Legacy Housing Corp (LEGH) 2019 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Legacy Housing Corporation Second Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call may be recorded.

I would now like to introduce your host for today's conference, Mr. Curt Hodgson, Executive Chairman of the Board. Sir, you may begin.

Thank you for joining the call today. Before we begin, may I remind our listeners that management's prepared remarks today will contain forward-looking statements, which are subject to risk and uncertainty, and management may take -- 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 as contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from management's current expectations, and therefore, we refer you to a more detailed discussion of the risks and uncertainties in the company's annual report filed with the Securities and Exchange Commission. In addition, any projections as to the company's future performance represents management's estimates of -- as of today's call. Legacy Housing assumes no obligation to update these projections in the future, unless otherwise required by applicable law.

With those preliminary remarks out of the way, the first thing I want to do on the call today is welcome Cork Van Den Handel, our new CFO, to his inaugural earnings call with Legacy. As part of our growth initiatives as a public company, we wanted to bring in a CFO with great analytical abilities, public company experience and a background that includes strategic and operational expertise. We found all those qualities and more in Cork, and I am excited about the value he has for Legacy and our shareholders.

I also want to take a moment to thank Jeff Burt who has transitioned into the role of Chief Accounting Officer. Jeff has been a critical part of Legacy's success over the last decade. And now with Cork's and Jeff's leadership, we have a dynamic team assembled to lead Legacy's accounting and financial reporting team into the next phase of Legacy's future.

Now let me turn to a discussion of our view of the industry, our second quarter performance and provide some additional updates on key projects. I will then turn the call over to Cork to introduce himself and to discuss the financial results in more detail.

We continue to believe that demand for affordable housing is strong and that our industry is a critical and necessary part of the solution to the affordable housing prices. We have seen stabilization of demand over some choppy waters at the end of 2018 and continuing into the first quarter of this year. Manufactured housing shipments in 2019 are still not quite tracking to the levels of shipments of last year, but we do not view this as indicative of long-term industry trend or having significant impact on Legacy for this year. The softening demand due to retailer inventory destocking and short-term weather-related events we view as more of an aberration than a red flag.

While Cork will provide more financial detail, there are certain trends in our financials that I think are important to note. First, we continue to see significant growth in our sales and financing activities to manufacturing home -- manufactured home parks or communities. Year-over-year, our sales to parks almost doubled. The fact that mobile home parks are investing in product is strong evidence of the fundamental role manufactured housing is playing in providing affordable house. Likewise, the manufacturing -- manufactured home park loan portfolio increased by $14 million to a total of $72 million, an increase of 24% from the end of last year.

Another trend we're seeing is increased sales through our company-owned retail stores, which in part explains our great margins this quarter and so far this year. I'm pleased to announce that we're opening an additional Tiny home outlet in the Atlanta area, this new store is on a lease, and should be opening the stores to public tomorrow.

The other trend we have seen, and it's one we spoke about on the roadshow, is a decrease of sales in 2019 through independent retailers. This change in our distribution mix is not without its benefits because parks and company-owned retail stores have higher prices and higher margins. If you take those factors, combined with some price increases that we implemented in the last 12 months, our average sales prices have increased year-over-year from around $40,800 to approximately $44,600, an increase of over 9%. Similarly, our gross margin increased to 29.9% from 23.2% from last -- from the same period last year.

Overall, we had a strong second quarter with revenue of $45.8 million compared to $44 million in the second quarter of 2018. Considering the industry as a whole has underperformed last year, we think Legacy's top line number is good.

Earnings before taxes grew $2.5 million or 28% to $11.4 million in the second quarter compared to the same period last year.

All of this growth was organic. Although we remain open to opportunities to grow the company if we can find the right partner for acquisition or collaboration, we thus far in history of the company have not purchased any capacity in the industry.

We also continue to make progress on land development projects. This is what I'd like to speak a minute about.

Our largest feature project is in Del Valle, Taxes, just outside of Austin. We still anticipate that project starting to show up in our revenue beginning in the first or second quarter of 2020. Projects like that should also ensure our production remains at or above current levels for the foreseeable future.

We now own 4 properties targeted for development, 2 in Austin market, 1 in the Fort Worth market and 1 in the San Antonio market. We've also provided financing to 3 developers of mobile home parks and are in the process of closing loans currently to 2 additional developers. We think that our role in the mobile home park development will keep us ahead of the competition for many years to come.

I will now turn the call over to Cork so that he can tell you a bit more about his background, experience and discuss the financials in more detail. Cork?

Thanks, Curt. First, let me say that I'm delighted to be a part of the Legacy team. It's an excellent company with an exceptional management team and is an innovator in its industry. My prior career spans a wide range of industries from aerospace manufacturing, distribution and engine overhaul to business services, solar energy and automotive retail. I've had CFO responsibilities in public, private equity owned and entrepreneurial businesses, and I look forward to contributing to the continued success of Legacy Housing.

Moving to the financial review. Net revenue for the second quarter of 2019 was $45.8 million, a 4% increase compared to net revenue of $44 million reported in 2018's second quarter.

As Curt noted, product sales are our largest component of revenue, and we again experienced exceptional growth in our sales to manufactured home communities, which increased $8.5 million or 93% to $17.6 million.

Sales through our company-owned retail stores increased 11% to $4.9 million, and these increases were partially offset, as Curt noted, by decreased sales of consigned inventory through our network of independent retailers and reduced factory direct sales.

Product sales gross margin percentage increased 6.7 points to 29.9%, resulting in a $3 million increase in gross margin. The shift in product sales to manufactured home parks and sales through our retail stores combined with annual price increases drove the margin improvement.

Interest income in the quarter was $5.1 million, a 13% increase over the $4.5 million recorded last year.

Our manufactured home park loan portfolio increased $14.1 million or 24% from the end of 2018 to $72 million, reflecting the significant growth Legacy is experiencing in sales to this market segment.

The consumer loan portfolio principal balance increased $3.8 million net to $101 million, inclusive of the allowance for loan loss and other discounts.

SG&A expenses grew 19% to $6.1 million, primarily the result of increased expenses for our company-owned retail stores and an increase in our warranty reserves.

Pretax earnings, as Curt noted, grew $2.5 million, a 28% increase to $11.4 million in the quarter. Income tax of $2.8 million increased $700,000 over the second quarter of 2018.

Net income was $8.6 million for the second quarter of '19 compared to $6.9 million in the prior year period, an increase of 25%. Earnings per share based on basic and diluted weighted average shares outstanding was $0.35 compared to $0.34 in the prior year quarter.

Finally, equity increased almost $20 million from year-end 2018 to $209.2 million on our strong earnings performance in 2019.

That completes our financial overview. Curt?

Thanks, Cork. The second quarter results reflected strong fundamentals of our company. And I think it's safe to say we are at a time of some transition, yet I view that as good for the long-term prospects for Legacy. We need to continue to execute our plan and the results will speak for themselves. As we emphasized during our roadshow, our priority is to steadily increase book value over the long haul.

Thank you for your interest and attention today, and now we'll take any questions.

(Operator Instructions) Our first question comes from Alex Rygiel with B. Riley FBR.

Curt and Kenny, nice quarter, and Cork, welcome aboard.

Thank you.

Thank you.

Curt, can you talk a little bit about sort of the outlook for the second half of the year, this year, understanding that the first half of the year had some strange demand characteristics with regards to whether and inventory adjustments? So how should we think about third quarter and fourth quarter as it relates to maybe the run rate that you printed for net sales in the second quarter here?

I think the industry as a whole over the last 6 months has kind of decreased inventories. If you look at our financials, we're not an exception to that. Our inventory, both finished goods and raw material, went down. So some of the contraction that you saw was a sell-off of the inventory that was already in place.

Anecdotally, we've got enough orders to run well through our show -- our fall show, and our fall show usually gives us enough orders to run through the fourth quarter. So I think it's -- I think we have the third and fourth quarter pretty well spoken for.

Overall, I think there's still an issue with the way we distribute homes through independent retailers, not just us but our competitors and well. And we're all kind of shucking and jiving, trying to figure out how to satisfy the demand for affordable housing through other distribution systems than the traditional independent retailer.

As for us, as you know, we're emphasizing community development near urban markets. We think that's where -- that's the place where we're going to be. So essentially, we're getting more vertical, and it's probably going to keep our plans running indefinitely in the future because we'll be supplying properties that we have a financial connection to. I hope that answers your question, Alex.

It sure does. Second question, as it relates to making progress on the land, it sounds like you own 4 lots, you have loans out to 3 others and you've got 2 loans in process. It looks like that's about 9 in total. How many properties or projects do you think you can sort of manage at one time? And does 9 go to 12 in the next 6 months? Or does 9 go to 20 in the next 6, 12 months?

Well, I'll take that one, too. I think as long as the projects are in our core market area of the southeast and southwest, we could probably go all the way to 20 projects of reasonable size that we had a financial involvement in without stretching the limits. The projects we currently have represent over 2,000 homesites and probably closer to 3,000 section sites, if you will, because many of the sites are designed for Double Wides. And we expect that those projects will contribute an ever-increasing role in our production. Maybe only 10% next year, maybe 15%, but within the next 2 or 3 years, I wouldn't be surprised if 30%, 40% of our production is going to development projects in our market areas. We think there's actually more profit opportunities doing that then there is expanding geographically. So that's why our focus is there. We're getting $500, $600 and sometimes even $1,000 a month for a place to park our product, but we're only charging $500, $600, $700 when you buy our product. It's an imbalance between the ratio between the cost of the place to put it and the product itself that we intended to get in there and help change the ratio a bit.

As you look at the broader landscape other than the shifting dynamics of the independent retailers, are you seeing any other shifts in the macro either from Fannie and Freddie getting involved or interest rates or competitors opening up new production facilities?

I think I know the answer to this, but I wasn't prepared for that question. There's about 3 or 4 new factories year-over-year around the United States, while shipments around the United States are down maybe 5% or 10%. I think the reason that they were down were some of the reasons we say in the call, but we're also running into a, "Place to put it problem" in the major metropolitan areas in our market. So that's why we're attacking that.

I think we're all going to be faced with a, "Place to put it" problem. And those people that are aligned with developers or doing their own developments will be able to keep their top line up, and those that aren't are going to suffer. So that's basically -- I know that's kind of a repeat of what I said, but we're seeing that. It's not the $600 a month mobile home payment that is causing a reduction in demand, it's simply a place to put it in the metropolitan areas. That issue just has to be remedied.

As far as new financing coming on board, even if they decreased our payments by $100 or $200 because the interest rate went down, it wouldn't solve the fundamental problem of the place to put it. The GSEs are coming in to the -- excuse me, GMOs are coming into the market very lightly with a very specialized product, and they're going to have the same interest rates for manufactured housing that the do site-built housing. But the product that will qualify for that is going to be kind of difficult to do for most manufactured housing plans. We're all kind of moving in that direction. We like the new level of manufactured housing that is anticipated by these programs. But let's see how it proves out before we get too excited about it.

And one last question for Cork so he doesn't get off too easy on this call. I heard a reference to an increase in warranty reserves and an increase in loan loss reserves. Can you comment on those 2 items?

Well, actually, I talked about warranty reserves, and they were up, I think, about $200,000. It's simply -- I think it's simply a matter of the fact that we've got a good deal of product out there, and as a result, we have greater exposure.

And our next question comes from David Burdick with Oak Ridge.

Congrats on the nice quarter. First, I guess, I just wanted to talk about these strong margins, which I believe were up about 600 bps versus the prior year. You guys called out a few things in here, but is there anything really specific driving this? And then is the 30% range something we should expect moving forward?

Well, I'll not comment on going forward right now as a relatively new player here, but I will say that we -- in our sales to -- through the mobile home communities and through our company-owned stores, those sale prices are significantly higher than through the dealers, and the margins that we get from them are significantly better. And so what we're seeing is a shift in the mix of business to the higher-margin sales.

Anything you'd like to add, Curt?

No. I'll try to give you the crystal ball going forward. I think the -- I think all companies will see higher gross margin but also higher SG&A facing that our gross margin. I think the model of selling wholesale and then forgetting about it is over. I think we'll all be more involved with the end user than we have been in the past. And in doing so, we'll have company-owned stores will be involved in communities. We'll offer more high-margin things like maybe car porch, for instance, which was recently okayed by the feds. And I think you're going to see more high-margin product facing consumers. There's also a shift towards a medium-end product and away from the low-end product. Our homes are more -- much more optioned up today than they were a few years ago, so there's a trend towards that. And as interest rates come down for our product, and they are even with what we do, they must stay the same and the people get more product. And usually, they get it with higher margin.

The home itself is graded low margin, and then we start adding options and pertinences to it, the margin gets higher. And I think that, basically, if we sell at wholesale for $60,000, we sell at retail for $90,000. That's basically -- I know it seems higher margin than most people would think, but there's about a 50% markup between wholesale and retail for our product.

That's helpful. And then can you guys just talk a little bit more about your strategy in the community development and why you think that's so important to go in this direction?

And then also, could you maybe help explain how the whole process works when it comes to time lines around breaking ground and first units coming online? I know the Austin development is pretty big, and you guys mentioned those sales coming online in 2020 -- early 2020, but just trying to get a time line or expectations around some of those other smaller lots as well.

Our industry hasn't had a lot of community development for -- really since the '80s. So when the 2 downturns in the industry happened in the '80s and then again at turn of the century when Green Tree filed bankruptcy. The response to that -- those downturns was to remove from the mobile home parks the mobile homes that were repossessed, creating all sorts of vacancy around the entire country. So no one was contemplating where we are today that mobile home parks should be full and we would be renting spaces for $600 or more per month.

The response to that has been very slow from the industry. If there were a lot of projects in development on the drawing boards, I think I would know about it because I'm kind of in the front seat. So we are -- we think that, that is fundamental to the industry. There are plenty of spaces out in the country in the small towns, but near big cities in Denver or in Dallas or Fort Worth or San Antonio or Atlanta or Jacksonville, these are basically full markets. And until development occurs, more places to put them, we're all kind of strained. We've been trying to sell product into those full markets.

Now how does it work? Well, if we buy the land and we engineer it ourselves and we put in roads and we put in water systems, it's a 24- to 36-month process. So that's the lead time on it. So when I said we have 4 of those properties, those 4 properties, I think the -- we're probably 1.5 years in the -- into the big one in Del Valle, which would be well over 1,000 mobile homes, and we're much younger in the other. So basically, I don't really see a significant lift from those in Del Valle till 2021 or beyond.

But that is the direct -- why do I think it's that way? Our industry is full of people that don't think very far out. And when we set a mobile home, we set it to high and we put skirting on it that isn't durable and doesn't look good. We don't think about where the cars are going to park or car porch. We don't think about how the pet is going to get in and out of the mobile home into the backyard. So we haven't matured like the Pultes and D.R. Hortons of the world. And Legacy's view is we have to address all of those concerns and more to be effective in the affordable housing market, and that's the direction we're going. We're going to take on the homebuilders head-on in our key markets and see if indeed somebody wants $129,000 all-in product as opposed to $220,000 product that the site-built housers -- housing people are doing. That's basically it.

I mean to answer to your question, the industry has not adequately addressed the entire package of affordable housing issues. The lumber, the roof, for the house itself, we've done a pretty good job on. Our product is stellar. But the rest of the package that you get when you buy a site-built house, our industry has not done a very good job at addressing that, and that's why we think the opportunity is now to do that.

I don't know if that answers you question. I know it was longer than I wanted, but I gave a 30-minute speech on the same issue about 3 weeks ago.

(Operator Instructions) Our final question comes from [David Mercer], an investor.

Good job, guys. It looks like you guys are doing a good job. This is for Cork. How is it -- like, in your past track record that you've done that has been successful to make us believe you could be an asset for Legacy. Like, have you worked for companies that you brought earnings from this and this in so many years? Or have you had your own company? What track record have you had that shows that your success will help Legacy grow its company?

That's a good question, [David], and I appreciate you asking that. I'm not going to go through my entire career because I think people have better things to do than fall asleep listening to me talk. But I will point out that after we took over the role at -- the new management team took over the role at Aviall, we managed to grow the company in about 6 years from about $300 million in revenue to about -- well, to over $1 billion. We did that by changing the way the -- we -- the aviation distribution business has performed in much the same manner that Curt is talking about changing the way this business had performed in manufactured housing.

I think that having a background that has been in a variety of industries brings -- enables me to bring some different viewpoints and different perspectives to this company. And it's gratifying to see the leadership that Curt and Kenny have brought to this company thus far and where we can take it going forward.

[David], this is Curt. Cork went to USC Aeronautical Engineering school, which is one of the better programs in United States, and he did that because of the scholarship opportunities that were available to him because of how well he did pass. His analytical skills are probably better than -- maybe even better than mine. And I think that when we're looking for the 10,000-foot view in the simplification project -- perspective, Cork is going to bring something to our party that we can take advantage of.

Jeff Burt has done a stellar job as CFO, and he's going to remain in almost an identical position for the indefinite future. As far as simplifying, figuring it out, moving into new frontiers, I think Cork's background is -- it's pretty incredible. And I'm looking forward to work with him to implement these visions that we had earlier on the call.

Okay. Great. And just two more things that I just want to say for Curt. What's the #1 thing that Legacy's homes are better than the competitors? If you could name one thing that makes them better, is it the different styles? Or is it the price? What's the one thing that makes your guys' homes better than the competitors?

We think we've done a heck of a good job on the colors. We think we have prettiest ones there are. Just kidding.

Curt, our floor plans -- this is Kenny. Our floor plans are just over the top. They're just -- when you walk in the house -- there's -- our houses are so user-friendly. I mean we -- they're furniture friendly. We've got places to put everything. Everything has been thought out. Curt has done an extremely great job of developing this product, and it's just over the top.

Okay. Yes, you guys seem like a really -- because I read about you guys. You guys seem like a fantastic combination. Kenny, you're fantastic in the sales department. And then Curt, I guess, seems like engineering. So you guys have years together.

And I just wanted to let you -- say some -- listen, one more thing here. You guys are in your 60s, so you guys know how to make important decisions. But remember, it's all about decision-making, okay? Read up one -- I know you guys are smart and you guys have been through it for years, but keep saying to yourself, "I've got to make good decisions. We've got to make a decisions." And you may want to look up people like Sam Walton, I know you guys are experts in your field, but you may want to read up a little bit about him. He may give you a couple of hints or even Jeff Bezos of Amazon, okay? Just -- I'm just throwing that out there. I know guys are experts in your field, but there may be 1 or 2 things that those guys are doing that you may say, "Hey, it may help our company." So I just wanted to say that, and you guys are doing a fantastic job.

We appreciate the input. Thank you very much.

Well, I believe there's no more questions, Curt. So should we turn this over to the...

Operator.

Operator?

Sure.

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