in shipments and demand. Do you think this is more company specific? Or do you see it improving kind of more on a macro basis across the entire sector?

[Robert Bates, executive]

I'd say after seeing our larger competitors report this week, I think everybody is pretty upbeat. Skyline had a big week, big sales numbers. And so I think the market is improving. It's not as great as we would like it, but it certainly seems to be moving in the right direction. I think our sales numbers show that we've been dealing with a lot of challenges that have distracted us from really managing the sales team closely and spending a lot of time with customers. And that's what I'm excited about for the second half of the year. So a long way of saying, I think the market is improving, but there are Legacy specific issues that we've been addressing. And I think this is an inflection point.

[Alexander Rygiel, analyst]

And some of the larger production homebuilders are using aggressive incentives and discounting to drive volume, and they're seeing great success with that. You've held margin here, but obviously, volume has weakened. As the market comes back or as your unit volume picks up, do you think you'll be giving up any margin to drive some of that incremental growth?

[Robert Bates, executive]

Yes. It's something we're discussing now. The margins do look great. We haven't used the price lever. I think a lot of our larger competitors have used the price lever, but we're mindful that I don't think labor is coming down, and we'll see what materials do. So something we're talking about right now as we get ready for the show, here in late September.

[Operator]

[Operator Instructions] And we have a follow-up from the line of Daniel Moore from CJS Securities.

[Dan Moore, analyst]

Probably related to the last question, but ASPs after, obviously, several quarters of declines flattened out and actually increased sequentially. So maybe just talk about whether you think we've maybe put in a little bit of a bottom and your expectations going forward?

[Robert Bates, executive]

Yes. Thanks, Dan. I think that's right. I think we've hit a bottom. We went through several quarters where there was a shift on both the dealer side of the business and the park side of the business to smaller, more affordable homes. Affordability is a problem throughout the entire housing market, not just first-time homebuyers buying stick built homes. And so I think, though, that the ASP declines have flattened out and should be pretty stable for the rest of the year.

[Dan Moore, analyst]

Excellent. And maybe the last one is the -- throughout the sort of rise in interest rates, the cost advantage continue to widen between not only MH and stick built, but obviously, you focused on kind of the lower-end price points as well in a declining if interest rates do pull in a little bit as forecast here over the next few quarters. Is that -- do you see that as a net benefit or positive or negative just kind of net of those cross currents?

[Robert Bates, executive]

Yes. We see interest rates really impacting the park side of our business. I mean chattel rates haven't increased as much as traditional mortgage rates have. And I think the availability of financing for this customer base is pretty broad with some of the larger players. And so I think is interest -- is there either interest rates come down or in September or there's indications that they will come down. I think the park guys who are evaluating these like real estate assets right, they'll start to move quicker and say, okay, well, I can get in this thing and refinance in the next 18 or 24 months. And that will drive volume for the park side of our business.

But we -- our entire business is built around offering a quality product and a financing solution to our customer that keeps this product affordable. And we -- like -- that is the key is keeping it affordable. And so I think that there will be a buyer for this product. I think there's other goods and services will continue to be more expensive and more of their discretionary income will go to other areas. And there's -- there'll be demand for this product going forward regardless of the interest rate environment.

[Operator]

And I'm not showing any further questions in the queue. I would now like to turn it back over to Duncan for any closing remarks.

[Robert Bates, executive]

Thank you for joining today's earnings call. We appreciate your interest in Legacy Housing. We're hosting our fall show in Fort Worth on September 23 and 24. We've got a link on our website and encourage you to come out, see -- we'll probably have 15 houses set up, fully furnished hundreds of customers there, speeches on our financing products and the industry. It's going to be a great event. I'd encourage anyone who's interested in learning more about the company or our products or seeing some of the updates to the products to come out.

Operator, this concludes our call.

[Operator]

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.