Legacy Housing Corp (LEGH) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Legacy Housing Corporation's earnings call regarding 2018 financials. (Operator Instructions). As a reminder, today's conference may be recorded. I would now like to turn the call over to Mr. Curt Hodgson. Sir, you may begin.

Good morning, everybody, and thank you for joining us on our first call. And realize that this is our first call, so we are going to be learning as we go ourselves. I've been tasked with some housekeeping words here which I'm going to say before I begin my prepared comments.

And those tasks are: before we begin 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 reports filed with the Securities and Exchange Commission. In addition, any projections as to the Company's future performance represents management estimates as of today's call. Legacy Housing assumes no obligation to update these projections in the future unless otherwise required by applicable law.

So, as I said before, welcome to our first-ever earnings call for Legacy Housing. Obviously 2018 was an exciting time for me and for our Company. We were pleased with our 2018 financial results, which resulted in $161 million in gross revenue, the highest annual revenue ever generated by Legacy in a year in which we spent considerable time, resources and energy in our successful effort to complete our public offering.

The Company sold 3,950 home sections in 2018 compared to 3,274 in 2017, an increase of over 20%. To put it in terms of complete homes, we sold 3,392 units in 2018 compared to 2,900 in 2017, a 17% increase. We also increased the average selling price of our products to approximately $41,000 as opposed to approximately $38,000 in 2017. This was attributable to sales price increases in 2017 as well as more sales being made through our company-owned retail stores, which carry higher prices and margins.

As for our view of the manufactured housing industry, overall the industry is continuing its incremental recovery, but remains well below long-term averages. We certainly see an opportunity for continued demand and growth for the industry, especially with the need for affordable housing and the potential for a rising interest rate environment that typically spurs growth in our industry.

We did see some softening in certain key markets at the end of 2018 mainly in Texas and Louisiana with respect to sales through our independent dealers, even accounting for seasonality. Some of the softness in this area was likely impacted by weather-related events. However, we remain optimistic on the demand for our products in our markets.

On the retail side we opened three new company-owned stores in December of 2018, two in Georgia and one in Texas. We continue to see abundant opportunities with our retail stores especially with the higher margins available and the potential for greater financing capture rates.

But we are taking a cautious and analytical approach in growing out that side of the business. We are taking a look at what has worked and what has been less successful in our retail efforts so that we can create a uniform effective and efficient rollout and expansion process for company-owned stores.

We're also excited about the potential we see in new park developments that we are involved with. The two projects I would highlight are a 400-plus acre parcel that we purchased last year near Austin; I think we bought it for $4 million. And another new development in San Antonio which we bought for about $900,000. We are buying the land only and working with joint venture partners to develop these out.

We foresee -- as I said in the road show, we foresee a places-to-put-them problem manifesting itself in the next few years. And there's a chance for a significant return on investment with these projects. Although we don't think the results of these projects will be readily evident on our income statement for another 12 to 24 months.

To give some framework of how we structure these deals, not only do we finance the acquisition and development of these new communities, including a 10% to 12% rate of return, but we also get a commitment from the developing party to install our products on most or all of the site pads at the development.

With that overview I will now turn the call over to Jeff Burt to discuss the financials in more detail. Jeff?

Thank you. As Kurt alluded to, we had strong revenue growth in 2018. We grew our revenue by 26% year-over-year, raising our net revenue in 2018 to $161.8 million. This was driven by strong growth in product sales going from approximately $110 million to $139 million.

Our company-owned retail store sales increased by 27% in 2018 going from $10.4 million in 2017 to $13.2 million in 2018. The cost of product sales increased $24.7 million to $107 million, which was a 30% increase. This was largely attributable to greater volume of production, increased material and labor costs and the cost with expanding our retail operations.

We also saw a 23% increase in SG&A expenses to $21 million. These expenses increased due to the costs associated with expanding our operations of our retail stores, the expenses of opening a new corporate office, opening a new sales office, as well as the costs associated with the IPO.

Our profit margins associated with our product sales was 23%, which was in line but slightly lower than the 25% margin we experienced in 2017. This was due to increased material and labor costs as well as the cost of rolling out and expanding our retail stores.

Income before taxes in 2018 was $30.6 million, an increase of 16% from $26.4 million in 2017. After a change in the operating structure of the Company from a partnership in 2017 to a Corporation in 2018, the income tax expense for 2018 was $8.7 million compared to only $124,000 in 2017.

Net income was $21.5 million in 2018 compared to $26.3 million in 2017. However, on a pro forma basis, accounting for the additional tax expense associated with converting from a partnership to a Corporation in 2018, the pro forma net income in 2017 was $16.9 million if the Company had not been a pass-through entity in 2017. On a pro forma basis so that we are comparing apples to apples, that would be a 27% increase in net income from 2017 to 2018.

We continue to see our financing operations provide steady growth. Our consumer loan portfolio increased by $10.5 million in 2018 to $97 million inclusive of the allowance for loan loss and other discounts. Our manufactured home park loan portfolio increased by $8.4 million in 2018 to $58 million. From 2017 to 2018 the interest income on our portfolios grew by more than $3.1 million which was close to 20%.

As of December 31, 2018 we had a borrowing capacity of $51.3 million between our two revolvers, which gives us substantial room to expand our financing operations as needed and appropriate. Lastly, equity grew to approximately $190 million as of December 31, 2018, up approximately $66 million from the 2017 balance. Curt, that completes our financial report.

Thanks, Jeff. While Kenny and I are pleased with our overall growth, we acknowledge that we have a lot more work to do, especially digesting the systems necessary to be a public corporation. Our near-term focus remains on internal opportunities, but we're going to continue to evaluate acquisitions and opportunities if it makes sense for the Company and for our shareholders.

We think we are well positioned in the next few years to grow the Company and to continue to expand our distribution channels, grow our loan books and generate attractive returns for all our stakeholders. We will now take questions and answers.

(Operator Instructions). Alex Rygiel, B. Riley FBR.

Curt, Kenny, Neil and Jeff, congratulations on everything you accomplished in the fourth quarter last year.

Thank you.

Thank you.

Curt or Jeff, if we could just address kind of the hot topic today, and that is can you talk a little bit about why the 10-K was delayed and when we might actually see a 10-K?

Jeff, go ahead and take that.

As we transition from the partnership operating entity to the corporate operating entity and we bring all of the resources online to be a public company, we wanted to make sure everything was right for our opening to the public. We may have been overly cautious making sure that everything fit into place, but we hired a number of resources and got them online and we missed the window by about 10 days.

Let me put a little color on that too. I think everybody's wanting to know the answer to this question. There was no disagreement, no controversy between us and our auditors that caused this delay. It was just housekeeping schedules and so on and so forth that had to be done to file our first 10-K. It had nothing to do with any issues between us and our auditor Grant Thornton.

That's helpful. And now that the first quarter is mostly wrapped --.

By the way, we will be filing that today.

Excellent. Now that the first quarter is wrapped up, Curt, can you give us a little bit more color on how the quarter developed either month-to-month or in its entirety?

Yes, let me give you an overview of things going on not just with Legacy but with the industry as a whole. I'm sure most of you are familiar with the MHI statistics that show softening in the markets, particularly in Texas and Louisiana, which we operate in. And that December sales year-over-year were down I believe -- or December shipments were down in those regions year-over-year by about 30%. And of course we are part of that tide that is rising or falling depending on what's going on.

That said, Legacy has not missed a day of work. We have a good order backlog still today. We were operating at or near capacity all three of our facilities for every day of the first quarter, which is kind of how I judge whether or not we are winning or losing. In fact, the second quarter is pretty well spoken for from a production point of view as well. So we are outperforming our competitors I think as far as backlog and operating at or near capacity in our plants.

That said, we still have a shipment problem. At the end of the first quarter we had 400-plus units that were manufactured and had customers' names on them but had not been shipped. That shipment problem is not so much a trucking capacity but a problem that the customer is not ready for the delivery like they thought. And generally they tend to say, well, I don't have room or the weather has gotten me back or I'm not ready for that house yet. So we maintain the house before we ship it and we charge them storage in doing so.

But I'm a little bit taken aback by having 400-plus finished units in our yards unshipped but yet having a firm order on at the end of the period. Jeff may or may not know the top-line number, but I mean really it would be hard to have a higher top line given our production limitations than what we have -- what we will be showing for the first quarter. I know that's little guidance.

And as far as the industry as a whole, the only barriers we have to the industry growing our interest rates and places to put them, interest rates declined for third-year mortgages significantly in the last quarter. And that is not exactly what we were hoping for from a tailwind point of view. That makes site built housing more competitive relative to our housing since our interest rates tend to remain the same while ordinary houses or site build houses fluctuate. I don't know, Jeff, do you have a feel for what the top line looks like for the quarter?

The preliminary analysis indicates that we are off about 11% over the 2018 quarter. However, we continue to struggle with the accounting for the houses in the yard. So we have houses that people have actually paid for and given this is -- we are nine days into the month, we are fine tuning -- we can't recognize the revenue on those that are in the yard. So we are eliminating those sales from the numbers. But the preliminary numbers indicate we are up 11% over the -- from the 2018 quarter to the 2019 quarter.

Jeff, is that in units or in dollars?

Dollars.

Dollars? Okay. And then of those 400 units, you briefly mentioned it, but how many of those are tagged as sold to the end home buyer versus being shipped to an independent dealer?

I'll chirp in on that. Almost all of our sales are not tagged to the end-user. In fact from a legal point of view manufacturers aren't even allowed to sell to end-users. We sometimes put a customer's name on them when it's ordered. My feel is the vast majority of it was tagged for independent retailers and mobile home parks.

When I walk the line I can tell by looking at units whether or not they are special ordered for consumer or they're stock, because consumers generally want more things than stock units. And I am pleased by what I'd say is an increase in special order units, those usually high-margin units as opposed to stock units when I walk the line. But when I say that, maybe I'm seeing 15% are special order as opposed to traditionally maybe 10%. So, the demand from a special order point of view seems to be on the way up.

On the independent retailer side, we continue to see softening of independent retailers. The independent retailers are being gobbled up by our competitors, so there aren't as many independent retailers. And so, we are having to further our distributions from company-owned stores and through sales to mobile home parks.

And just one clarification. You mentioned a couple times that customers are not ready for the units to be shipped. What could cause a customer not to be ready for a unit to be shipped?

If it's going into a park they may not have the site ready. So their development of the site could be behind schedule, which oftentimes happens in the first -- fourth and first quarter because of weather issues.

If it's going to an independent retailer, his sales may not have been as robust as he anticipated when he ordered it and he may just want to clear out his. I don't know what's happening with the independent retailer side. Kenny is on the call; he may have a feel for how the first quarter was. Kenny, do you want to chirp in?

Yes, I will be glad to, Curt. A lot of the retailers, they just -- we were at Tunica and had a pretty good show. I think Alex -- I ran across Alex there and a lot of the independent dealers were saying that they didn't have room on their lot. They hadn't been able to deliver anything.

I had a couple of guys from Houston that said they hadn't been able to deliver a house in 90 days because of the weather. So, many of them, when they ordered the houses and we had a 12-, 13-week backlog, they never dreamt that they'd be shut down for 90 days waiting to try to deliver houses. So they haven't been able to take anything because they hadn't been able to deliver anything.

I mean, we've got to get permits to move these things up and down the highway, as well as the site being ready. And some of them hadn't even got their sites ready because of the rain. We had a couple sites that we did up in Louisiana ourselves for one our company stores and it got washed -- the sites when we do the pads to place the mobile home on them, they actually got washed away before we could get the house is delivered. So we had to go back and redo the pads after it dried out.

That's helpful. Curt, you've talked to some extent in the past about community development, park development. I believe you own two or so plots of land and you are a lender on a few others. Could you run through each one of those again and maybe even bracket the size of each one and the anticipated first date of sale or revenue opportunity that each one could bring?

Sure. I'm doing it off the top of my head; I don't have any prepared notes on this, but there are so few of them I'm familiar with all of them. The first one coming online is one we are financing with one of our better dealers in Fort Worth. He is developing about a 100 unit subdivision and it is obligated to be filled with Legacy housing as part of its development. And he is probably only 90 days away from taking his first houses in that subdivision. The biggest project, which we talked about earlier, is a 400 unit --.

We did deliver one -- we did deliver one there. He took one.

All right, so he has already taken one. I didn't know he was already legal to do that. But the 400 unit -- or 400 acre subdivision in the Austin area is really near Austin, Texas, near the Formula One racetrack in the southern part of Austin, really gorgeous land. I would guess we are up probably $2 million in market value on the purchase.

And I know I'm not supposed to opine on that, but okay, so my first mistake as a public corporation Chairman. But -- and we are about halfway through the engineering stages. It's going to require a water treatment plant, which in Texas is about a one-year lead time just from application on a water treatment plant. I would guess that we'll be breaking ground on that this year and we will see significant revenues in the year 2020 on that.

Then the third one is some land that we own that we're the principal on, but in a joint venture with a dealer in San Antonio. It's going to be around a 120 unit subdivision. It's a little behind but it doesn't have the water treatment plant as subject systems. So I imagine that will be online first quarter of next year. And then we are financing some land in a different part of San Antonio that we are the lender on. And I don't know what the horizon on that is. It seems to be going slower than I expected.

We are in negotiations right now on land in the West Houston area and on a parcel in Miami, Florida that seems to be a unique parcel. That's about it from the land point of view. Slow going, but I really think that the places to put an issue is going to be so significant for our competitors that they are going to get caught with very little market if they don't do what we are doing.

One last question, Curt or Jeff -- or even Kenny. Can you comment on how your loan book might've changed in the first quarter? Or what characteristics may have looked different for the buyers and how that -- anything has changed -- if anything has changed in the first quarter of 2019 here?

There's two loan books that are significant, a consumer loan book and a mobile home park loan. The consumer loan book hasn't changed much at all. I don't think Stuart is on the call, but we had a conference call with him yesterday. We've just got a slow grower there. We are growing the loan book at a 10% to 15% annual clip by adding loans to it.

Almost nothing has changed in that other than we keep getting more loans -- we're generating 40 or 50 loans a month and that loan book has positive cash flowing. As it is, it takes in more cash monthly than it puts out. The second loan book, which is the park loan book, has been very volatile the last couple quarters. Jeff, do you want to chirp in on that?

We have, we've seen significant upswing in the booking of the loans for the mobile home park. At the end of 2018 I think our MHP portfolio of loans was roughly $58 million and the quarter for March of 2019 we're up to $67 million, even after we've taken some significant payoffs for the first quarter in 2019 compared to the first quarter in 2018, it was up approximately $7.5 million.

Georgia in particular is penetrating the park market even better than we expected. They are probably selling 60%, 70% of their production to parks in the southeast all the way from Kentucky on the north side to Florida on the south side, and doing a remarkably good job on it. We've been building a steady five a day in Georgia, which is up considerably year-over-year. I think we were at three or four a day year ago in Georgia.

All very helpful. Thank you very much, gentlemen.

Mark Smith, Oak Ridge Financial.

First off, Curt, can you give us a repeat on some of the product numbers during the year or during fourth quarter as well as average selling price and any insight into how that was moving in fourth quarter maybe versus a year ago?

Our plan is to continue to find ways to raise per unit pricing either by making nicer product or by selling more of it retail. So, when we have a -- we had a $38,000 to $41,000 price increase year-over-year, which Jeff already reported, which was up a little bit more than our cost of developing product.

Our materials are up nominally year-over-year, our labor is up more significantly. So probably our cost of making the same exact product is up, if I was just guessing, somewhere in the 4% range. But yet our cost of what we're selling is up closer to 8% or 9%. So that improvement in top line on a per unit basis is continuing.

We have not had a price increase in almost six months, mostly because, if you all are following the commodity markets, lumber had a significant decline beginning about six months ago, so we were saving money on the number one component of manufacturing lumber. And so therefore did not take a price increase. Although I think that we'll probably be going -- we'll probably have an across-the-board price increase shortly.

We also are managing labor better. Our labor numbers in Georgia are the best ever at under $5 a square foot to build a house and in Fort Worth they've been steady to improving lately. We are challenged in one of our plants in commerce and we're trying to work that from a labor point of view.

I don't know if that answers your question, but this fall we will be introducing some product changes that are product options that will increase the overall -- or increase the price of what we sell mostly by delivering a nicer product to the consumer.

No, that's helpful. And then second, can you speak to -- a year ago you guys had really strong sales in FEMA homes. Is there any FEMA business that's happening now or any other things that kind of add lumpiness to sales that we should be looking at?

I was hoping somebody would ask about that. I think there's 20-plus people on this call and I think we probably need to admit that Hurricane Harvey and Hurricane Erma 18, 19, 20 months ago was a big shock the arm for the industry. They were both category four hurricanes, they were both smack dab in the middle of our market areas. And the hurricane here in Texas was so severe the flooding caused a huge need for housing of which FEMA bought -- stepped up and bought I think 8,000 or 10,000 units that we all participated in that uptick in business.

When I look at the number that we delivered for the fourth quarter in top line, I wasn't that happy with it because it was a little less than what we all had hoped for. However, when I go back and look at our pre-hurricane numbers, pre-Harvey in pre-Erma, our fourth quarter was higher than any of those quarters. It was the highest quarter on record before Harvey and before Erma. So in that sense I was not that dissatisfied.

The short answer to your question there is with the flooding that has occurred and with the small hurricane that was -- that hit last year in one of our markets, there were absolutely no FEMA orders that came up because of those events. And we don't see any in the near future unless there's some catastrophe that has not yet happened.

Okay. And then lastly, can you just give us more of an update on your retail store strategy? I know that you maybe are slowing things down and trying to do things prudently here. Can you talk about how some of these new sites are doing out of the gates now that we are about a quarter into it?

Kenny?

I'm sorry. I was reading something. Could you repeat that question?

Yes, Kenny, can you just give us an update on the retail stores, the Company owned ones that you guys have, especially those that opened late in the year and how those are doing so far?

Yes, I really think we've turned a corner. We're just like all the other independents. We've had some weather issues to get around, especially the stores up in the Southeast, they got just hammered with weather. Every day we were trying to ship houses it was just raining.

But we had a pretty good month last month and it's looking better. It's all a people business, so we're changing people every day and trying to get a more experienced crew in there for sales. But the sale seems to be picking up. Not only does weather slow down deliveries but it also slows down traffic. So it's been a trying first quarter for us to get these things going. I think we're starting to turn some corners here. We're starting to get some numbers out.

Let me be a little bit objective on this, guys. Our stores, we have about 11 of them operating, have been selling approximately two per month, which is actually a losing proposition, it's a drain on earnings. But many of these stores are in their early stages of development and we are expecting to get them to four to five per month, six per month, which makes them significantly profitable and gives us a distribution leg.

It has been harder to accomplish those numbers than we would've liked and Kenny has been spending a lot of his time on that mission. Since he is the world's best retailer I think he's going to pull it off here and that we'll eventually get these stores where they are contributing to profitability rather than dragging it down.

Starting a store is not just a decision, it's a process. And it can take six months, 12 months before you turn the corner. So we have a lot of these that are on the beginning of turning the corner. We've had to change managers sometimes three and four times because they just don't get the process. It's more challenging than we'd hoped.

Okay, that's helpful. Thanks, guys.

Ian Ellis, MicroCapital.

Would you just be kind enough to clarify the 11% year-over-year number for the Q1? Is that revenues or units? And what's the year-over-year comparison, because I don't think that's been disclosed publicly yet?

That's revenue.

Revenue? So what was the year ago number? What was Q1 2018?

I don't have that in front of me. I've got an excerpt that I'm looking at. Hold on a second. So for --.

Q1 for 2018 was $37 million.

$37 million? Okay. (Multiple speakers) so we are looking at above $40 million for Q1 revenues 2019?

Curt -- I think that was fourth quarter, Curt.

I'm sorry.

I think that number was the fourth quarter. I'm showing the first quarter at $24.4 million.

$24.4 million? So we're looking at --?

I think you're looking at first quarter 2017, Jeff.

Oh my God, you're right, I'm sorry. You're right.

Okay. This is important, so I can wait for you to get the right number.

Yes, I'm sorry, it's -- he's right, it's $37.4 million.

$37.4 million. Okay, thanks, gentlemen.

Which was a FEMA quarter. So are you saying, Jeff, 11% less than that? Is that what you are projecting?

No, I'm showing 11% more than that.

Okay, so you are saying 11% more than that is obviously above $40 million. Does that include the 400 units you've got in your yard or not include the 400 units you've got in your yard?

I looked at those numbers this morning because I was thinking that that was relevant, Ian. And they may include part of them. But our yard inventory at -- or our finished good inventory, unshipped finished good inventory at the end of the year was about 350 units system-wide. At the end of the first quarter it was about 400 units system-wide.

So, while I was hoping it would decline, it actually went from 350 to 400 units. So, 50 units -- let's just say that's probably $2 million worth of product increased finished good inventory still unshipped in the yard. So it could be a $2 million swing one way or the other depending on how we are counting it I guess.

Okay, so -- all right. So, all and we've got a range on Q1 revenue, depending on how you account for those, of $38 million to $41 million. Is that correct?

That's correct.

Okay, all right, that's helpful. Thank you, gentlemen.

Thank you and I'm showing no further questions at this time. I would now like to turn the call back to Mr. Curt Hodgson for closing remarks.

Well, that was pretty painless. Gentlemen, thank you for asking those questions and letting me give some color to it. On an ad-lib basis, because, as you know, these remarks are usually prepared, so let me read the prepared remarks to finish the call. And as you know, Kenny and I are both accessible; anytime you want to find us we do have a way of answering our cell phones.

While I'm pleased that our overall growth from 2017 was -- 2017 to 2018 was good, I do think we'll have growth in 2019 as well. So thanks for attending the call and with that I will end it.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a great day.