Q3 2019 Earnings Call
Ladies and gentlemen, today's conference is scheduled to begin shortly please continue to standby. Thank you for your patience.
Ladies and gentlemen, thank you for standing by and welcome to the legacy Housing Corporation third quarter 2019 earnings call.
At this time all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session.
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I'd now like to hand, the conference over to your Speaker today, Kurt Hodson Executive Chairman of the Board. Please go ahead Sir.
Thank you for joining the call today before we would be good 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 represents managements estimates as of todays call I.
I guess the housing assumes no obligation to update these projections in the future unless otherwise required by applicable law.
With those preliminary remarks, or the way that'd be turned to our third quarter results in our view of the rest of the year.
Our third quarter was not as robust as we would've liked.
We were still very profitable this quarter, making over $8 million, an income before tax expense and over $6 million and net income. Our total revenue was approximately $41.9 million a 3.4 person increase overperformance in third quarter of last year.
We were slightly under our own revenue in our own income expectations for the quarter.
This was caused by a few factors notable among them.
We simply had production issues that are commerce, Texas plant.
Resulting in a 31 per cent decrease and a 36% decrease.
Quarter over quarter and year over year production at that facility in Commerce, Texas.
About a month ago, we brought in a new general manager for this facility and we are now back to running at or near capacity.
We also experienced a margin shrinkage due to the impact of the Chinese tariffs.
It is all of you know were brought on with very little notice.
We almost immediately implemented a price increase that should offset these tariff increases going forward.
And lastly, we saw a decrease in our company owned retail sales in the third quarter.
As we had been restructuring those stores any implementing certain management changes.
But there's plenty of good news.
First on a high level, we continue to believe that demand for affordable housing is strong the affordable housing need is not be met what is currently.
Offered but most traditional homebuilders.
And the multi family industry as well.
And that manufactured housing is a critical component of solving the affordable housing crisis.
We've also seen improving shipments across the industry in the last few weeks with the latest available data, indicating overall industry shipments in September .
Outpacing shipments from the same time period in both 2017 in 2018.
More specifically to legacy housing.
I'm very optimistic about how we will close out 2019, our orders are up.
Production is up at all three plants.
We have a very healthy backlog.
We also have indications of improving performance at our company owned stores.
All these factors make me very confident that we are close out the year strong.
We also continue to make progress on land projects, which is a part of the company, we anticipate leading the top and bottom line growth in 2020.
In total we now have close to 2000 to say pads or pipeline.
That over the next 12 to 36 months, we'll begin to blossom.
For the first time.
We are publishing in our Q.
Table of those projects, indicating our total investment.
But $9000 towards development.
I'll now turn the call over to court to provide more color and more analysis on our third quarter Financial Corp.
Thank you Kurt.
Net revenue for the third quarter of 2019 was 41.9 million an increase of 1.4 million over 20, eighteens third quarter net revenue of 40.5 million.
Product sales to largest component of our revenue grew 1.3% in the quarter to 35.4 million.
Sales to manufactured home parks, which increased 9.1 million to 16.9 million were partially offset by decrease sales of consigned inventory through our network of independent retailers have reduced factory direct sales.
Also as Curt noted sales through our company owned retail stores declined to 3 million from 3.6 million in the prior year quarter.
Product sales gross margin percentage decreased 2.3 points to 22.2%.
As a result of reduced cost absorption from a lower production volumes increased costs related to import tariffs have reduced sales through our retail stores, which typically carry the highest margins.
Interest income in the quarter was 5.7 million a 20% increase over the 4.8 million recorded last year.
Our manufactured home park loan portfolio increased 24.1 million or 42% from the end of 2018 to 82 million.
And the consumer loan portfolio of principal balance increased 5.9 million 203 million net of the allowance for loan loss and other discounts.
SGN a expenses of 6.1 million increased 1.2 million from the third quarter of 2018, reflecting higher personnel expenses related to public company compliance and staffing of our company owned retail stores, along with increased delivery costs.
These increases were partially offset by reduced audit fees.
Pre tax earnings decreased 700000 to 8 million in the quarter income tax of $1.9 million decreased 300000 over the third quarter of 2018.
Income was 6.1 million for the third quarter compared to 6.5 million in a similar period of 2018.
Net income per share based on basic and diluted weighted average shares outstanding was 25 cents in the quarter compared to 32 cents in the prior year quarter.
And finally equity has increased 26.1 million from year end 2018 to 215.4 million.
That completes our financial overview Kurt.
Thanks for.
The fundamentals of legacy business remains strong and we're very bullish on how well positioned legacy is for fourth quarter performance.
Thank you for your interest should attention today.
I'll take your questions.
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Interest of time, please limit yourself to one question and one follow up please standby will be compiled acuity roster.
And our first question comes from Alex Regal with B. Riley FBR. Please proceed with your question.
Thanks Kurt.
I appreciate your Frank commentary with regards to the quarter there a couple quick questions.
Orders are up production is up backlog is healthy improving performance a company owned stores. There's comments you made in your opening remarks are those relative to the third quarter of this year or.
The fourth quarter of last year as you think about you know as we move into this fourth quarter. Here. So are you talking about sequential improvement or year over year improvement that you expect in Fourq you have 19.
I think both was Kurt I think but.
The fourth quarter is typically a down quarter in order production.
Just last week for instance, we put on two or 300 orders we weren't expecting.
From our part customers predominantly we don't usually give or take title tied to lift in the fourth quarter that was true both last year in this year last year. We are on the tail end of the two hurricane boom that we had began nearly two years ago.
And we were already seeing a decline in.
Order volume.
By the fourth quarter last year.
Fourth quarter is typically a down quarter in orders this quarter is.
And anomaly so.
I guess that business is probably good not just for us probably for the industry.
Sales.
In the state, Oklahoma increased significantly in the third quarter as well as Alabama sales in Texas, Georgia were down significantly can you talk a little bit about the.
If the mix of demand.
By state.
Well as as you know.
And as I've indicated for some time.
We have a place to put a challenge industry, particularly in large metropolitan areas like Dallas, Houston, San Antonio Atlanta.
Denver.
That's difficulty is not being remedied at least not currently some space development on the drawing boards, so where the opportunities for shipments have been and again. This is an industry wide issue.
For the.
Our the empty mobile home parks and Rural America, and there is more of those in Oklahoma and Kansas and Nebraska, then there are in the more urban parts of this were like Texas, Georgia.
So I don't expect that those.
Markets to improve it until.
We see space creation.
Around the second or third circles, the big cities, we're working on that ourselves and there's also some big players that are working on that.
With our.
With our.
Summers being so much in the community development business.
These guys tend to buy an existing part that existing part to be in Wichita, Kansas.
That al was said becomes our market because as their market.
On the other had our retailers at or near cities like Fort worth in Dallas and Houston are struggling.
They spend more time trying to find a place to put it they do try to sell the house. So that's that's that's eight.
Systemic problem that the industry's did it have to work through and I expect it will take 210 years before we get.
Balances and between the demand for space in the supply of space.
And I suspect that also explains the decline in independent retail locations from 111 do 87 sequentially.
Any other reason for that decline.
America's cultivating fewer entrepreneurs oil their old stores.
That you're right.
I would say I'd like to add to that if I may occurred in that.
One of the.
Side.
Effects of having.
Such and such a large percentage of our production moving tool manufactured home Park owners.
They are taking a priority in our production schedule, along with our larger independent dealers.
And I would say that I think theres some effect of having.
Less production available for the smaller.
Onesie Twosie type type.
And that dealers I think those are probably the ones that are are dropping off.
Last question current a few quarters ago inventory had spiked quite a bit I think it was the ended the first quarter inventory is now has declined nicely sequentially for a couple of quarters. How do you think about inventory today as you enter the winter months and how should we think about it changing in the next three to six months.
Our financials, a little bit unique in that inventory as a category includes a significant amount of finished good inventory.
Raw materials were still operating or we are operating at a little over $2 million per plant.
In raw material and then a warehouse on top that.
That puts us at the high end of the manufactured housing communities as far as how much raw material. We have as you know we buy so much of our material on a bulk basis by the truckload by the train car load by the container China that we tend to have a lot more inventory.
And our competitors are the raw material, but our.
Management has done a pretty good job of bringing that down. So we don't have a 12 month supply hardly anything anymore. Like we did you are to go on the finished goods side.
We have.
Inventory two ways at our company owned stores, which is pretty stable right now, we're not adding any stores and that's been the inventory we have at the stores is being managed pretty well and then the other way we have it is the inventory at our at our independent retailers is really our inventory because we can sign it.
And.
And that says you noted declined.
Independent retailers and with that comes a corresponding decline in consigned inventory. So I would guess that the trend in finished good inventory will be flat to down the trend in raw material will be sweats down just because you're getting a better we're getting a we're getting to manage a little bit better.
Helpful. Thank you very much.
Thank you next question comes from David Burton with brokerage. Please proceed with your question.
Hey, guys hope all is well on thanks for taking my questions.
So just wanted to ask about MHP is and how your Austin community is coming along and then you also mentioned you were near closing on a few more locations on the last call.
Provide maybe some more color on where are you guys stand and lots of land currently and then where are those potential lunar new lot stand.
Yeah, I'll I'll answer that.
Let's take let's take it for Big This mall, where.
Currently invested in essentially three markets.
We think are pretty good Austin, Texas, Fort Worth, Texas, San Antonio, Texas, we see opportunities in other markets, but we've made substantial.
Business in those areas.
In Austin, we were active in two different places that are actually but 70 miles apart, but there was the me Austin market when you're referring to we paid $4 million per piece of land South of Austin. It is not survive sure. It is going to take its own water treatment facility. We are on the break getting that permit and expect to be.
We're out of that facility with X four to six much there'll be a major facility with over a thousand space probably over 1400 floors for that facility.
In the I was part of Austin, we own.
Approximately 33 should mean 300.
Lots that are zone for mobile homes in Horseshoe Bay.
It is a very regulated city that we're working to regulations and we already have released for production.
First six models to go into that area and test the waters and Horseshoe Bay in Fort worth we have two properties.
It will total roughly 400 lots to total.
Both in south of us or South Fort worth.
Yes, subordinate Venus that is actually access bubbles Dallas or for work, we're quite optimistic about that and our bases in that land to put her perspective is somewhere around $6000 per acre and it's very difficult to find 6000 dollar.
Pretty much broader areas.
And lastly were lightly active in San Antonio.
Currently own about 100 acres is being subdivided into like one acre lots. So it isn't a major play.
We have we have a loan interest and some other land in San Antonio They were.
Lending money to fill up or that's making a big play.
Antonio and we're in negotiations all the time with people to develop or ballpark.
Outside financing.
As for them in exchange for some.
So tie in where our product goes in that facility.
We think is if we think is a big part of the industry going forward.
And you guys mentioned you might see some contributions from MHP is on the top and bottom line in 2020.
You know this more of a later 2020 contribution or when should we expect to see some sales start to treat Glenn.
Land development is real difficult from a GAAP accounting point of view very industry for industrial itself like ourselves.
Really don't we see it that revenue and profits when you sell the property.
But we will see increased sales of our products through those facilities and we should see that probably beginning mid 2020.
And those products sales are likely to have higher art.
Any other thing that were involved in.
Okay. That's helpful. Thanks, and good luck moving forward.
Thank you and our next question comes from Mark Smith with Lake Street Capital Markets. Please proceed with your question.
Hey, Good morning, guys first off for me can you talk about the sales mix, a little bit and the impact on average selling price of homes for instance, as you sell into these mobile home parks.
Are you doing more single Wides or are there better deals that maybe these guys get maybe walk us through the quarter on average selling price and why we saw the I think it was a tenant half percent decline year over year.
Certainly.
You're right you're spot on them.
Manufactured home communities, so basically purchase single wise.
These are if you want to put it in the in terms of a.
A new car that you're buying off of a lot versus something that you're going to run at a national.
The goal the manufactured home communities is to provide a.
Hey, good solid on at a reasonable cost and so they're not exactly specked out to a two an optimum level that one might choose a few we're purchasing home for yourself.
Their competition, obviously is the the multifamily communities and they're trying to beat those those costs and provide a better product at a lower price. So there are no no double whites that are being purchased by the mobile.
Manufactured home communities.
Same time, and just can't give you a sense year over year, the double wide sales.
In the quarter dropped about 31% actually a little over that.
At the same time, we've actually increased our sales of our tiny houses.
I apologize I don't have that exact number with me in my mind right now but.
As you know the average selling price on a on a tiny house is significantly less than a double wide or a single.
Okay, and then can you talk about kind of with Espeed down how much impact that had on margin and then I think you guys also called out within gross margins labor as well as some cost material sounds like some tariff and pipe impact and any other insight and they kind of outlook, especially as we look.
It kind of labor and cost of materials.
Well again year over year, I think and I'll take the first part of this current year over here.
Our production the number of.
Floors that we we manufactured was down over 5%.
And again.
We have a higher percentage of tiny houses so that the actual square footage is down even more.
Largely because of what Curt was pointing out and in the issues with commerce. So as you know when you.
Youre producing less.
Your fixed costs and even some of your variable costs don't necessarily go down the same same rate.
Kurt.
Kurt you have any additional color reflect that.
Yeah I guess.
I was going to say Kurt the main thing that I'd be looking for is just kind of your outlook on on labor, but also on cost of materials any pressure that you are continuing to see.
Pardon me it looks like there is no wonder connected.
I think.
Kurt dropped off the line SEC.
Yeah.
[noise].
Let's ask for the next question, perhaps we can get Curt back on and circle back I'm sorry, Mark.
Okay. Thanks, guys.
Your next question comes from David Mercer.
Please proceed with your question.
Hey, guys. This is not really question about the business.
As William Shipley there.
Yes.
You mean, Kenny Shipley.
Alright, Sandy if we can he says Oh, sorry about.
I am on here, yes, yes, I just like no.
Like the send you an email if I keep your direct email address baby sure from called the business what I like to do is if once a quarter.
Yes, send you email I won't bother, yet because I know you're busy person.
This once a quarter it'd be like a paragraph less just some fits.
That for you guys copy that May help you out like I said I'm not going to Bobby all that will just be wants a quarter well take like no one that.
You don't have to respond so if like maybe I could get your email address from.
Somebody else.
Investors are if you could send that if you could send that to investors at legacy housing Corp. Dot com.
That we get to county, and and the senior management team.
Oh, Okay, well like I said I won't body of the whole time or anything like that and I mean, I said this before about all people said every quarter guys. Just make sure you make the decisions when I've that some companies I say to myself that I have to make the decision is actually its help me out so.
Every now that's to say do yourself that you have to make good decisions will help you with a decision process also.
Ben but you guys may know this but just remember this focus on the long term.
I know a lot of people May watch it hit numbers hit numbers, you know into short term, but don't focus on that focus on the long term whats long term best for the company and then in the in the company do better so try not to focus on a short short term for so long term probably doing that already and just one more thing remember costs.
From a focus I'm sure you guys already doing that but I guess, where ride to keep will focus on how you can meet customer needs are you can make the product better.
Constantly constant cost least focus on how you can do that so yeah.
Sure. Thank you that that's all good advice I appreciate it.
And clearly care to what you were well you were officer.
We have a a a follow up question.
Related to where you see a raw material costs going going forward.
Oh, yeah, raw materials are behaving, rather well other than the Chinese import issues, which was like 20 or 25%.
Out of the Blue increase, but if you look at a lumber chart or steel chart.
Or copper chart easier materials will use.
The Industrys those industries, we continued to be.
A very competitive we're seeing good uptick in appliances right now.
May be part B due to Chinese imports steep they tend to make appliances using Chinese imports.
By about eight or 9% increase proposed for appliances, but the big part of our components lumber steel building materials in general that are base that are made in America.
Our flat the challenge as everybody knows not just our industry, but as the world.
Labor.
Labor continues to gradually move up.
As we pay.
Less experienced people more money to build what we did last year just to labor shortage.
It's going to be stubborn for quite a while we're all struggling with how to be more efficient.
And labor as far as overheads concerned.
Which is an alcohol deal its.
Our g. the is up.
Our executives.
Tend to want to make more money every year.
Correspondingly, we need to have more sales more problems justified.
Justify the so I'm and accounting is been.
A challenge this last year that we think we have under control so do they I think.
We have to really take that the last questioner I think as Bruce makes some really valid points.
Don't know anybody in the industry that has IRI more on the consumers value proposition than me in our company I think we're with it we lead the.
Nation in the value proposition when it comes to what does it doesn't really get out of the deal.
Anything else.
I think we can conclude the call.
Ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.
Thanks Bye.