Legacy Housing Corporation

Thank you for standing by and welcome to the Legacy Housing Corporation's third quarter 2024 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you'll need to press star 1-1 on your telephone. If your question has been answered and you'd like to remove yourself from the queue, simply press star 1-1 again. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Duncan Bates, Legacy Housing President and Chief Executive Officer. Please go ahead, sir.

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

Thanks, Duncan. Thanks, Duncan. Before we begin, I want to 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 Security Litigation Reform Act of 1995. Actual results may differ from management's current expectations. Any projections as to the company's future performance represent management's best estimates as of today, and Legacy assumes no obligation to update these projections in the future unless otherwise required by applicable law.

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

Thanks, Duncan. Product sales consist primarily consist of direct sales, commercial sales, inventory finance sales, and retail store sales. Product sales decreased 6.8 million or 18.8% during the three months ended September 30th, 2024, as compared to the same period in 2023. The decrease was driven by a decrease in unit volume shipped primarily in direct sales, mobile home park sales, and inventory finance sales categories. The decrease was partially offset by increased sales at our company on retail stores. For the three months ended September 30, 2024, our net revenue per product sold did not change significantly as compared to the three months ended September 30, 2023. Consumer MHP and dealer loans interest income increased 1.5 million, or 17.3%, during the three months ended September 30th, 2024, as compared to the same period, 2023, due to growth in our loan portfolios. This increase was driven primarily by increased balances in the MHP and consumer loan portfolios. Between September 30th, 2024 and September 30th, 2023, our MHP loan portfolio increased by 22.0 million, and our consumer loan portfolio increased by $15.6 million. Other revenue primarily consists of contract deposit forfeitures, consignment fees, commercial lease rents, land sales, service fees, and other miscellaneous income, and decreased $0.4 million, or 8.7%, during the three months ended September 30, 2024, as compared to the same period in 2023. This decrease was primarily due to a 2.4 million decrease in forfeited deposits and a 1.0 million decrease in dealer finance fees, partially offset by a 2.7 million increase in land sales and a 0.3 million increase in other miscellaneous revenue. The cost of product sales decreased 3.5 million, or 13.9%, during the three months ended September 30, 2024, as compared to the same period in 2023. The decrease in costs is primarily related to the decrease in units sold. Gross profit margin was 29.2% of product sales during the three months ended September 30, 2024, as compared to 32.9% during the three months ended September 30, 2023. The cost of other sales increased $2.0 million during the three months ended September 30, 2024, as compared to the same period in 2023. The increase in costs is due to the sale of land. Selling general and administrative expenses during the three months ended September 30, 2024, remained flat compared to the same period in 2023. We had a $0.6 million increase in payroll and healthcare expense, a $0.2 million increase in marketing expense, a $0.1 million increase in other miscellaneous expense, offset by a $0.3 million decrease in warranty expense, a $0.2 million decrease in low-loss provision, a $0.2 million decrease in bad debt expense, and a $0.2 million decrease in professional fees. Other income expense increased 3.5 million or 781% during the three months ended September 30th, 2024, as compared to the same period in 2023. We had a decrease of 0.8 million in non-operating interest income, primarily as a result of the settlement agreement that we executed in the third quarter. An increase of 3.9 million in income in miscellaneous net also primarily as a result of the settlement agreement, an increase of $0.4 million in income in miscellaneous net due to a gain on conversion of inventory finance loans, a decrease of $0.1 million in interest expense, and an increase of $0.1 million in expense in miscellaneous net related to other expenses. Net income decreased 1.8% to 15.8 million in the third quarter of 2024 compared to the third quarter of 2023. Basic earnings per share decreased one cent per share or 1.5% in the third quarter of 2024 compared to the third quarter of 2023. As of September 30th, 2024, we had approximately 0.6 million in cash compared to $0.7 million as of December 31, 2023. The outstanding balance of the revolver as of September 30, 2024 and December 31, 2023 was $2.1 million and $23.7 million, respectively. At the end of the third quarter of 2024, Legacy's book value per basic share outstanding was $19.84. an increase of 12.7% from the same period in 2023.

Thanks, Jeff. Legacy's 2024 fall show in late September was a huge success. We hosted a record number of customers and wrote orders that extended the backlog into the first quarter of 2025. During the fourth quarter, we increased production at both Texas plants. At the fall show, We showcase significant updates to interior and exterior home finishes to appeal to younger home buyers. The changes were very well received by both dealer and community customers. We are building and shipping these orders now. Third quarter shipments came in lower than we would have liked. Given the marketing around the product updates, many of our customers elected to see the changes in person and order at the show. We continue to build the team, including onboarding a senior sales manager for the Texas plants in late September. Despite slower sales in the third quarter, we're moving in the right direction. Product sales for October 2024 were up 27% over September of 2024. We continue to hold pricing, which has contributed to a slower recovery than our peers. Our dealer business across most of the network is good. We are pushing the team to add new independent dealers across the manufacturing footprint. South Texas, Florida, and the Carolinas are top areas of focus. We view retail finance as a leading indicator on the dealer side. A couple recent data points. Applications were up 16% for the third quarter of 2024 compared to the third quarter of 2023. October 2024 retail finance fundings were the highest recorded since December 2020. Our community business is improving slowly. High interest rates continue to depress transaction volumes. We are receiving more inbound requests and think the community business will continue to improve in 2025. During the quarter, we secured several meaningful orders on the community side. We continue to have success selling HUD tiny homes to RV park investors, transitioning these assets from seasonal to year-round occupancy. I view this as a growth opportunity and highly encourage any of the community customers listening to explore the economics of this strategy. Our lending portfolios continue to grow. Over the last 12 months, interest revenue from MHP, retail finance, and floor plan financing is up 33.9%. Our delinquencies remain low and recovery rates are strong. Product gross margins were 29.2% for the third quarter of 2024. Underabsorbed labor, given the lower production levels, drove the decline. We continue to watch labor closely and expect margins to normalize with production improving. We are also keeping an eye on material price fluctuations. We sold excess land in Horseshoe Bay during the third quarter for $2.7 million. As I mentioned on the last call, investors will continue to see land sales as we shift our focus to the core properties. Legacy is now operating two mobile home parks that were deeded to us under the settlement agreement. The parks combined have 275 spaces and occupancy rates of approximately 35%. Brand new homes were already on site. We hired a manager in the corporate office to oversee these projects. We're renting homes now to increase occupancy before monetizing. As Jeff mentioned, the settlement agreement resulted in a one-time gain during the third quarter. We believe there is still meaningful upside to realize when we sell the properties over the next couple quarters. A few updates on land development. In Bastrop County, our 1100 pad development near Austin The roads and utilities are nearly complete for phase one. We anticipate selling lots during the first half of 2025. We are starting the roads in phase two now and will provide additional updates next quarter. In Horseshoe Bay, we own 300 developed mobile home lots. A market study estimated that the lots are worth approximately three times the value on our balance sheet. This quarter, We are opening our first new company-owned dealership since the post-IPO buildout. The sales lot is near the Horseshoe Bay land, and we will begin selling land and homes in the first half of 2025. We are making progress on our retail business and view our independent dealer network as a path to expand our company-owned footprint as some business owners approach retirement age. I continue to believe in the long-term fundamentals of this business. We are seeing more coverage of factory-built housing in the media and hear talks of regulatory reform. The affordable housing crisis is not solved without our industry. Operator, this concludes our prepared remarks. Please begin the Q&A.

Certainly. And our first question for today comes from the line of Daniel Moore from CJS Securities. Your question, please. Thank you, Duncan.

Thanks, Jeff, for all the color and taking questions. Let's start with, good morning. Appreciate the color on October. Maybe just talk about your expectations for production rates across your three plants for the December quarter in light of, relative to Q3, in light of the strength in orders that you've seen during the fall show and It sounds like you intend to ramp production rather than let backlogs build, but any detail or color there would be really helpful.

Yeah, absolutely. Dan, we were looking for a catalyst to ramp production up, and we've been trying to build our backlog. Third quarter was lighter than we would have liked, but We created a lot of excitement around the fall show, which was at the end of September. And I think as our sales team started seeing the new colors and features in the houses and sharing those with customers ahead of the show, we had some customers that decided to wait and order at the show for delivery in the fourth quarter or even in the first quarter of next year. And so that delayed some shipments for us. I think the other thing, you know, we continue to build the team here and we've made over the last couple of years, you know, several key senior hires. You know, what wasn't working for the two Texas plants is, you know, me overseeing the sales department and all my spare time. And so we've, you know, we've hired a senior sales manager there and, um, you know, he's managing the team, uh, daily. And, you know, I think, like, pricing's had an impact. I mean, we haven't taken pricing down. I think some of our larger competitors have. You know, so ultimately, we're building these show orders now. We had a little bit of a delay getting some of the new materials in, but I certainly expect, you know, the fourth quarter from a product sales standpoint to be up over the third quarter.

Very helpful. And maybe just talk about how orders, you know, obviously give good detail around the show and we can kind of see how things are trending in October, but just how have orders trended thus far into Q4, the momentum you've experienced in Q3 kind of carried over so far this quarter?

Yeah, you know, I think we, like, even since the show and writing, you know, all the orders at the show, we've had pretty steady sales. for the last couple weeks that continue to take the backlog out, which is good. You know, production's still below where we'd like it to be, but better than Q3. And I think the, you know, the encouraging thing is we're starting to see the park customers come back. You know, that's been a space that, you know, kind of through COVID, right, the two founders really built the business on the park side. We had a good dealer network. And, um, you know, we've been, we've been struggling on the community side and are starting to see more inquiries and, you know, sign some meaningful deals, you know, not huge deals where you're selling hundreds of houses, but, but deals where we're selling, you know, 20 to 60. And, uh, and that helps us out a little bit. So it's, you know, it's, it's, it's still, it's slower than we'd like, but it's certainly improving.

Really helpful. And it doesn't sound like it, but just checking to see if there was any impact from the hurricanes and the, you know, Georgia's and Carolina's. And, um, if not, as we look forward, do you see potential opportunity either in terms of rebuild or FEMA replacement or both?

Yeah, absolutely. I, you know, we were fortunate where, um, we, you know, we, we had some delayed shipments just, you know, going to customers in certain areas in the Southeast. from the storm, but as far as the plant and the inventory and our team there, we luckily came out of it unscathed. I think the hurricane rebuild work has been confusing. There's been conversations with HUD and with other providers of, say, temporary or workforce housing There, you know, there doesn't seem like there's been any meaningful money that started to flow yet. But we certainly expect that, you know, going forward, there will be rebuild work. And, you know, we're getting a lot of inquiries on our workforce housing products that we, you know, primarily build in Texas, but we can build in Georgia for, you know, temporary housing applications over in the Carolinas.

Great. Last one, I'll jump back in queue, but gross margins, as you pointed out, tick lower sequentially. Sounds like you'll get better absorption, you know, starting in Q4. So, you know, any more specificity in terms of what normalization looks like for margins, you know, as we think about Q4 and into the first half of next year? Thanks again.

yeah absolutely dan you know i think we'll get back to you know in the 30s and and uh low 30s in first quarter or i'm sorry in the fourth quarter um you know labor labor's obviously the market's not as tight as it was through covid but it's still pretty tight and you want to hang on to your people and you know so this was a quarter where just you know our production was down until we got got through the show and really started building those orders. And I think we'll, you know, we'll normalize heading into the end of the year as, you know, we've ramped production up to, you know, and I think right size the team from a production standpoint.

Perfect. Appreciate it. Appreciate the color.

Thanks, Sam.

Thank you. And our next question comes from the line of Mark Smith from Lake Street. Your question, please.

Hey, Duncan. Just wanted to check in first on the settlement agreement, if we've now kind of worked through everything there, if there's any kind of ongoing impact as we look at Q4.

No, you know, we've worked through it. This was the last quarter of, you know, the moving pieces around getting the settlement agreement onto the books. We did realize a pretty meaningful gain during the quarter. Ultimately, the borrower's current and we're now operating two parts. that we've got our arms around and we've got a team hired at the corporate level and then new park managers on site. And so there's some cleanup work to do. There's opportunities to take occupancy higher. And then I think we'll ultimately look to monetize these assets in the fairly near future. As far as the moving pieces of getting the settlement agreement on the books, we are complete.

Perfect. And then I did just want to ask about the big ramp in the MHP financing portfolio came up in size quite a bit. If you can just speak to kind of what all happened there.

Yeah. It was really from, you know, as part of the settlement agreement, we had – The borrower had MHP notes that were secured by homes, and then there were also development loans as well. With the settlement, we shifted some of the balances from the development loan portfolio over to MHP.

Perfect. Thank you.

Thank you. And our next question comes from the line of Alex from B Reilly Securities. Your question, please.

Thanks. Good morning, Duncan. A couple quick questions. First, can you give us clarification? Did you see earlier that product sales gross margin would get back above 30% in the fourth quarter?

I think we'd like to get to 30%. We slid from 31 to 29 with the lower production in the fourth quarter. And so we'd like to get closer to where we were in the second quarter. I think the improving production helps, but there's also, we're keeping an eye on the lumber and wood products, which I think have been impacted after the hurricane. That's the goal, but the margin really slipped because of labor under absorption in the third quarter.

How long might it take to increase the occupancy of the two owned parks to a level that's attractive to sell?

I think we can get there in a quarter, Alex. Both of these parks had a lot of brand new homes that we had shipped some of which had been set up and not rented, others that were on pads and utilities weren't connected. And so we're really focused on Beaumont, Texas. I think that's where the most upside is. And we've done a pretty good job so far with the new park manager leasing those homes up. So I'd like to get us somewhere between 50% and 70% occupancy before we ultimately monetize these. We'll just see how it goes.

That's helpful. And then as it relates to the fall show, it sounds like coming out of the fall show, you've got good visibility for backlog into 1Q25. You've increased production in your Texas plants. Does that all suggest that the show was better than you had expected or about the same?

No, the show was, the show would really was a big success. I mean, that's our, you know, that's our big sales event every year. And I think the difference this year is, um, you know, we made more updates to the houses this year than we probably had in the last 10 years combined. You know, so think, you know, new flooring options, wallboard, know cabinet colors uh countertops walk-in showers the team really did a nice job you know on the interior and exterior finishes to modernize the product and i think what was you know we really pushed that we got um we got a lot of customers there weather was great and um ultimately we wrote a lot of orders, but you know, the, I'd say 95% of the orders were for, uh, you know, the updated finishes. And so we, you know, we took us a little bit of time or a couple of weeks to get all the, the, um, the new colors in, and then we started building them. So I think in the longterm, um, you know, our customers were looking for us to update the product we did. You know, the feedback was great. And, you know, we're starting to get these homes out on dealer lots where they're selling them really quickly. And I think that, you know, there may have been, you know, a little pain kind of getting through the show and production in the third quarter. But for the long term, it really sets us up nicely.

That's great. Congratulations. Thanks.

Thank you.

Thank you. This does conclude the question and answer session of today's program. I'd now like to hand the program back to Duncan Bates for any further remarks.

Sure. Thank you for joining today's earnings call. We appreciate your interest in legacy housing. Operator, this concludes our call.

Thank you. And thank you, ladies and gentlemen, for your participation at today's conference. This does conclude the program. You may now disconnect. Good day.