Legacy Housing Corporation Q1 2023 Earnings Call
Good morning, Mark This is Tom.
Yep.
Go ahead Sir.
Or we would get to go get but you're good to go.
Alright.
Good morning, This is Dunkin' base legacy as president and CEO .
For journeys, joining our first quarter 2023 conference call.
Max outbreak legacies General counsel, who will read the safe Harbor disclosure before getting started.
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 is contained in the private Securities Litigation Reform Act of 1990.
Actual results may vary.
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.
Any projections as to the Companys future performance represent managements estimates as of today's call legacy housing assumes no obligation to update these projections in the future unless otherwise required by applicable law.
Thanks Max.
I'll run through our prepared remarks, then we'll open the call for Q&A.
Product revenue decreased to $43 3 million or 16, 4% in the first quarter of 2023 compared to the first quarter of 2022.
The decrease primarily resulted from a reduction in shipments across all three plants.
Also we did not convert any independent dealer consignment agreements to floor plan financing agreements during this quarter as we did most quarters last year.
The manufactured housing industry has slowed according to Nhi's March 2023 data March shipments were up over February , but still well below 2022 numbers.
We believe that our business has fared better than most we made a big push on sales this year and have a nice backlog at all plants.
Several longtime customers have stepped up with large orders, we have a small manufacturing footprint and continue to run near capacity, we anticipate having orders to feed all three plants. We also believe that there are several major tailwind for our industry. It's housing affordability nears record.
Gloves.
As we discussed on the prior call we have been working hard on improvements at our Eton, Georgia manufacturing plant, we right sized our workforce brought in a third party to retrain and monitor the team and have significantly improved our product quality.
Reduction during the first quarter of 2023, we're still below historical levels and Georgia. However, we recently gained momentum on the manufacturing side and have secured several large orders for the plant or our team continues to push production volume without sacrificing quality.
<unk>.
Consumer and MH P loan interest income increased to $7 7 million or 13, 9%. During the three months ended March 31, 2023 as compared to the same period in 2022.
This increase was driven by increased balances in the MH and consumer loan portfolios.
Other revenue primarily consists of dealer finance fees and commercial lease rates, which increased to $1 8 million or 33, 3%. During the three months ended March 31, 2023 as compared to the same period in 2022.
Our financing business generates predictable recurring revenue.
We now have over $350 million in principal outstanding across our loan portfolios.
The portfolios are performing well and defaults remained near record lows.
Selling general and administrative expenses decreased $2 3 million or 29, 3%. During the three months ended March 31, 2023 as compared to the same period in 2022.
This decrease was primarily due to a decrease in salaries and incentive costs and a decrease in legal expense, partially offset by an increase in warranty costs.
Net income increased one 1% to $16 3 million in the first quarter of 2023 compared to the first quarter of 2022.
Basic earnings per share grew one <unk> per share in the first quarter of <unk> 23, an increase of 1% from the same period in 2022.
Legacy delivered an 18, 7% return on equity over the last 12 months at the end of the first quarter of 2023 legacy book value per basic share outstanding was $16.32 an increase of 23%.
From the same period in 2022.
We continue to hold pricing and reduce our raw material inventory.
Our top focus remains on sales, but we are also looking at ways to reduce SG&A and warranty costs legacy balance sheet is healthy we ended the quarter with $3 2 million in cash and $7 $8 million drawn on our line of credit we also around $8 $5 million of.
<unk>, yielding approximately four 7%.
As the economy slows investors should start to see the beauty of our integrated business model sales were down during the first quarter, but margins and earnings improved.
From a strategic standpoint, I recently discussed the opportunities we are seeing in our industry with our founders they've been waiting years for this our foundation of stable and we are well positioned for growth.
Operator. This concludes our prepared remarks, please begin the Q&A.
Thank you ladies and gentlemen, if you have a question or a comment at this time. Please press star one on your telephone. If your question has been answered you were seeing with yourself from the queue. Please press star one again, we will pause for a moment, while we compile our Q&A roster.
Our first question comes from Alex Rygiel with B Riley Your line is open.
Yes.
Yes, Alex.
Hey, Duncan how are you.
I'm. Good how are you very good a couple of quick questions here first.
Can you sort of.
Touch upon kind of the macro environment here, obviously, we've got a significant rise in mortgage rates.
We had slowing demand for new home construction now thats kind of leaked into.
Your space as well, so maybe talk just a little bit about the macro dynamic here and it kind of feels like the single family homebuilders have kind of stabilized to be kind of a lower level now, but going into sort of maybe normal seasonality.
<unk>. So do you feel like Thats, the case as well in the mobile industry.
Yes, I think Thats right Alex.
Certainly have seen demand slow.
That said, we've got three plants, we feel very comfortable keeping them full.
I think the most important thing that you pointed out as you know.
There are some real tailwind for this business you've got mortgage rates right that have doubled.
Got underwriting standards for mortgages that have really tightened you've got home prices.
Near all time highs.
And at the end of the day, you've got over 50% in this.
Of households in this country.
Make less than $75000 a year.
And those are our customers and we tend to serve the lower end of this market and I think that all.
Although there is slowing demand we should see.
An uptick as this affordability problem worsens in our country.
Okay.
That's helpful. And then can you talk a bit about your land development activities. The company has had.
A number of properties sort of on its books has been making some investments in some water treatment facilities or whatnot through the years can you talk about that in conjunction with your comment earlier about pretty confident that you can keep your plants full.
Yes sure.
No.
I personally believe that the largest headwind this industry faces is where do you put these things.
And we've got seven properties that we own outright.
We have been developing into communities over the last few years, our primary business is building selling and financing mobile homes, but at the same time, we have made significant progress and I'll tell you that based on this.
Discussions with other developers in our industry.
There is.
There is a lot of value here I think there are certain properties that make sense for us to.
To push forward.
Two through full development, there's probably others that could make sense to partner on what we're allowed to to contribute homes and potentially financing and have some type of recurring.
Cash flow stream.
And look theres, others that we haven't made much progress on that are primarily entitled Raw land.
We're we've bought right and as you can imagine.
Land in Texas around major metropolitan areas.
That has really increased in value. So there may be.
A couple of those that makes sense to either either sell or partner with somebody on the near in the near term.
And then lastly, I think you've in the past you've mentioned some geographic opportunities ahead can you maybe talk about.
As it relates to sort of the business plan over the next kind of one to three years.
Yes sure.
I think we are lining up for a pretty.
Interesting and exciting time for our business, we've got a great balance sheet.
We've got recurring earnings from the financing business.
And.
This is a regional business you typically you don't ship these homes much.
Much outside of two to 300 miles from where your plants are and Covid.
<unk> created some some opportunities where I mean, we shipped homes a lot farther and we continue to do that but there are certainly regions that we don't hit.
As economically as wed like to and there are if you are a single plant manufacturer.
With no backlog and no balance sheet.
I think there will really be some some opportunities for us to move into some new geographic areas.
We're going to be conservative, we're not going out and participating in a bank process where.
We're really going to overpay for something but we are definitely getting getting some looks on things.
Which which is exciting for all of us.
Okay.
That's great. Thank you very much.
One more.
Questions.
Okay.
Our next question comes from Mark Smith with Lake Street. Your line is open.
Hi, guys.
First question I've got Duncan is really just on kind of average selling price what kind of price movement that we see here in the quarter.
So.
Our last price increase.
And June of 2022, we.
We have not raised prices.
Since then but we've also haven't dropped prices. So I would say it's been in.
In line with.
With the past few quarters.
Okay.
They are also just one more comment on that I mean.
The.
<unk>.
We primarily sell our park model homes are very very basic homes.
And typically single Wides without a lot of bells and whistles those have.
Typically lower prices than some of the big more elaborate homes that we're selling to dealers.
So there has been.
Recently, we've been building a lot of park model homes.
And so I think when you see.
Our.
When you see the filing you will see that there could be some mix issues, there, but overall pretty much in line.
Okay.
Then as we think about the pressure on the industry any more details you can give us is it really.
Rates that are pressuring consumers is it just kind of general consumer.
Consumers being squeezed in today's environment, what is it that's really hurting them and if so rates.
Can you guys use your lending arm.
As a lever with lower rates.
At Sam Moore sales.
Yes.
Take it into two pieces Marc.
About half of our business is selling through dealers to retail customers.
And I think theres been a lot of talk in the industry about that channel being backed up right. You've got these dealers, whether they're company owned or.
They are independent dealers.
Did have a decent amount of inventory sitting on their lots.
And I think.
Overall, what we're seeing and we're hearing is that foot traffic.
<unk> picked up but conversions are still below.
Where they where they should be.
So.
I really think it's just.
There's a lot going on in the economy.
And the consumers are being squeezed. This is an affordable product, though and we haven't raised our rates.
On the financing side of things and so I think theres, just some hesitation to go out and make.
Large purchase.
Right now by by most consumers, but I think that could change as.
Other housing options, whether its rent increasing or home prices, we already discussed the issues there of traditional stick built homes. So we're hoping to see more of a pickup on the dealer side of the business and that conversion rate higher.
The.
On the park side of the business, which which we sell homes directly at wholesale prices to community owners and developers thats the other half of our business.
We typically serve a customer base.
That are.
I would categorize as regional entrepreneurs. These are guys that have been in the industry for a long time and have written the ups and downs and.
A lot of them took chips off the table when you.
You had big institutional backed guys.
Paying astronomical prices and so.
A lot of those guys are our customers and a lot of them are are deploying capital now, which is which has helped us out on orders.
I think on the if you're a large institutional backed player I mean, a lot of these guys went out and consolidated it.
At all time high prices on the on the park side, and if youre using variable rate debt and you can't raise the rents as much as you need to.
Some of their expansion plans.
May have changed.
So that's hopefully that helps.
Okay.
Last question for me.
Any additional breakdown you can give us on the inventory just what kind of you're sitting on a finished goods versus kind of raw material.
Comfort level with the inventory today.
Yes.
The number directly in front of me I'll tell you our raw material inventories around 17 million Bucks.
And the rest of the inventory is.
At our company owned.
Dealerships and so forth company owned dealerships or sitting sitting in the lots I think we've got more inventory that we would like across the board that's really.
An area that we've been focused on and we're making some progress on especially on the raw materials side.
And but we've got a ways to go there and then company owned.
<unk> dealerships I think are in similar boat is a lot of the other dealers where the.
The inventory is not turning as quick as you'd like and and <unk> got some excess there.
Okay, great. Thank you Doug.
Thanks.
One moment for our next question.
Our next question comes from Tim Moore with <unk>. Your line is open.
Hey, Tim.
I'm sorry.
Okay.
Okay.
Yes.
Listen I appreciate your time, Hey, Tim you there.
It's a favorite one for Tim she is very well.
Could you speak up I'm a little bit.
I'm sorry.
Okay.
Can you guys hear me.
Yes, yes, that's much better okay, sorry about that.
This is Leon Hayden from Es.
For 10 more he is immersed in our annual conference right now, but regardless thank you vishal.
My first question is just a follow up on pricing.
Your pricing is still below your competitors despite their cut.
Do you plan to offer more promotions and online specials in order to preserve your asp's or what are your plans for that.
Yes.
We have been able to hold our pricing, we certainly have seen.
Our competitors start to cut pricing.
I think.
Pricing is important to discuss in the context of our integrated model.
And what we've been able to do recently.
<unk> offer.
Offer financing specials, and so we've held pricing.
But we're offering a few months with with no payments or other incentives.
To sell homes and finance them at what we believe are good returns for our business without sacrificing.
The price increases that we've pushed through.
Over the past couple of years, and so that will continue to be our strategy. I mean, we heard on the call like sales sales were down this quarter.
But.
At the same time.
We have been able to secure.
A decent amount of large orders. So I mean, we're going to keep holding price as long as we can and if we need to use our financing tools to do that we will.
Okay, Yes that makes sense. My second question is regarding your more nimble manufacturing, but was hoping three.
Scott S sudden downturn in order volume what can you do to keep utilization at your plants and can you just would you shift dollars are retaining talented workers, how would something like that play out.
Yes, I mean I think the typical ways are you can you can slowdown production, whether it's not.
Working as many.
Hours in a week or or or cutting production days.
We haven't missed.
<unk> of production.
Yet this year, so and I feel pretty good about where the backlog is moving forward and so there are some tools, but hopefully we're not planning to to use them at this time.
And cut production days.
We're just we're trying to really make a push on the sales front and continue to grow the backlog and I.
I think we'll start to see demand.
Picking up.
Okay, Alright, that's great.
How is how should we think about gross margin to be down this year versus last year, when factoring in less of a price, but raw material cost deflation.
Wrapping that compared to a year ago from the Georgia plant and efficiencies in the second half.
Would that be something that would help.
Yes, we're really I finally feel like we've got some momentum in Georgia.
It's been a long road to get here and the team.
Really stepped up and done a good job, we're still a little bit below where we'd like to be I think though if we could get back to you.
If we could push through one additional house a day by the end of the quarter I think that's a realistic goal, but also one that really helps us out.
From a cost efficiency standpoint.
Again were holding prices in material prices are coming down.
So I think as long as those two things continue to move in the same direction and we're able to keep production up.
Margins still should continue to be strong.
Okay. That's great. Thank you so much.
My last question is about the conversion of some dealers who are financing program that seem to boost your December 2020, Q quarter revenues by.
$17 million does that mean that this year's December quarter, which faced heightened decline for product sales.
The ergo benefit or what do you expect for that.
Sure.
So I'll give everyone just a quick reminder on.
The consignment to floor plan financing conversion.
We have had a consignment program in place for years that I wouldn't say it's.
Necessarily market and so we've moved over to a market floor plan.
Dancing program.
And as we converted these dealers over.
We essentially recognized the conversion as sales sensors no theres no take back on on the inventory and so we.
This was a project that started well.
Well over a year ago, and we were we're trying to push everybody to the new program and we still have some dealers that have not converted over but we had a big conversion during the first quarter of last year.
So.
I would not expect yes, we just we don't have the same volume that we that we have.
Fourth quarter of last year, but we will have conversions that happen. This year. It's just a it's a smaller number and not something that we made a push on during the first quarter.
Okay. That's all for me. Thank you so much for those answers.
Yes. Thanks, so much good luck with the conference. Thank.
One moment for our next question.
Yeah.
Okay.
Yes.
Our next question comes from Deforest Hinman, who is a private investor Your line is open.
Hey, thanks for taking the questions.
It's around a little bit you talked about.
In a rising rate environment, but then also some.
Opportunities youre seeing in specials on the.
The financing generally speaking.
On a forward basis relative to the first quarter should we expect the interest income dollars to be kind of consistent or should those be.
Moving directionally higher.
Yes, there'll be moving Directionally higher.
The financing in this industry.
As we have seen a pullback in financing in this industry, which I think creates a nice opportunity for us to deploy deploy.
Deploy capital.
The loan portfolios.
We're not borrowing to land.
And take a spread so we've got some flexibility as far as where we set our rates and how long.
Those rates are fixed for the promotions that we've been.
We've been running.
Include say, a couple of say three to six months without payments and so while the interest revenue won't pick up immediately as we make new loans towards the end of the year you should start to see.
The benefits of all that cash that we've deployed into the loan portfolios.
Okay. Thank you that's helpful. And then you did some brief comments on the land portfolio on the development side, but.
Just a little bit more color there is there anything.
In process in the sense like Youre talking about transacting some of the land is that just hypothetical or you have had.
Negotiations about actually doing something.
Yeah look we continue to work on all of these developments and in the background.
And I think if you look at over the past year.
Here with the history in our business right. We had some major challenges that we had to work through that took up a significant amount of management's time and so we're back getting refocused on really pushing these developments forward.
And I think if there are like there are certainly people that are there.
Or building parks in Texas, and they are looking for land thats entitled and.
We have created.
Significant value by pushing these forward that hasn't been realized yet and so our plan we don't have like.
No.
A for sale sign on any of this stuff, but I mean, we have been approached and I think.
We're always open to opportunities and and and hearing offers and and but ultimately haven't needed.
The decision to do anything yet so it's kind of we're back refocused on pushing the developments forward and creating value there, but if someone is interested in a certain piece will certainly listen to them.
Okay, and I apologize if this was asked and answered but on the backlog side.
We can give any color or commentary there either on the units or dollar amounts or directionally, where that's been moving.
Yeah.
No we don't publish a.
A backlog number.
One area of our our balance sheet that you can look to is we've got a liability for customer deposits, you'll see that's that's down a little less than 2 million bucks over quarter over.
Since last quarter.
That said.
It's difficult to transition your sales team.
After going through two years of order, taking to really selling and thats something that I will tell you has been.
Really the top focus for our management team and it's amazing when you get people you get a little bit momentum and.
And you have the management team involved and we've got.
Long time customer relationships, we have.
Really been able to secure some some nice orders and we were planning to continue that so.
We've got we've got several months of homes to build.
And then just building on those customer relationships I've asked about this in the past is there still ongoing discussions regarding any long term supply agreements or do we already have some.
In place.
No none right now we've talked with some larger players.
About it but we will if we get a large order. So you get somebody wants 200 homes.
We will sell them under our our standard agreement just space them out.
With the amount of production that they can handle our deliveries they can handle on them on a monthly basis and so we do have customers that are taking significant volume from really all three of the factories, but.
We're not under any type of.
Long term supply agreement right now.
Okay, Great and then this is kind of a shorter question, but maybe more so a longer answer but can you help just.
Shareholders you came public a few years back we had some.
Issues on the accounting side, we have revenue those but during that period of time, you weren't able to really discuss what was happening with shareholders. All the financial results were were quite good but.
You talked about the ups and downs of the industry can you just give us an update in terms of whats the long term strategy for this business.
You got three plants and you have some founders they've been at this for a long time, they own a fair amount of stock.
Whats the long term outlook for the business.
And is there any desire to sell the entire company, which would probably entail a pretty nice return for for everybody.
Yes, no plans for any type of larger transaction at this time.
We have worked through.
Some issues on the SEC reporting side I think some of that was caused by.
Issues with our team internally, but we also add a large issue with the with our new our prior auditor.
But we worked through that and we've now have it.
<unk> in place debt.
Can deliver.
Accurate numbers in a timely manner and so that's that's no longer the concern that it was.
I think at this point.
Our founders would love to see this business.
Continue to grow for years and.
I'm very fortunate to have them as coaches and mentors.
In this business because they've both been in it for for over 40 years.
And probably have combined more experience in this industry than anyone at any any two people in the country.
And so our goal is to continue growing the business.
We're.
We're always bottom line focused.
And we're focused on continuing to.
Invest our profit at high rates of return.
To grow legacy book value.
And if you look at what we've done over the last 12 months.
We're making almost 20%.
Year over year on that money, which is pretty remarkable and this business was started with less than $10 million and they've grown that at 10% to 20% a year for 18 years, and then you look down in Europe $550 million market cap company.
And so we're going to continue to operate this in a conservative manner.
Investor cash, but we're now we've got the foundation set where we're not afraid to be opportunistic as things arise.
And we believe that we are.
We're at a time and we're seeing it where opportunities are popping up and we've got the team to actually execute so.
Long long way of saying, we're going to keep growing the business and plan to stay a public company.
Okay, that's great and maybe just a little bit.
More clarity there when you talk about opportunities is it organic is their facilities that are.
Actively producing units or.
Maybe a building we're looking at that.
On finished that we would put some <unk>.
Production assets in there like how do you frame opportunity because.
And I'm trying to be very respectful I think you guys have done a fantastic job historically, but.
It's hard.
To know exactly what's going on when we're only getting quarterly updates.
You had this strategy for a period of time on the <unk>.
The land development side.
He has taken some time on the permitting side and maybe we're looking for some partners. So thats changed to some extent, but just any color you could provide shareholders in terms of what that opportunity set is in terms of capital deployment. Thank you.
Yes sure.
I would say first of all.
Now that we're through some of these issues that take taken up a lot of management time to get back on track.
We do plan to.
I have more of an IR present and update the market on our strategy.
But there are when I when I talk about opportunities I think we first have to start with.
The opportunities in our own business I mean.
Our margins.
Great, but there are a lot of areas, where we can improve those we can do a better job on the sales side, we can do a better job on managing our inventory, we can do a better job on managing our costs and SG&A and those are all those are all things that we're aggressively folk.
Based on now.
Once we have.
All of those set and.
There are there's other products that we'd like to manufacturer there is other.
There's other markets that we'd like to manufacture in there's opportunities to realize value from.
From these developments and and especially right now theres opportunities to deploy capital on the financing side and so we're looking at all of these through a.
A lens the focus is strictly on returns and there may be times when we.
We feel like there's better returns generated by by deploying all of our cash into.
Land development, we think that there is times when the best return we can get is by deploying it on in the financing businesses.
And I think that there will be times, when we feel like hey, there are single plant operating businesses in this country and attractive geographies, where we can make it return that.
They may.
May compare to what we currently do on the manufacturing side and then that also gives us additional units to finance.
Okay, Great that's a very.
Helpful answer and I look forward to the company being more active with investors because I think there is a.
There is a very good story to tell so thanks for taking all my questions I appreciate it.
Yeah, absolutely thanks for the questions.
One moment for our next question.
Our next question comes from Roman <unk> offerings are also a private investor Your line is open.
Thank you.
Duncan great presentation.
Quick question on the land development side.
Is the idea.
You do proceed with.
The plan for this.
These various sites do you have that you guys own.
Is the idea then to build the business around that raise capital to from JV partners like Whats how does this fit into the company's longer term strategy.
On.
Is this going to be long term holds are you going to be spinning them off like how.
How do you think about that.
As you kind of near completion on some of the entitlement stuff on this on these on these parcels.
Yeah sure. So like I said, we continue to push forward with them.
I can't tell you I had the answer for that yet.
I think the plan in Q.
Yes.
To monetize them.
As we see fit I think ultimately what makes our business special is the.
Stable recurring revenue.
Side of it and so as I look forward.
Growing the business I don't think anyone wants to own a cyclical manufacturing company they want to own something that generates.
Generates predictable returns.
It has high margins and so as I think and we'll use that lens to look at the entire business. So we think about land development and I think it is how do we.
How do we either develop our partner on these.
And create a business model that we can replicate in grow and generate.
Recurring income from them.
Okay.
Yes, I think that's exactly the right way to look at it I think I would encourage you to do.
To think through it from effectively.
Like a JV fund management route right, what do you bring capital in and like you said collect either collect cleans a JV with somebody to do this so so it's not so the capital outlay is not all on the company side.
Sebastian, but great presentation Super excited about the business.
Yes, thanks for the questions.
And I'm not showing any further questions. This time I'd like to turn the call back over to Duncan for any closing remarks.
Perfect. Thank you to two final comments one thank.
Thank you to our customers I mentioned during the call in the press release certain longtime customers to place large orders.
The orders keep our facilities full and keep our worker's paid and we truly appreciate your business.
And secondly, I'd like to thank everyone who joined.
Today's earnings call. We appreciate your interest in legacy housing feel.
<unk> free to reach out to us with any follow up questions.
My contact information is at the bottom of the press release operator. This concludes our call.
Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.
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